Expense Reimbursement 101: What Should Small Businesses Cover?
Some employers choose to have an expense reimbursement policy in place at their small business. Here are several types of expenses you may consider addressing in an expense reimbursement policy, as well as information on how to maximize the tax benefits related to employee expense reimbursement.
Employee Business Expenses
Under the Fair Labor Standards Act (FLSA), employers are not required to reimburse employees for business expenses. However, business expenses may not reduce non-exempt employees’ wages below the minimum wage, nor decrease their overtime compensation. (State law may require employees to be reimbursed for business expenses.) To avoid the need to reimburse employees, some employers consider giving employees who purchase items on a regular basis a business credit card. In these cases, it is considered a best practice to maintain separation of duties, and all credit card purchases should be reviewed and paid by someone other than the purchaser.
Required Tools and Equipment
Some employers require employees to purchase items that are considered primarily for the benefit or convenience of the employer (tools used in the employee's work, for example). Under the FLSA, non-exempt employees may not be required to pay for any of the cost of such items if, by so doing, their wages would be reduced below the required minimum wage or overtime compensation. Again, state law may differ.
If an employer requires employees to wear a uniform, the cost and maintenance of the uniform is considered to be a business expense of the employer. If the employer requires the employee to bear the cost, it may not reduce the employee's wage below the minimum wage or cut into overtime compensation required by the FLSA.
Reimbursing Business Expenses
Any business expense should be substantiated to qualify for reimbursement. In the case of mileage, a travel log prepared by the employee is acceptable. For ease of tracking, you can ask employees to use a mobile app to input all business-related expenses for reimbursement. Receipts can be scanned and saved in the app to reduce paperwork.
Maximizing Reimbursement-Related Tax Benefits
To maximize the tax benefits related to employee expense reimbursement, companies may set up an accountable plan. Expenses detailed and reimbursed under this plan are not considered taxable income to employees and therefore not subjected to payroll tax. When choosing to reimburse expenses under a nonaccountable plan, the amount employees are paid is considered income for tax purposes. Companies may use a combination of an accountable plan and a nonaccountable plan if they wish to reimburse some expenses tax-free and others (such as meal per diems) as taxable income.
The key to successful employee expense reimbursement is to have a documented policy defining reimbursable expenses and stipulating how they will be repaid. As your company grows and the number of employee expense reimbursement requests increases, moving to an online accounting system may help increase reimbursement efficiency and policy enforcement.