The process of employers paying back their employees is crucial because there are instances when reimbursements can cause an imbalance in the company’s finances.
By managing business-related expenses properly, business owners are protecting their company, and finances are handled properly.
How can companies track and manage business expenses and what is the best way to pay employees their out-of-pocket spending?
What is Expense Reimbursement?
Expense reimbursement is the process of paying back out-of-pocket expenses. Based on the policies of the IRAS, employers are not allowed to claim input tax or tax deduction on employee reimbursable expenses unless you can prove that the employee is acting on the company’s behalf when the purchase was made to make them deductible.
When is an Expense Reimbursement Allowable?
An employee expense reimbursement should meet the company’s policies. However, in general, here are a few things to consider before validating a purchase as reimbursable.
Establish the accuracy of business-related expenses
Is the purchase related to the company’s operations or function? Is it a priority or is it necessary according to the company’s accountable plans? Was the employee authorized to make the purchase?
Establishing the connection of the work-related expenses with the company is important to make sure that the employee does not just submit random receipts or invoices. If the evaluation of connection is made evident from the beginning, employees will be hesitant to take fraudulent actions against the company by submitting unrelated or unqualified claims.
Employees should be able to identify whether a claim is valid or not depending on the expense reimbursement policy. If an employee fails to establish a business connection with the claim, then the company should automatically invalidate it.
Make sure the claim is substantial
Expense claims should be substantiated with documents to prove that the purchase or payment happened. As much as possible, small business owners should require that receipts are official for the qualified expenses. For example, receipts provided by the airline for business travels are acceptable while order forms which do not bear merchant information should not be valid.
Having sufficient documents can make it easier for the company to create valid expense reports acceptable to the IRS and allowable for a tax deduction.
Substantiation should not only be related to a specific business purpose but also be made within a specific timeframe. Depending on your company expense reimbursement policy, claims should be made immediately after the purchase is made or after the business trip. It should also clearly establish a business connection claimed within a reasonable period of time.
What is Allowable in the Expense Reimbursement Policy?
Identifying or qualifying reimbursable expenses should not be difficult if company reimbursement policies are set beforehand. There are different types of expenses and the following are generally considered as reimbursable:
Travel expenses are costs made by an employee during an official business trip. Employers send their staff to attend out-of-office seminars, meetings, or transactions. transport cost should be reimbursed. They even spend on lunches and other things necessary to pull off a business-related transaction.
Employees, however, should also remember that even during business travels, expenses for personal purposes are not considered allowable. For instance, if an employee went for an out-of-town business trip and decided to visit his family before going back, the company should not reimburse the expenses incurred during the visit.
Examples of reimbursable expenses for business purposes include car rental, per diem rates, gas mileage, computer rental or company computer repair, and shipment of items or luggage necessary for the trip.
During the ordinary course of business, employees make purchases for supplies or services. These are considered small business expenses or work-related expenses that should be necessary.
Aside from the 9 Common Types Of Company Expenses To Consider When Budgeting, you should also include in the list of reimbursable expenses the following:
- Credit card processing fees
- Education and training expenses for employees
- Certain legal fees
- License and regulatory fees
- Insurance costs
- Interest paid
- Office expenses and supplies
- Maintenance and repair costs
- Office lease
- Utility expenses
- Per diem rates
Healthcare or medicare expenses are company-funded made to cover the medical costs for employees such as medicare.
According to IRAS, the company’s expenses on employee health benefits are tax-deductible with a cap of 1%. The cap shall increase to 2% given the following conditions:
- Portable Medical Benefits Scheme (PMBS);
- Transferable Medical Insurance Scheme (TMIS); or
- Provision of inpatient medical insurance and Medicare benefits in the form of portable medical shield plans
What Employees Should Remember When Filing Expense Claims?
Although employees are permitted to reimburse, they should also remember that the company has policies for reimbursement which they should comply with.
Submission of claims
There is a deadline for the submission of claims against necessary expenses made before IRS publication. More often than not, employees should make an expense claim within one month after the business travel or within a reasonable period of time.
Although some companies allow employees to submit at any time, it is advisable to make a claim immediately. Some companies using clouds payment platforms allow for seamless uploading of receipts so employees can submit upon making a purchase or upon payment of the service wherever they are.
Required supporting documents
Companies reimbursing employees’ expense claims should collect enough accurate information for substantiation so proper documentation is required.
Employees should see to it that receipts and other documents comply with the company policies.
- For payments using credit cards, receipts should specify the items purchased and payment confirmation. As much as possible, payments should be supported by a credit card statement.
- For internet purchases, receipts don’t look the same as those coming from brick and mortar stores. For flights booked and paid online, the employee should submit both tickets and boarding passes.
- For use of their own car, some employers require the car’s mileage before and after the trip along with proof of fuel purchases. This is essential when reimbursing at the standard mileage rate.
Acceptable amounts based on expense reimbursement policy
Although business expense reimbursements can be paid back by the company, employees should remember that there is a budget set for every purpose. For instance, business trips to a certain location may just have a budget of $1,000. Employees should not go beyond the set amount unless they can prove that the excess budget is necessary and reasonable.
What are the Best Practices When Using Expense Reimbursement Software?
Have a firm and consistent expense reimbursement policy
Having a clear standard policy for reimbursement is important especially if employers would want their employees to submit genuine documents for expense claims.
Sometimes, companies need to ensure that employee expense reimbursements are not just a process but also an aspect of keeping track of company expenses. If the policies are consistent, clear, and fair, there will be fewer possibilities for inaccurate and fraudulent claims.
Implement a simple reimbursement process
Understandably, companies would like to make sure reimbursements are valid. However, if it will be difficult for employees to process expense claims within a reasonable period of time, then this might cause employees to exaggerate their expense claims to compensate for the complex process they go through.
Simple expense reimbursement processes will encourage employees to spend from their pockets and expect repayments with tax benefits at the soonest possible time.
Approve expense claims on time
Employees don’t have as much money as the company and they need to have their own money back as soon as possible. Delay in repayments can lead to frustrations and disappointments which might not inspire employees to be productive.
Aside from delivering employee satisfaction, timely repayments of expense claims with the employee’s wages can help the accounts team to manage the company’s financial health properly, balance the accounting books regularly and submit accurate expense reports on time for tax return.
In case an employee fails to submit proper documents to substantiate their claims due to the pandemic, certain considerations should be extended for such expenses to be reimbursed.
Consistently audit the processes
Time is changing, and one step may no longer apply to the digitized world we move in today. Replace traditional accounting and reimbursement processes with the right SaaS platform integrated into an updated reimbursement plan that offers seamless reimbursement for actual expenses.
Review the processes regularly to consider adopting a cloud platform to ease the reimbursement.
How to Reimburse Employees Using Expense Reimbursement Software?
Business owners can automate expense reimbursement by choosing the right software. Cost and operational efficiencies can be possible with expense reimbursement software.
The automation platform should support multiple users for actual expenses and should allow customization to fit the reimbursement policies of the company. You may also want to choose a reimbursement system that can categorize business-related expenses, create expense reports and submit these automatically.
One of the best ways to satisfy employees and enhance their trust in the company is to reimburse small business expenses on time and accurately. With seamless integration of expense reimbursement software in your accounting processes, you will not only secure the health of your business funds but also ensure the confidence of employees towards company processes.