Best Practices for a Foolproof Expense Reimbursement Policy
A well-crafted expense reimbursement policy (also called an employee reimbursement policy) can make a big difference for small business owners, LLCs, and S Corps looking to stay organized and compliant while supporting their remote and hybrid teams.
Expense reimbursement allows businesses to cover costs incurred by employees for work-related expenses—tax-free for the employee and deductible for the employer.
Here's our advice on what your reimbursement policy should include and the best practices to make it foolproof.
What is an Expense Reimbursement Program?
An expense reimbursement program enables businesses to repay employees for work-related costs, such as travel, meals, office supplies, and other necessary purchases. This system is especially valuable for companies with team members working from home, as it offsets expenses incurred by remote work without additional tax burdens. Establishing a clear expense reimbursement policy helps avoid misunderstandings and simplifies expense management and tax filing.
Critical Elements of a Foolproof Expense Reimbursement Policy
Creating a robust reimbursement policy begins with outlining clear eligibility, submission, and approval guidelines. Let's review each essential part to cover in your expense reimbursement policy.
1. Outline Eligible Expenses
Start by specifying which expenses are eligible for reimbursement. Common examples include travel, meals, office supplies or uniforms, internet or phone bills, software subscriptions, and professional development. Categorizing eligible expenses helps employees understand which costs qualify for reimbursement and reduces the chance of confusion or non-compliance.
2. Submission Process and Deadlines
Specify how employees should submit expenses and the deadlines—typically within 30 days. An expense reimbursement form with digitally attached expense receipts is applicable here, as it standardizes the information required for each claim and facilitates an organized submission process.
3. Define the Approval Process
Make it clear who is responsible for approving reimbursements. Depending on the business size and structure, this might include department leaders, direct supervisors, HR, or the finance team. Ensuring transparency about who reviews claims improves accountability and helps avoid delays.
4. Clarify the Reimbursement Method
Indicate how employees will receive reimbursements. In general, there are three popular methods:
Payroll: The payroll processor can add a simple line item to the next payroll check or deposit, which will be tagged as a non-taxable reimbursement.
Checks: The accounting department may cut a paper check, perhaps once a month.
Reimbursement software: Most platforms can issue a reimbursement through payroll or ACH deposit.
No matter which method you choose, consistency in your reimbursement method allows employees to anticipate how and when they'll be reimbursed. Remember, in a prior post, we covered how payroll management mistakes (which may include expense reimbursements) are expensive for an employer in more ways than one. A reimbursement policy helps foster trust within your company culture.
5. Incorporate the Policy in Your Employee Handbook
For accessibility, include the reimbursement policy in your employee handbook and review it with new hires while onboarding. An annual review is also advisable to ensure everyone stays updated on the policy.
Best Practices for Expense Reimbursement Policies
In addition to laying down the primary policy framework, adopting some best practices can make your expense reimbursement process even more effective and foolproof.
1. Set Spending Limits by Category
Establishing spending limits by category (e.g., meals, office supplies, travel) is a straightforward way to manage budgets and curb unnecessary expenses. A flat daily or monthly reimbursement rate is practical and transparent for some categories like meals or remote work expenses.
2. Require Pre-approval for Large Expenses
For significant expenses, such as conference fees or high-cost equipment, requiring pre-approval can prevent budget overruns and ensure the purchase aligns with business goals. It also minimizes the risk of rejection when reimbursement requests come through.
3. Maintain Strong Documentation
Maintaining thorough documentation is essential to supporting your expense reimbursement policy. This includes documentation from meetings where reimbursement agreements were discussed and tracked. Solid records protect your business in the event of an IRS audit and also ensure accurate accounting.
4. Mileage Reimbursement at the Applicable Rate
If you reimburse for mileage, adhere to the IRS's standard mileage rate, which is adjusted annually. This practice ensures consistency and compliance with tax guidelines, making it easier to track mileage accurately and avoid potential discrepancies.
5. Automate with Expense Management Software
Expense reimbursement software is a game-changer for busy businesses. Automation simplifies the process by streamlining employee submissions, expense approvals, and payments. Many expense management systems offer real-time monitoring and alerts, reducing administrative workload and improving accuracy.
Pro Tip: It's a good idea to add language to your employee handbook about potential overpayments for submitted expenses to ensure the company can recover losses.
Benefits of a Foolproof Expense Reimbursement Policy
Having a reliable, clear reimbursement policy benefits both the employer and employees in several ways:
Improved Transparency: When employees know exactly what's reimbursable and understand the process, misunderstandings are minimized, and satisfaction improves.
Increased Compliance: A detailed policy supports legal compliance, especially around remote work reimbursements, which can be essential for businesses employing people across different states.
Tax Efficiency: Employee reimbursements remain tax-free, while businesses gain deductible expenses. Having detailed records of costs reimbursed also simplifies tax reporting and can minimize audit risk.
Enhanced Financial Management: By setting spending limits and automating the reimbursement process, businesses gain better control over expenses, reduce unauthorized spending, and manage budgets more effectively.
In Summary
An effective expense reimbursement policy is essential for small businesses and LLCs that want to support their employees while maintaining organized finances.
By outlining eligible expenses, establishing explicit submission and approval guidelines, and adhering to best practices like pre-approvals for significant expenses, spending limits, and documentation requirements, you create a reimbursement system that is fair, efficient, and compliant.
Additionally, leveraging expense management software can automate and simplify the process, leaving you and your team more time to focus on what truly matters.
Do you need guidance in setting up reimbursement policies, systems, and documentation? Schedule an introductory call to see how JLS Accounting can be of service!