Managing expense reimbursements manually can be time-consuming. We’ve addressed some of the most common questions in this blog to help you simplify the expense reimbursement process.
What Is An Expense Reimbursement?
An expense reimbursement is a payment made by a business to an employee for a business-related expense the employee has incurred personally. The reimbursed amount should exactly match the expense paid by the employee.
What Expenses Can I Reimburse?
Your organization can reimburse employees for all work-related expenses incurred. However, there are two things to consider:
IRS Rules
You should reimburse all employee expenses according to the same guidelines the IRS sets for other business expenses, like rent or salaries. In short, these expenses must be ordinary and necessary for your business to function.
Company Policy
You also have the freedom to set your own expense policy. This helps you decide on specific things like–whether employees can fly business class or expense large dinners or parties for clients. Having a clear expense policy in place helps everyone stay on the same page about what expenses are reimbursable.
Here’s what a sample expense policy would look like:
To ensure all expense reimbursement requests adhere to company policy, accountants would need to verify them manually, a process that can often span weeks or days.
Here’s how an expense reimbursement software can set & enforce policies with a single click:
See how Fyle can automate policy compliance for your entire organization.
How Can I Create An Employee Reimbursement Policy?
A well-defined employee reimbursement clarifies what business expenses your company will reimburse and sets expectations for employees. It helps ensure responsible spending and simplifies the expense reimbursement process. Here’s how you can create one:
Define Reimbursable Expenses
You’ll need to begin by defining what expenses are acceptable and reimbursable. Here are the most employee expenses that are reimbursed:
- Business travel: Outline what travel-related costs you will cover, such as transportation, meals, and lodging. Specify limitations, like the mileage rate for cars or daily allowances.
- Business entertainment: Determine if you’ll cover entertainment expenses for clients or colleagues. Set guidelines and require justifications for these expenses.
- Other business expenses: List other expenses you’ll reimburse, such as professional development courses, subscriptions, or home office supplies. Set spending limits if necessary.
Accountable vs Non-Accountable Reimbursement Plan
Accountable Reimbursement Plan
An accountable plan is an employee expense reimbursement method for out-of-pocket expenses on a non-taxable basis.
Under the accountable plan, employees must:
- Incur ordinary and necessary business expenses.
- Adequately account for expenses with receipts and detailed reports within a reasonable time frame (typically 60 days).
- Return any excess reimbursement received over documented expenses.
Benefits:
- Reimbursed amounts are generally excluded from employee income (not taxed).
- The company can deduct the reimbursed expenses as business costs.
Non-Accountable Reimbursement Plan
A non-accountable employee expense reimbursement plan does not follow the IRS guidelines for an accountable plan. These plans are simpler to manage but offer less tax advantage.
Employees don't need to submit detailed expense reports, but:
- The entire reimbursement amount is considered taxable income for the employee.
- The company can only deduct the actual documented business expense portion, not the entire reimbursement.
For more information, please refer IRS 26 CFR 1.62-2: Reimbursements and other expense allowance arrangements.
Expense Reporting Procedure
- Method: Choose a method for submitting expense reports–paper forms, spreadsheets, or an expense report software.
- Documentation requirements: Specify the valid proof of purchase for each expense type (invoices, receipts, etc.)
- Deadlines: Set clear deadlines for submitting expense reports (e.g., within 14 days of a trip).
Communication and Enforcement
- Employee Education: Distribute the policy document to all employees and explain key points during training sessions.
- Approval Process: Establish an approval process for expense reports, specifying who has authority to approve based on expense amount.
- Consequences: Outline potential consequences for violating the policy, such as non-reimbursement of expenses or disciplinary action.
See how Fyle’s automated approvals can benefit your organization.
Review and Update
- Regularly review your policy to ensure it aligns with IRS regulations and your company's evolving needs.
- Update the policy as needed and communicate changes to employees.
Do I Need Receipts To Reimburse An Employee?
It depends. If you have an accountable reimbursement plan in place, receipts are required to ensure proper documentation and avoid implications.
The IRS generally does not require receipts for a non-accountable plan. However, as a best practice, it’s recommended that you keep your receipts safe, as they are the only accepted proof of purchase if the IRS ever audits you. Saving receipts is often a huge headache for employees and business owners, which is why most businesses are adopting paperless receipt management.
Are Reimbursed Expenses Taxable?
The entire reimbursement for business expenses under a non-accountable plan is considered taxable income to the employee. This means the employee will receive the reimbursement amount on their W-2 and owe income taxes on it.
In contrast, accountable plans allow employees to be reimbursed for legitimate business expenses without them being taxed on the reimbursement. For accountable plans, receipts are required for the employee to claim the deduction for business expenses.
For more information, please refer IRS 26 CFR 1.62-2: Reimbursements and other expense allowance arrangements.
How Long Do I Have To Reimburse Employee Expenses?
Reimbursements should occur promptly. Employees shouldn’t have to wait for too long to get back the personal funds they spent on behalf of the organization.
How To Reimburse Employees For Expenses?
The answer to this question depends on your company’s typical reimbursement volume, frequency, and how much time your accounting team can dedicate to managing each option.
Payroll
This is often the simplest and quickest method. Just add a reimbursement line item to their next paycheck. For accountable plans, these reimbursements are added without income tax withholding.
Checks
The accounting team can write individual checks for reimbursements, either based on each expense report or in a monthly batch.
Using an Expense Reimbursement Software
If you use an expense management platform, reimbursements can be automated. Many platforms, like Fyle, allow employees to receive reimbursements with just a single click, typically through ACH transfer.
Why You Should Use Fyle To Pay Your Expense Reimbursements
Simplified Expense Tracking
Fyle lets you submit and track receipts using text messages and other everyday apps like Slack, Gmail, Outlook, and Teams, making the process faster and easier for employees.
Automated Policy Checks
Fyle's AI checks expenses against pre-configured policies before submission, flagging any potential issues.
Direct ACH Reimbursements
Fyle allows for secure and fast reimbursements directly deposited into employee accounts via ACH (US only).
In Conclusion
If you’re feeling the pain of managing expense reports and reimbursements, you are not alone. We work with small businesses across the U.S. daily to streamline the entire expense reimbursement process, from tracking and reporting to approvals and reimbursements.
Our services are affordable for businesses of all sizes and are designed to be more cost-effective than manual expense reporting. See for yourself! Schedule a demo today and discover how Fyle can revolutionize your expense reimbursement process.
