Reimbursing employees for expenses seems like it should be a straightforward process, but like so many other processes in HR and business accounting, there are many things that can go wrong. Failing to properly handle and document expense reimbursements can wind up costing your company money in taxes or even legal fees.
Below are a few best practices to consider for reimbursing employees for expenses.
Every company should clearly outline their policies regarding business expenses in their employee handbook. The policies should include entries for different kinds of expenses like travel or equipment. It should also lay out clear guidelines for what can be reimbursed and steps for how expenses are approved. Companies that have transitioned to remote work settings during the COVID-19 pandemic should also consider reevaluating their policies to account for work-at-home expenses or home offices.
The IRS requires receipts and other documentation for business expenses. Make sure your employees know exactly what they need in order to claim an expense for reimbursement, and give them a simple system to submit those expenses. Keeping the documentation process easy for employees will make it easier on your HR department and increase compliance with IRS rules.
Tacking a reimbursement onto an employee’s paycheck may seem simple, but that money can then incur payroll taxes and force the employee to declare the reimbursement as income. To avoid these taxes, employers should work to correctly set up a non-taxed reimbursement code for processing their payroll and reimbursements separately. Along with avoiding unnecessary taxes, separate accounting also helps make auditing employee expenses much simpler.
While no business manager ever wants to discover an employee committing fraud, audits can be important for larger companies or businesses where employees charge large amounts of expenses. Audits can uncover employees who are submitting dishonest expense reports. This helps eliminate fraudulent expenses for the company and keeps the business in compliance with IRS fraud regulations. Even in cases where no fraud is discovered, audits can be useful for analyzing business expenses and making changes to reduce overall costs.
Managing expense reimbursement may seem like a routine accounting task back at the office, but it has a big impact on the lives of employees. Expense policies can affect how comfortable employees are when they travel and whether they can use business expenses to accrue points for reward programs. The process for submitting, approving, and paying out expenses also impacts how quickly employees are reimbursed.
Establish spending limits for different categories of expenses. This prevents employees from overspending and submitting excessive reimbursement requests. Clear guidelines on allowable amounts for meals, accommodations, transportation, and other expenses help control costs and ensure consistency.
Utilize digital tools or software that streamline the expense reimbursement process. An online system allows employees to submit expenses electronically, attach digital receipts, and track the status of their requests. This automation saves time, reduces paperwork, and enhances accuracy.
Set deadlines for expense submissions to prevent delays and backlogs. Encourage employees to submit expenses as soon as they’re incurred to ensure accurate records and timely reimbursement. Late submissions can lead to confusion, delayed payments, and potential non-compliance with tax regulations.
Implement a multi-level approval process for expense reimbursements. This involves having expenses reviewed and approved by different individuals, such as the employee’s supervisor, department head, and finance manager. Segregating approval authority adds an extra layer of oversight, reducing the likelihood of fraudulent claims.
After an expense reimbursement request is submitted, provide timely feedback to employees. If there are any issues with the submission, documentation, or compliance, communicate this promptly so that corrections can be made without unnecessary delays.
Remember, the goal of these best practices is to create a streamlined, transparent, and fair expense reimbursement process that benefits both the company and its employees. Adapting these practices to your organization’s unique needs will help ensure efficient expense management while minimizing the potential for errors, fraud, and compliance issues.
Expense management can sometimes feel like a daunting task for HR departments. Contact us today to learn how LBMC Employment Partners can help. From payroll services to HR outsourcing to our PEO services, we’re equipped with a comprehensive suite of HR services to grow and scale with your company along the way!
