After salaries, travel and business expenses are the second largest controllable cost for your business. Having an effective expense policy helps you keep an eye on your expenses and have better control over them.
Without an expense policy, your team has no clue what the rules are. With an expense policy, however, your team knows exactly what they can be reimbursed for, and your finance team (which, might just be you!) will know exactly when to accept or reject an expense report.
If you don’t want your employees to have to declare their expense reimbursements as taxable income, then the IRS requires you to have a documented expense policy, too. Your employees will thank you come tax season.
What Does the IRS Say About Expense Policies?
Per the IRS, expense reimbursements don’t have to be included in an employee’s wages if you have an accountable plan. For your expense policy to be an accountable plan, it must meet the following criteria:
Expenses must have a business connection. Your employees must have paid or incurred expenses while performing services as your employee.
Your employees must adequately account for their expenses within a reasonable amount of time.
If you give your employees an advance for an expense, they must return any excess within a reasonable amount of time.
If your expense policy does not meet those three criteria, then the IRS considers your policy a non-accountable plan, so any expense reimbursements are considered income and are included on the employee’s W-2.
What Does Adequately Accounting for Expenses Mean?
For your employees to adequately account for expenses, they must submit receipts or invoices documenting the nature and amount of the expense. If the expense is less than $75, the IRS does not require a receipt (except for lodging).
With meal receipts, your employees should include:
Who was there;
Why the meal was considered official business;
Where the meal occurred;
What the cost of the meal was; and
When the meal occurred.
If your employees are submitting mileage, and you’re using the standard mileage allowance, they must document where they drove to and for what business purpose. The standard mileage allowance for 2017 is 53.5 cents.
What is a Reasonable Amount of Time?
A reasonable amount of time can change depending on the facts and circumstances of a particular situation. Actions taking place in the following timeframes, however, are considered reasonable amounts of time:
An employee submits an advance request within 30 days of expecting to incur an expense;
An employee adequately accounts for their expenses within 60 days after incurring or paying the expense;
Your employee returns any excess reimbursement within 120 days of the expense being incurred or paid; or
You give an employee a periodic statement, at least quarterly, asking to return or account for outstanding advances. Your employee should comply within 120 days of receiving the statement.
**We recommend you consult your legal and/or tax advisor to ensure your expense policy is IRS compliant.**
What Should I Include in My Expense Policy?
When creating your expense policy, include the following sections:
Purpose & Scope
In your introduction, explain the purpose of the expense policy and reiterate that the expense policy applies to all employees.
Expectations & Procedures
Outline any expectations you have about employees’ incurring expense.
Explain the exact procedure employees should follow to track, document, and submit expense information for reimbursement. Using web-based programs, like Workful, makes these procedures easy. Your employees can track, document, and submit their expenses and mileage from anywhere.
Travel Expense Policies
Discuss your policies about travel expenses, including transportation, lodging, and food.
Miscellaneous Expense Policies
Sometimes, your employees will incur miscellaneous expenses, like postage or office supplies, so make sure you include those policies, too.
Explain your policy on advances, even if your policy is that you don’t give advances. If you do give advances, explain when your employees should request the advance, when they should submit their expense report after incurring the expense, and when they should return any excess amounts.
Your employees might get antsy waiting for their reimbursements, so put them at ease by telling them when they should expect their reimbursement (as long as they submitted their expense report and documentation correctly).
Tips for Creating an Effective Expense Policy
Reading an expense policy probably isn’t something your employees enjoy doing, but if you follow these tips, you’ll be able to create an expense policy that’s easy to read and understand.
Keep It Simple
Your expense policy should be a helpful list of guidelines explaining what employees can and cannot claim on their expense reports. Make sure it’s easy enough for everyone in your company to understand, so more people will remember the rules and follow them.
Make It Fair
Your employees should be able to claim reasonable expenses, so set reasonable expectations. If you set too low of a limit on travel expenses, for example, your employees might have to spend hours looking for a hotel that fits in the budget or might feel guilty grabbing a sandwich on the road.
You should also make sure that the same guidelines apply to everyone in your company and that no one is getting special treatment.
Keep It Up-to-Date
As technology and prices change, your expense policy should change, too. Make sure that you’re regularly reviewing your expense policy and updating it.
Make It Easily Accessible
Your employees can’t read your policy if they can’t find it. Keep it in an easy to find spot, like an online document warehouse, so everyone can access it.
Make sure you reimburse your employees accurately and timely. If your employees are following the policy guidelines, you should be able to easily approve their expense reports, so you can pay them back faster.