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Even as a startup founder, you probably remember when an employer kept you waiting for reimbursement. That wait might have caused you to miss paying your rent on time or kept you from purchasing something you wanted. At the very least, you were likely stressed and wished your employer would give you the money they owed you.
Companies risk alienating workers if they don't have a robust employee expense reimbursement process. In the worst cases, failing to reimburse your workers quickly can adversely impact employee morale and create an atmosphere of distrust.
Having a clear employee expense reimbursement plan is critical to keeping employees satisfied. That way, your workers understand how to submit their expenses for repayment and when they can expect to receive their money.
In this article, we discuss the best practices for employee expense reimbursement. You can use these tips to implement a process that suits the needs of your business and your team.
What is employee expense reimbursement?
It's common for employees to incur certain expenses related to their position. For example, workers who regularly travel for work will have lodging, transportation, and food costs. Employees also purchase items such as computer equipment or a desk to support remote work.
Employees who spend their money on business expenses expect reimbursement from the company. Most organizations have policies concerning employee expense reimbursement and refund the worker once they receive clear documentation of the costs.
5 best practices for managing employee expense reimbursements
Business owners and managers should develop a streamlined process everyone understands so employees can receive funds promptly. The process should be simple and clearly documented for ease of use. Here are a few bookkeeping best practices that can help you accurately track employee reimbursement in your books.
1. Establish clear guidelines and reimbursement policies
Your first step is to identify reimbursable employee expenses. Most items an employee pays for to support your business are eligible for reimbursement. Below is a list of typical reimbursable expenses:
- Air travel for a company-sponsored event or meeting
- Lodging or hotel costs
- Meals and entertainment
- Office supplies and equipment, such as a computer monitor or desk
- Training and development courses
- Subscription fees or renewal of professional licenses
- Gas or mileage for business travel
Identify the types of expenses you'll reimburse and notify your employees of the reimbursement process. They should keep all receipts of their costs and submit copies to you for your records. Indicate when they can expect to receive a reimbursement and establish a deadline for reimbursement submissions.
Additionally, establish a system with your bookkeeper to ensure proper recording of all receipts and reimbursements. A missed reimbursement negatively affects the accuracy of your expense totals and cash outflow.
2. Implement an online system for submitting and approving expenses
Most companies use an online tool to collect, store, and approve employee expenses. Online systems are helpful for documentation purposes. Anytime a question arises concerning an employee expense, you can retrieve copies of the receipt and the submission date. You can also track when you sent the reimbursement to your employee.
Online employee expense reimbursement systems provide a layer of transparency that manual systems can't. Most systems contain an approval feature, which allows managers to approve or deny an employee's request for reimbursement.
3. Set up a budgeting and tracking system
Plan for employee expenses into your financial budget. That way, you can track whether employee expenses align with your expectations or whether you need to adjust your expense policy.
Ideally, you'll address any cost overruns quickly. If an employee's expenses exceed the budget, seek to understand why. You may need to implement a stricter approval process and ensure managers keep a tight rein over their department's employee expenses to avoid unnecessary costs that can drain your company's cash flow.
4. Communicate regularly with employees
Every employee should clearly understand the expense reimbursement process. Put your policy in writing to ensure everyone is on the same page, and employees and managers can refer to the policy if they have questions. If your company has an intranet, post the expense policy so that all employees have access.
An integrated reimbursement system improves communication between managers and employees. Employees can check on the status of their submitted reimbursement request, including its approval and expected payment date. This visibility may eliminate some tense conversations among teammates.
5. Conduct regular audits
Even if you have a robust employee expense reimbursement process, it's still important to regularly audit your employee's expenses. Pull a sample of expenditures every few months and ensure they have the appropriate supporting documentation. Compare the receipts to the amount you paid to ensure there aren't any discrepancies.
Regular audits ensure you're ready when it comes time to close your financials for the year and prepare your annual tax return.
Are employee expense reimbursements taxable?
It depends. The IRS categorizes your expense reimbursement policy as accountable or non-accountable.
An accountable plan requires you to reimburse employees for expenses connected to your business. You'll keep clear documentation of the receipts and handle all repayments to employees within 60 days. Employee expenses that qualify as accountable are not subject to payroll taxes and are deductible by employers on their business tax returns.
A non-accountable plan doesn't substantiate or track employee expenses. There are few resources to document the employee's expenses. A business with a non-accountable plan is responsible for payroll taxes on employee expense reimbursements.
How do i report employee-reimbursed expenses?
Reporting employee expenses as a deductible on your company's startup taxes or annual tax returns is possible if you retain the appropriate documentation. However, without the proper documentation, you must include the expenses as part of an employee's wages or salary. Employee expenses included as wages are subject to federal and payroll taxes, including Social Security and Medicare taxes.
Can expenses be reimbursed through payroll?
You can reimburse your employees for their expenses through payroll. However, if employee expenses qualify for the accountable plan, you must ensure you don't tax them. Record the total amount you pay to the team member, and separate employee expense reimbursements clearly on the payroll stubs.
If your payroll system doesn't allow you to combine non-taxable reimbursements with salaries and wages, issue a separate check to the employee for any expenses they incur.
A solid employee expense reimbursement platform is critical
Startup companies should ensure they have a robust platform to track employee reimbursements for business-related expenses. This demonstrates integrity and promotes morale. An adequate reimbursement system has specific features, including document storage, manager approval, and expense tracking. Even if you have a strong platform, you should regularly audit employee expenses to avoid tax issues and work with a startup tax expert to ensure you’re following all guidelines You can learn more about managing your startup taxes here.
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