Businesses of all sizes incur expenses that may qualify for tax deductions. These expenses are “costs of conducting business” paid by employees out of their pocket, and reimbursed by employers. This is where expense reimbursement comes into play.
Unless you like giving away money to the IRS, your business must have in place what the IRS calls an accountable plan.
Under an accountable plan, expenses must be two things:
- Deductible: The expense must be “ordinary” and “necessary” to be tax-deductible.
- Substantiated: A “proof of expense,” or receipt must be submitted along with the expense report.
The IRS holds high regard for the accountability of every penny spent. Thus, in case you decide to provide allowances or cash advances, the employee must return any excess amount within a reasonable timeframe. If the employee fails to do so, both the employer and the employee have to face the brunt for intentional or unintentional negligence.
You can refer to the IRS’ guidelines to create an accountable plan for more details.
However, employers can clearly define what expenses they consider as reimbursable. . This article is your up-to-date guide on compensating employees for different types of (tax-deductible) reimbursements in 2020.
Employee expense reimbursements in 2020
Employers may have to change their organization’s travel and expense policies according to changing business needs, new tax rules, or a global pandemic. No matter the reason for the change, your expense reimbursement process should accommodate and enforce policy changes effectively.
In 2020, businesses in the US have made rapid changes in their corporate T&E policies as a response to new tax rules and a remote or home-based workforce. Here are the most common types of employee expense reimbursements in 2020:
Telework/ tools of the trade expense reimbursement
Remote work expenses are traditionally not required to be reimbursed according to California Law. However, for the duration of the pandemic, most companies are requiring employees to work from home. In such a case, employers may be required to reimburse employees for reasonable and necessary expenses.
Some common examples of reimbursable telework/tools of the trade expenses are:
- Installation of internet at home
- Cell phone or landline plans
- Purchase of devices like computers, tablets or fax machines
- Teleconferencing software or hardware
Employers planning to move their workforce to a remote set-up are also assisting with home office set-up by reimbursing employees for expenses like higher-speed internet, laptops and desktops, printers, workstations, and (most importantly!) ergonomic chairs.
No matter the nuances of your revised WFH expense policy, you must ensure fair compensation for your employees, while also complying with federal, state, and local laws.
SUGGESTED READ: Guide to creating an IRS-compliant expense reimbursement policy
Gas mileage reimbursement
The new IRS standard mileage rate for 2020 can be used by taxpayers to calculate deductible costs for operating a vehicle for business, medical, and charitable purposes. This year’s mileage rate saw some significant changes.
Here are some mileage rate highlights for 2020:
- For business miles: 57.5 cents per mile (58 cents in 2019)
- For medical or moving purposes: 17 cents per mile (20 cents in 2019)
- For service of charitable organizations: 14 cents per mile (20 cents in 2019)
Access detailed information about IRS mileage rate 2020 here →
Businesses must understand what the IRS allows for mileage reimbursements (which change in January every year) to create compliant gas/mileage reimbursement policies for their traveling employees.
Suppose you do not require employees to travel anywhere to conduct business and wish to slash mileage reimbursements for the pandemic duration, you will need to inform your employees about the policy change in advance.
Health reimbursement arrangements
Health reimbursements are arrangements in which the employer reimburses medical costs incurred by an employee or individual health insurance premiums procured by the employee. Health reimbursements are covered under HRAs.
In 2020, employees can be offered two new forms of HRAs:
- Individual HRAs
- Excepted benefits HRAs
These new forms of health reimbursements may require employers to start offering ICHRAs (Individual Coverage Health Reimbursement Arrangement) and EBHRAs (Excepted Benefits Health Reimbursement Arrangement) and must communicate the same with their employees in advance.
For detailed information, refer to the IRS’s FAQs on health reimbursement arrangements.
Now that you know what employers in the US are reimbursing their employees for in 2020, let’s talk about how to manage employee expense reimbursements while ensuring policy compliance.
SUGGESTED READ: Balancing expense policy compliance and happy employees
How to reimburse employees in 2020
There are many variables when it comes to deciding what you should reimburse your employees for, as we discussed earlier in this article. One thing that must not quiver no matter what your policy changes, is your expense reimbursement system.
The only way to ensure that in a fast-paced business world is by embracing expense management automation. Here’s what a typical expense reimbursement process looks like, and how an expense software helps streamline and automate each step:
While this flowchart outlines the basic processes an expense reimbursement software automates, there is a lot more that an AI-powered expense software can do.
Additional features to look for in an expense reimbursement software
An expense reimbursement software drastically reduces human-interference in all repetitive, error-prone tasks in your travel and expense reporting system. This helps you reduce turnaround time for employee expense reimbursements and gives your employees/Finance teams more time to focus on other important job functions.
Here’s a list of some expense reimbursement features you should look for while shortlisting T&E automation partners:
- Travel reimbursement software: Configure trip policies, define trip budgets, track trip expenses in real-time, and get 360-degree trip-wise expense reports.
- Mileage tracking app: Track mileage on-the-go with a mobile mileage tracking app integrated with Google Maps and log trips with a single click.
- Mobile receipt scanner app: Scan and upload paper receipts on your mobile expense tracking app, which automatically extracts all expense data.
- Advanced expense analytics: Access in-depth analytics and actionable insights based on your employees’ spending behavior on your dashboard.
- Expense receipt management: Track, store, and organize all of your organization’s expense receipts in a searchable, unified expense management cloud.
Let Fyle do all the heavy lifting while ensuring you achieve data-driven financial productivity. Bid goodbyes to all your expense management woes by scheduling a demo with us today!