Large companies often offer expense accounts to employees to make business-related purchases, but what about small businesses? A simple Reimbursement Form may be all you need! Small businesses can use reimbursement forms in place of expense accounts to accomplish the same task and simplify accounting. An employee uses the reimbursement form to recover business expenses paid for out of their own pocket. Employers should consider the following questions:
- Is your reimbursement plan Accountable or Nonaccountable?
- Why keep records for expenses and what is "Substantiation"?
- Do established criteria exist for approved employee expenses?
- Should limits be set on expenses?
Accountable vs. Nonaccountable Plans
For tax purposes, the IRS categorizes expense accounts in the following two ways depending on the criteria they meet.
- Expenses must be business related and reported in timely manner.
- Business expenses exceeding a certain amount require accompanying documentation.
- Payment to the employee’s is usually paid separately in the form of a check or deposit, separate from the gross income. This type of account is exempt from with-holdings.
- The employee is required to return any excess amount given by the company and not used for business expense (an advancement for example).
- The company doesn’t require employees to validate reimbursement through documentation.
- Reimbursement is considered part of the income and subject to taxes and with-holdings.
For more information about requirements visit the IRS publication regarding these two plans. Vertex42 prefers to use an Accountable plan for simplicity and good record keeping. You don't have to mess with the payroll, and employees may appreciate not having their reimbursement penalized with with-holdings. With an Accountable plan the payment can be allocated to the various expense categories when recording the check in your accounting software, just as if the purchase had been made through the business account instead.
Substantiation for Expense Reports
Substantiation is the term the IRS uses for documenting business expenses exceeding a certain amount. Documentation usually occurs in the form of receipts. The IRS requires businesses to keep receipts for 3 years. It set the minimum amount to substantiate as $25 in 1962 to help reduce paperwork. The amount was raised to $75 in 1995. Some experts still suggest obtaining receipts for all expenses. You will need to decide what works best for your business.
I worked for a company where the employee substantiated purchases over $50 with a receipt. The exception to this rule was office supplies, which required receipts with any purchase regardless of the amount.
Establish Reimbursement Criteria
It behooves both employer and employee to discuss approved expenses for the company. Pointing out approved business expenses helps avoid misunderstandings and may curtail fraudulent activities. For example, Some employers won’t approve the purchase of alcohol or entertainment, while others feel that expenses can be approved if it is on a business related trip.
This situation occurred within a company where an employee left over an expense dispute with a supervisor. The employee had gone to some business training. He had felt like one of his expenditures was justified for business purposes while the manager felt like it was a personal expense and didn’t approve it. The parties couldn’t agree on the situation and the employee resigned (other factors played into the decision as well). Understanding the criteria can be beneficial to both parties.
Setting Limits for Reimbursement
Setting limits for expenses is at the discretion of the business. It can be difficult to set limits on some expenses like office supplies or fuel because it depends on the need. Other items such as meals are easier to set limits for. Some businesses use per diem rates (Latin for “per day”) found on the General Services Administration website for limits on lodging, meals and incidental expenses. Employees should be aware of any per diems or limits used for reimbursements.
Expense Reimbursement Form
Vertex42 has created a free Reimbursement Form that employers can customize for their business. Take a look at the screenshot on the right.
The Travel Expense Template is used for small businesses with employees that travel. Travel rates are found at the GSA site.