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Dealing With Employee Expenses: Identifying, Setting Limits

Proper identification and classification of employee expenses are essential to ensure that expense reimbursements are not considered taxable income. To manage a company budget and ultimately reported net income, small businesses may also consider capping some employee expenses.

Small businesses customarily reimburse certain employee expenses incurred in connection with assigned job functions. Proper identification and classification of employees' expenses are essential to ensure that expense reimbursements are treated in a beneficial manner for tax purposes. To manage a company budget and ultimately reported net income, small businesses may also consider capping some employee expenses.

Identifying Expenses to Reimburse

The first step in deciding which expenses to reimburse involves identifying those expenditures required by employees to complete their job assignments. Business-related travel and meals are the examples of costs employees generally expect to be reimbursed by employers. As the need for extended accessibility to voicemail and emails increases, smartphone plans are another commonly reimbursable expense.

Expenses Falling Under a Benefit Plan

Some reimbursable expenses may fall under a benefit plan. Educational expenses such as graduate school tuition may be reimbursed and taken as a tax deduction when covered under an employer-defined educational assistance program. If an employee is required to participate in training classes to maintain their job qualifications (such as CPA continuing education), those expenses may also be considered for employer reimbursement.

Capping Expenses

In order to manage a company budget and set employee expectations, employers may choose to cap employee expenses. Limits can be set in a variety of ways. Here are a few examples:

  • Out-of-town meals can be capped via a daily per diem rate, which would allow employees the discretion of how much to spend on each individual meal. Extra meal costs above the per diem would be out of pocket for the employee. The U.S. General Services Administration (GSA) sets per diem rates that give small employers a guide to reasonable amounts per geographic region.
  • Tuition reimbursement may be limited to a certain number of classes or a dollar amount each year.
  • Car expenses can be handled in a variety of ways, including the use of a set vehicle allowance versus reimbursing actual mileage or a combination of both. There are tax differences in these methods that should be carefully assessed prior to selecting one or the other.
  • Cell phone expenses, when required for one's job, could also be reimbursed by employers. This can be handled by providing employees with a company cell phone or by allowing employees to select and pay for their own cell phone and be reimbursed. The company may opt to reimburse a set amount to each individual that would equal a common company plan.

Understanding an Accountable Plan

Consider setting up an accountable plan to ensure beneficial tax treatment of employee expenses. This plan conforms to IRS stipulations and requires employees to incur the expenses while performing their job. Documentation supporting expenses should be submitted by the employee within a reasonable time period. Also, accountable plans require employers to reimburse substantiated expenses in a reasonable amount of time. If the accountable plan requirements are met, the expense reimbursement is not considered taxable income to the employee.

Tracking Reimbursable Expenses

Employee expenses can be tracked in a variety of ways. One of the easiest methods is through the use of a cloud accounting system's mobile app. Employees can download the app on their phone and scan receipts as they are accumulated. The documentation can be downloaded to a centralized tracking system and categorized appropriately. By making it easy for employees to track expenses, the result will be a higher degree of efficiency and accuracy of expense reporting at year-end.

By thinking strategically about expenses, small businesses can find ways to manage reimbursement amounts. Staying on top of expenses as incurred helps guarantee that every cost is properly reported. Customized reports may also be developed within a cloud accounting system for optimal expense reimbursement tracking.


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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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