A Comprehensive Guide On Employee Expense Reimbursement (With IRS Rules)
Employee expense reimbursement makes up for a large portion of the work for finance teams worldwide. Ask any finance manager and she will tell you how critical it is to set up the right expense reimbursement process in your organization. Done right, it will save you money, effort, time and will create a great employee experience leading to happier and productive teams.
A process this important must be understood properly before you get to implement it. So, we have put together this guide that will walk you through types of employee expenses, IRS guidelines, and the best practices to manage expense reimbursement like a pro. Read on and if you like it, do share in your network.
The basics of employee expense reimbursement
When an employee pays out of her pocket on behalf of the company during business meetings, business travel, or any other business-related activity the employer has to pay that money back to the employee. This process is expense reimbursement.
Expenses made by an employee can be reimbursable or non-reimbursable, as categorized in your company’s expense policy.
Types of reimbursable employee expenses
All the expenses that an employee bears for business-building activities can be categorized as reimbursable expenses. They are majorly classified into three main categories:
1. Auto mileage & travel reimbursement
Any work trip that your employees take for building the business such as a sales meeting or attending a work conference comes under this category. While generally, a company books a flight, hotel, and rental car for the employee in advance, other expenses like cab and meals happen on-site. So, most of the organizations pay per diem rates in advance or reimburse the amount later.
In the case of mileage reimbursement, it includes paying back the employees for using their own vehicle for traveling.
In the U.S, IRS recommends the standard mileage rates for employees, self-employed individuals, or other taxpayers. You can refer to that while defining the expense policy for your business. Also, to decide on the per diem travel expense for your employees, you can refer to per diem rates here as specified by the GSA.
2. Medical expense reimbursement
Most organizations offer employee benefits like health and medical insurance, that have tax benefits associated with them. Under this, your employees get reimbursed for the money they spend on any medical treatment and hospitalization.
Depending on your country, the guidelines for medical reimbursement might vary. Some countries like the US have medical expense reimbursement plans defined by the relevant authorities. Companies can choose from the common HRA (Health Reimbursement Arrangement) plans to cover medical expenses for their employees. Under the HRA, an employer determines the amount of money that will go into the plan and the employee can ask to be reimbursed for qualified medical expenses up to the designated amount. Employers can take a tax deduction for the reimbursements made through these plans. Different types of HRAs are:
- Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs)
- Individual Coverage Health reimbursement Arrangements (ICHRAs)
- Group Coverage Health Reimbursement Arrangements (GCHRAs)
3. Business expense reimbursement
Apart from business travel and medical reimbursement, sometimes employees also spend from their pocket for business-related costs. Expenses like office supplies, stationery used in the office, any paid training or education taken to perform the job come under this category. Organizations also need to reimburse such expenses to their employees.
What are non-reimbursable expenses then?
When an employee is out on a business trip, there are chances that she might spend money on something that is not work-related, for example, buying a souvenir on a business trip or attending a jazz concert on Saturday evening. These expenses are purely for personal purposes, and hence companies are not liable to reimburse them. These are non-reimbursable expenses.
One question that most of you might have by now would be how do companies decide what type of expenses should be reimbursed? For this, most countries have guidelines that help businesses draft an employee reimbursement plan. For instance, companies in the US have to abide by the IRS (Internal Revenue Service) guidelines for expense reimbursement plans and there are HMRC criteria for companies in the UK. Let’s understand the IRS guidelines in detail in our next section.
IRS Guidelines: Have an accountable plan for employee expense reimbursement
As per the IRS guidelines, companies must have an accountable plan to reimburse employee expenses, in the absence of which expenses are considered as earned wages and are taxable in the US. The reimbursable expenses covered under the accountable plan should meet these criteria, as explained in the IRS Publication 15, Circular E, Employer’s Tax Guide.
- The expenses done by the employee must be connected with business-related duties
- The expenses have to be substantiated with proof of payment in receipts, invoices, or canceled tickets or deemed to be substantiated (such as per diem rate) within a reasonable period
- For expenses paid in advance, the employee must return any excess amount within a stated reasonable period
Now that the basics are covered, let’s talk about how you can handle employee expense reimbursement like a pro!
Streamline your expense reimbursement process
Follow these 3 steps to set up a smooth expense reimbursement process for your employees:
Step 1: Create a clearly defined expense policy
Understanding any process is the first step to its effective implementation. A well-defined expense policy clearly lays out the reimbursement process with timelines, explains what is considered as a reimbursable expense, defines approval flows, do’s and don’ts for all stakeholders, guides on managing exceptions, and much more. This rule book guides the organization through the overall process. So, it is important to get the policy right. To know how to create an expense policy for your organization, read this guide.
Pro-tip: Just having a policy in place isn’t enough. To ensure that policy is implemented successfully, you will need to automate it using good integrated T&E software like ITILITE.
Step 2: Automate your expense reimbursement process
A manual reimbursement process is inefficient, time-consuming, and frustrating for all stakeholders involved – finance teams, employees, and business leaders. Automation is the key to making reimbursements simple, efficient, and delightful for everyone. It saves time, effort, and money for the company and creates a seamless process adopted by teams easily.
Pro-tip: While choosing an expense management software, do go for an integrated travel & expense solution to get complete visibility on spend data across all categories. It will help you save up to 30% of business costs by just plugging in leakages.
Step 3: Control, measure & report employee expense reimbursements
Look at employee expenses as a metric to review spend trends, identify cost-saving opportunities, build strategies and establish goals. Solutions that offer granular data insights and complete data visibility help you do all these things while ensuring 100% policy compliance by your employees.
Ready to automate your reimbursement process? Here is the list of features you should look into while choosing the right expense management software for your organization:
- Easy to use expense management software with a mobile app for easy filing
- Automatic smart notification feature for faster book closing
- Flexibility and intuitive interface to configure custom policy and approval flows
- Digital audit trails for complete visibility on approvals
- Intuitive dashboard with powerful analytics for complete visibility
ITILITE offers all this and much more to help businesses save big on cost and create a wonderful employee experience. Want to know more? Book a personalized walkthrough with our product expert today!