How To Handle Employee Expenses
By VICKY BROWN
First off (and I’m sure this isn’t a surprise that I’m saying this), have a policy. You need to define what is and isn’t an expense that the company will reimburse. And who is, and isn’t, eligible to incur those expenses. And trust me, just giving someone the company credit card and saying ‘get whatever we need’ isn’t a great strategy, because it opens you up to all sorts of possible issues.
The main thing to keep in mind is that reimbursing expenses is an IRS exercise, because the question is, what can your business claim on your tax returns. So you have to stay within IRS guidelines on what can and can’t be expensed. And you have to keep records, good records – because, well because you know – the IRS. If they decide to audit your taxes, they will definitely look at reimbursed expenses, and they will want backup.
So, back to the policy – have one, and it should clearly state what’s reimbursable, who can be reimbursed, and lay out guidelines for submitting those expenses to the company. After all, you don’t want to get an expense report in December for the full year. And you don’t want to give everyone the ability to charge things to the company. Think carefully about who in your organization should have that financial responsibility – it should be a limited number of people, otherwise you can get some ugly surprises, accompanied by ‘but I thought I could just charge it to the company’.
You can have a company credit card if you wish. But there are some hoops to jump through – you need to clearly lay out how often expense reports should be submitted. I suggest no less than monthly, that way you’ll have the corresponding receipts for the charges on your monthly bill. You also need to clearly state what happens if you don’t get a report with receipts for expenses that someone charged against the card. And no, generally you can’t just take the amount out of their check
The option I usually see is the company considers the charge additional compensation for the employee, and issues a 1099 to them at the end of the year. Of course all of that happens with a performance discussion for violating company policy – and there may even be a formal write up, or in extreme cases a termination.
“…It’s never a good idea to have a petty cash stash.“
Another alternative to the company credit card, is individual cards issued under the company’s account. So, ABC company has a VISA account. They then apply to VISA to add users to the account, the employee then gets a card with their name on it, and the bill (and accountability for paying it) goes to the company. This can make things easier when someone is using the card for travel or similar charges. Again, since the company is responsible for paying VISA directly, you’ll want to keep tight reins on getting timely expense reports; and staying on top of non reimbursable expenses put on the card (like in-room movies in the hotel). Also, keep in mind that you want a strong expense agreement in place with the employee, that fully outlines that they are responsible for using the card appropriately, and what will happen if they don’t submit timely expense reports with receipts – and have them sign it.
Now, to be honest, the arrangement I see most often is – the employee pays for the expense out of pocket, submits an expense report, and is reimbursed from the company. The big pro in this approach is that it shifts the burden of payment from the company to the employee. But the big con is that, depending on the amount of the expense, they may or may not be able to carry it out of pocket (I’m particularly thinking of things like flights and other travel expenses). So realistically, depending on the situation, most companies use a hybrid of the employee paying out of pocket, and putting big ticket items directly on the company card.
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Having said all that, there are other types of expenses that will pop up. For instance, if you have remote staff, you may (depending on your state) have to provide them reimbursement or an allowance, for the equipment and utilities (read internet connection) they use remotely.
And if you have an employee go to clients, or offsite for meetings etc., you have to reimburse them for mileage. Check out the IRS website for the most recent mileage reimbursement – it generally changes each year.
The easiest way to reimburse expenses is to do it through your payroll system vs. cutting separate checks. Simply add it as a non payroll, non taxed, item to the payroll run. That saves you from doing a separate check or payment process.
As you might guess – software can make this whole process significantly easier for everyone. You can use an app like Concur or Expensify; or you can go old school and opt for an excel spreadsheet with receipts attached. Either way, make sure you keep copies of everything for your taxes.
And speaking of taxes, before you design an expense reimbursement program, it’s a great idea to have a chat with your accountant, so you have solid information on how it all may impact your tax return.
And one last bit of advice – it’s never a good idea to have a petty cash stash. They’re impossible to reconcile, and as a result, money somehow just disappears. That’s not to say anyone is stealing, it’s just that petty cash is very hard to track properly, so it usually doesn’t get tracked well – and the result is…well, untracked (read lost) money out of the business.