Have you ever fronted the bill for a business lunch, travel expenses, or office supplies? If you’re an employee, chances are you have. Employee expense reimbursements are a common practice, but navigating the process can sometimes feel like a maze.
This blog aims to shed light on everything you need to know about employee expense reimbursements, from understanding what gets reimbursed to building a smoother system for both employees and businesses.
What Are Employee Expense Reimbursements?
Employee expense reimbursements are essentially a way for companies to repay employees for business-related costs they incur out of pocket. This can include a variety of expenses, depending on company policy.
What Are Common Employee Expenses Reimbursed By Businesses?
Businesses reimburse employees for a variety of work-related expenses. Here’s a breakdown of the most common categories:
Travel Expenses
- Traditional Travel: This includes flights, hotels, meals during travel, and local transportation (taxis, buses,etc.) incurred during business trips. Companies typically set guidelines for reasonable spending on meals and may require receipts for larger expenditures.
- Auto Mileage and Travel Reimbursement: If you use your own vehicle for business travel, many companies will reimburse you based on the standard mileage rate set by the IRS. This rate is periodically adjusted to account for gas prices and wear-and-tear on the vehicle. Alternatively, some companies may offer a flat per diem rate to cover all travel expenses (including meals) for a specific location or timeframe.
Also Read:
- How To Track Mileage For Taxes: A Quick Guide
- Business Travel Expenses: A Guide to Management, Calculation, Tax Deductions & More
Meals and Entertainment Expenses
Expenses related to client lunches, dinners, or other business related entertainment may be reimbursed, often with spending limits. These meals must have a clear business purpose, such as building relationships with clients or potential partners.
Office and Work-Related Supplies
If you regularly purchase office supplies for your work (printer, ink, notepads, etc.) you might be able to get reimbursed for these costs. Some companies may have a spending limit or require receipts for larger purchases.
Professional Development
Companies may reimburse the cost of conferences, workshops, or other professional development opportunities relevant to your job. This can help employees up–to-date on industry trends and enhance their skills.
Home Office Expenses
With the rise of remote work, some companies reimburse a portion of internet bills, phone bills, ergonomic furniture for your home office. These reimbursements may be based on a specific percentage of the total cost of a fixed monthly allowance.
Medical Expense Reimbursement
It’s important to note that some companies offer health insurance that incorporate employee expenses reimbursements. Here are a few examples:
Qualified Small Employer HRA (QSEHRA)
This type of Health Reimbursement Arrangement allows employers to contribute tax-deductible funds to an account that employees can use to pay for qualified medical expenses not covered by their insurance plan.
Is your small business eligible to offer a QSEHRA?
To set up a QSEHRA, your business typically needs to meet these criteria:
- Small Team Size: You must have fewer than 50 full-time employees on your payroll.
- Equal Opportunity: The QSEHRA program needs to be available to all your full-time employees on the same terms. The only exception is that reimbursement amounts can differ based on employee age and the number of people covered under their health insurance plan.
- No Group Health Plans: Your company cannot offer other group health insurance plans like SHOP coverage or a Flexible Spending Account (FSA) alongside a QSEHRA.
Source: HealthCare.Gov
Individual Coverage HRA (ICHRA)
Similar to a QSEHRA, but designed for companies with fewer employees who don't offer group health insurance plans.
Group Coverage HRA (GCHRA)
This HRA can be used in conjunction with a traditional employer-sponsored group health plan. Employees can use pre-tax dollars contributed by their employer and themselves to cover qualified medical expenses.
Other Reimbursable Expenses
Employee Stipends
Some companies provide employees with stipends to cover various work-related expenses. These can be categorized as follows:
- Health Stipends: These stipends can be used to help employees cover out-of-pocket healthcare costs not covered by insurance, such as gym memberships or co-pays.
- Wellness Stipends: These stipends can be used for expenses related to overall well-being, such as fitness trackers, healthy meal delivery services, or stress management programs.
Important Note
This list provides a general overview, and specific policies will vary depending on the company. Always be sure to consult your company's expense reimbursement policy for details on what is and is not reimbursable.
Also Read:
Are Employee Reimbursements Taxable?
Generally, legitimate business expense reimbursements from your employer are not considered taxable income. However, there are a few things to keep in mind:
- Receipts are crucial: You’ll need to provide proper documentation to qualify for reimbursements.
- Taxable reimbursements: If your company reimburses you for personal expenses (like a non-essentail meal upgrade), that portion may be considered taxable income.
- Accountability is key: It’s important to follow your company’s specific expense reimbursement policy to avoid tax implications.
Tax-Deductible Employee Expense Reimbursements
Not all employee expenses are created equal. While some business expenses are simply reimbursed by the company, others can offer a tax advantage for both the business and the employee. For a business expenses to be considered tax-deductible to the company and for employees to receive tax-free reimbursements, it must fall under the definition of an accountable plan.
What Is An Accountable Plan?
Think of an accountable plan as a set of guidelines established by the IRS to ensure reimbursements are legitimate business expenses. To qualify as an accountable plan, your reimbursement arrangement must meet the following criteria:
Business Expenses Only
The plan can only reimburse employees for legitimate business expenses they incur while performing their job duties.
Proper Documentation
Employees must provide detailed receipts or expense reports within a reasonable timeframe (typically 60 days) to substantiate their expenses. These records should clearly show the date, time, place, amount spent, and the business purpose of the expense.
Returning Excess Funds
If an employee receives a fixed allowance for expenses and spends less than the allocated amount, they must return the unused portion to the company within a reasonable time frame.
Benefits of Accountable Plans
Following these guidelines offers significant advantages:
- Tax Advantages: As long as the reimbursements meet the accountable plan criteria, the company can deduct the expense from their taxes, and the employee doesn't have to report the reimbursement as income. This reduces the tax burden for both parties.
- Simplified Reporting: When reimbursements fall under an accountable plan, they don't need to be included on the employee's W-2 form, streamlining tax filing for everyone.
Key Points:
- The IRS provides a safe harbor for substantiation, allowing 60 days for employees to submit expense reports.
- Electronic receipts generated by credit card companies can be used as evidence, as long as they contain sufficient detail about the expense.
- Paper documentation may still be required for certain situations, such as expenses exceeding $75 where the electronic receipt is unclear.
Source: IRS 26 CFR 1.62-2: Reimbursements and other expense allowance arrangements.
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Building A Strategic Framework
A smooth and efficient expense reimbursement system benefits both employees and businesses. Here’s how to build a strategic framework:
- Clear Guidelines: A well-defined expense reimbursement policy outlines what expenses are eligible, spending limits (if any), and the submission process.
- Easy-to-Use Tools: Utilize expense reimbursement tools or other expense reimbursement apps to simplify the process for employees to track and submit their claims.
- Fast and Efficient Processing: Streamline the approval process to ensure employees receive their reimbursements promptly. This builds trust and avoids unnecessary frustration.
How Fyle Can Help
Fyle goes beyond just automating employee reimbursements–it automates the entire process, saving you time and money. From submitting receipts to ensuring compliance, Fyle streamlines expense reimbursements from start to finish. Let's see how it works:
- Skip the Paperwork: With Fyle, submitting and tracking receipts is a breeze. Just use text messages or your favorite apps like Slack, Gmail, Outlook, or Teams. No more hunting for receipts or filling out tedious forms.
- Automate Policy Compliance: Fyle's built-in AI double-checks your expenses against company policies before you even submit them. This helps avoid any mistakes or delays in getting reimbursed.
- Fast and Secure Reimbursements: Get your money back quickly and safely. Fyle allows for direct deposits into your bank account via ACH (available in the US).
