Expense reimbursement policy best practices
Expense reimbursements are when a company owes its employees money for out-of-pocket purchases that they made on behalf of the company. Establishing a formal expense reimbursement policy sets expectations about what types of expenses will be covered by the company and when the company will pay them back.
What is an expense reimbursement policy?
An expense reimbursement policy is a set of guidelines that dictate what out-of-pocket purchases employees can make on behalf of their company, and how and when they will be paid back for work-related expenses.
Any business in which an employee makes a purchase on behalf of the company using personal funds (cash, personal credit card, etc.) instead of a corporate credit card should have an expense reimbursement policy.
Out-of-pocket business expenses are very common for event planning or travel heavy roles. An employee might pay out-of-pocket for cab fare from the airport to a conference center. Or someone might use personal funds to buy last minute supplies for a fundraiser that their company is hosting. When employees use their own money to make purchases on behalf of their employer, they need to know how they will be reimbursed for these expenses.
How to create an expense reimbursement policy
There are two key steps to building an expense reimbursement policy:
Create guidelines for what counts as reimbursable expenses
Ask yourself these questions:
- Is the expense travel-related? If yes, refer to your travel guidelines for employees. You should have guidelines for what does and doesn’t count as a travel-related expense in there. For example, meals eaten while traveling, would be reimbursable so long as they adhere to your company’s per diem rates.
- Expenses that aren’t travel-related can be reimbursed if they meet the criteria for accountable plan rules. The IRS creates guidelines for reimbursing employees so that these expenses don’t count as taxable income. For expenses to meet accountable plan rules they must be work-related expenses and reported to employers in a timely manner.
Outline how employees should report expenses
First, have them track their purchases by saving receipts. They should note what each expense was for to prove that it had a business purpose if the IRS decides to conduct an audit. Tired of collecting paper receipts? Use an expensing tool to automate expense reports and simplify travel expense tracking.
Next, set deadlines for filing expense reports so that you can close the books and reimburse employees in a timely manner. Decide how you will deliver the reimbursements to employees. Expense reimbursements are not taxable income for employees if they meet the IRS’s accountable plan criteria. In this case, reimbursements should be separated from an employee’s wages.
Set expectations for when and how employees will be reimbursed. For example, you could reimburse employees for out-of-pocket expenses via direct deposit when they get their paychecks, or you could cut checks 30 days after the expenses have been processed. It’s just a matter of deciding what works best for your organization.
How to document and implement your employee expense policy
Creating a reimbursement policy for out-of-pocket expenses is half the battle for a finance team. Proper documentation and implementation are the keys to policy success. You can do this by:
- Making your company’s expense reimbursement policy clear and specific. Define any potentially confusing jargon so that employees won’t misunderstand the rules.
- Testing it out on employees. When you know the ins and outs of accounting, it’s easy to assume that everyone else does too. Test your new policy on a focus group before rolling it out to the entire company to see what you need to explain or simplify. Does everyone understand what an accountable plan is? Are “work-related expenses” clearly defined? Can employees get access to the company credit card instead of paying out of pocket? Get feedback to determine whether or not the policy has clauses that can be misinterpreted. Make adjustments as needed.
- Announcing the new policy and making it easily available through your company's communication tool, Slack, intranet, etc. Make the policy available in a cloud-based drive so that employees can review it on the go. This accessibility is especially important for your business travelers.
- Including the expense reimbursement policy in your corporate travel policy to make it even more accessible.
- Equipping employees with travel and expense software to enforce the policy. Give them an expense management tool to help collect receipts and file expense reports and travel booking software to track travel expenses.
Another factor in the success of your expense policy is timing. To optimize adherence to a new policy, implement it at the start of a new year (fiscal or calendar) or after you’ve created new budgets or audited travel and expense spending.
Seamlessly integrate your expense tool with TravelPerk
The simplest and most efficient way to manage business travel expenses is to integrate your chosen expense partner with a business travel booking tool like TravelPerk. By keeping all your expenses in one place you can stay in control of your budget, avoid mistakes and keep your travelers happy.
Tips for enforcing an expense reimbursement policy
After implementing your reimbursement policy, it’s important to enforce it to avoid fraud. Expense reimbursement fraud usually happens in one of two ways: when employees make up expenses that they didn’t have (like a taxi ride to a meeting that they walked to) or when they inflate expenses (renting a luxury vehicle instead of a more economical option).
Minor travel expense reimbursements can add up. Let’s say that an employee uses a personal credit card to pay for a cab ride taken for a personal outing during a business trip. The fare costs only $6 so it slips under the finance department's radar. However, when you multiply minor fraudulent expenses like this one by dozens of employees and hundreds of rides, this $6 could quickly turn into $6,000 or $60,000!
It’s important to enforce an expense reimbursement policy to maintain control over company spend and prevent any greedy employees from draining the company’s resources for personal use. If you enforce the policy and punish abusers, overspending and fraud will stop.
Use these tips to avoid expense reimbursement fraud:
- Ask employees for receipts that include the vendor’s name, date and time of purchase, and list of items bought.
- Scrutinize receipts. Are they forged? Do the purchases make sense? Is the employee trying to get reimbursed for a tip although gratuity was included in the meal? Does the receipt have a bunch of business-related expenses and several personal purchases hidden amongst them? Play detective.
- Create consequences for fraud. Firing employees who commit fraud will set an example and discourage others from following suit.
- Create consequences for overspending. If employees spend over the per diem rate for their trip, reimburse them up to the allowed amount, but don’t let them get away with anything more. If a certain employee consistently overspends on business trips, consider giving them fewer travel opportunities.
- Use tools that enforce the company’s spending policy. Adopt a travel management tool that shows which options are on-policy and which aren’t. Technology makes it easier than ever to identify and prevent expense reimbursement policy fraud.
- Grant employees access to virtual corporate cards. These cards give administrators the ability to track spending in real time. If a finance team member sees a business traveler making suspicious purchases, they can send the employee a warning or email them a copy of the expense policy as a reminder.
Enforce your company’s expense reimbursement policy to avoid fraud and save your company money.