Your employees will likely incur a host of expenses that are simultaneously work-related and personal—such as phone bills, meals, and commuting fees—and determining which ones to cover can be difficult.
If it’s done right, there is a smooth process benefiting both the employer and employee. If it’s done poorly, it can become a focus for employee dissatisfaction and negatively impact company cash flows.
Decide on accountable vs. non-accountable
One of the first areas for your company to consider is whether you will have an accountable or non-accountable policy. The two types carry different tax consequences.
An accountable policy means that employees are reimbursed only when they provide receipts and only for the exact dollar amount. For example, when an employee is on a business trip, they provide receipts for all meals and are reimbursed accordingly.
In contrast, a non-accountable plan gives the employee a certain amount to spend on items and no receipts are needed. Using the meal example, an employee may be given $100 per day for food. They can eat $200 in food each day if they choose, but the extra $100 will be at their own expense. No receipts are required and the amount given to the employee is seen as taxable income.
Under the recent Tax Cuts and Jobs Act, many expenses which formerly allowed business deductions no longer allow them. It’s important to review your reimbursement against the newest guidelines and determine which type of plan suits your business best.
Key areas to include in your corporate guidelines
There is a balancing act between having a 300 page policy that no one will read and a verbal policy that nobody knows. There will always be questions and exceptions, but it’s important to have clear guidelines that are detailed enough to cover most situations without requiring employee discretion. Some areas to address are:
- Expenses that are eligible for reimbursement
- Whether or not pre-approval is needed
- Differences for in-office and remote employees
- Guidelines on how claims should be submitted
- Amount of time an employee has to submit the claim
- Timeline for reimbursement
- Specific categories (cell phones, meals, business trips)
There should be a clear owner of the policy who will serve as employees’ point of contact when they have questions or concerns.
T&E is perhaps the first thing that comes to mind when someone says employee expenses. Business travel likely includes multiple modes of transportation, meals, accommodations, and incidentals.
People have a lot of ways of getting around—personal car, rental car, car service, bus, train, plane—so deciding on the mode of transportation your is step one. Next is deciding the type of seat (e.g. economy, business class, first class) and if there are any preferred carriers.
Some companies let their employees book travel independently as they wish and reimburse whatever the employee decides, as long as it is approved by a manager.
Others have more detailed travel guidelines, such as mileage brackets, seat distinctions, and travel tiers based on employee seniority. For example, companies may require employees to take ground transportation for any travel under 300 miles, or only allow employees flying for more than nine hours to upgrade from economy.
Most modes of transport have distinct seat classes that indicate the relative price, but accommodations often don’t. Because of this, it is hard to establish firm lodging guidelines, even though we all know that there is a clear difference between Motel 6 and the Ritz Carlton (and most companies probably want something in the middle).
To address this gray area, many organizations have preferred lodging vendors, such as particular hotel chains or Airbnb. They may also outline general expense caps, though it can be difficult to have these set in stone given changing prices depending on location and dates.
Companies often make use of a corporate travel management (CTM) platform, such as Lola or TripActions, to handle the travel booking process. The CTM interface denotes airlines that employees are allowed to fly, the hotels that employees can stay at, and shows the negotiated corporate rates. This way, employees don’t have to worry about remaining compliant because the companies preferred options will be displayed.
There are several approaches to reimbursing employees for meals. Some companies do not set limits and simply reimburse any purchase made on a business trip as long as a receipt is provided.
Another is to set a limit per meal, such as $12 for breakfast and lunch and $30 for dinner, and require receipts to substantiate any reimbursement. This approach would not include snacks or coffee
A third option is to give employees a per diem allowance that can spend as they wish. This approach gives more discretion to the employees and allows for snacks and incidentals in between meals.
In 2018, the government set the average per diem rate for meals and incidental expenses at $51, with larger cities such as New York and San Francisco carrying per diem rates of $74.
These guidelines are helpful, but as a non-government entity, your company can set whatever per diem allowance is right for you. And as long as employees submit proper expenses and you don’t deduct more than the specified rate, per diem rates will not be considered part of your employees’ taxable wages.
Technology has become so intertwined with our daily and working lives that cell phones are now part of the job. According to Syntonic, 87% of companies rely on employees using their personal phones to access business apps. If your company does not provide employees with work phones, it may make sense to put a BYOD (Bring Your Own Device) policy in place.
There are two common options for reimbursing employees for cell phones.
The first is for the employee to submit their monthly bill highlighting business related calls and the AP department will then analyze and reimburse accordingly. While this policy ensures an exact amount will be paid, it requires an investment of time from both the employee and the AP department.
The second option is for companies to have a flat rate system in place where employees are reimbursed a set amount each month. One recent survey from Oxford Economics shows that mobile reimbursements to employees varied between $30 and $50 per month.
It might make sense to implement a two-tier reimbursement policy: one for heavy business cell phone users, such as sales, and one for those who only sometimes use their phones for business.
The amounts will vary by state and usage. The average cell phone bill is now nearly $80 , so you should aim for heavy usage rates lower than that. If you pay employees a greater amount than their entire monthly cell phone bill, it must be recorded as additional income for that individual. Samsung created a nifty calculator to help you compare your reimbursement policies with industry averages.
Companies can provide tax-free reimbursement up to a certain limit for mass transit, ridesharing, and parking to employees. After that, the additional amount shows as gross income for the employee.
There are several companies that offer commuter benefits, which allow employees to set aside a designated portion of their monthly income, tax free, to pay for their commute via public transport. As an added bonus, this helps companies save on payroll taxes, since you’re lowering the amount of taxable income for your employees.
For employees who drive to work, setting a maximum OOP mileage and then covering mileage beyond that is an option. You can refer to the federal government’s safe harbor mileage limits to get an idea for reimbursement levels. In 2018 it was 54.5 cents per mile.
Employees who work a lot of overtime may choose to take a taxi or rideshare home rather than embark on a long commute via public transport late at night. This cost may fall beyond the regular commuter benefit.
While it is not standard across the board to reimburse rides for employees who stay late in the office, failing to do so may promote ill-will and discourage people from working overtime. Acknowledging that working late benefits the company, it might make sense to add this type of expense to your reimbursement policy, perhaps with a cap on the amount.
According to Gallup, 43% of employees work remotely at least some of the time. As this part of the workforce grows, it’s important to develop policies that account for their unique situation.
When remote workers travel to an office location they may incur expenses such as transportation, meals and accommodation.
If management is requiring a remote worker to travel outside the area where they reside, whether that be a company office or other location, then many companies treat it as a business trip for that employee and reimburse all incurred expenses.
If the remote employee is asked to travel within their current city, they are typically not reimbursed for mileage, though they may be given funds for parking fees if they need to put their car in a garage.
Clarity is key
Although your exact guidelines will be tailored to your unique business and employee needs, the common thread among all policies is clarity. Most employees want to do the right thing by your company—book the right type of transportation, get reimbursed when eligible, spend only what is allotted—but confusing policies cause them to make mistakes, which can lead to misunderstandings and awkward conversations. At the end of the day, policies are in place to both keep costs under control for your company and create a pleasant working environment for your employees.