Complete Guide to Reimbursing Employees for Travel Expenses
When an employee travels away from the office and incurs expenses, the company should reimburse them. Whether travelling across the world or just driving their car to a client’s location, getting the reimbursement right isn’t hard.
Keep reading to learn how to make proper employee reimbursements.
You’ll first need to decide if you will implement an accountable or nonaccountable plan. This is just as it sounds; either you’ll have employees be accountable for business expense reimbursements or not.
All businesses should have an expense reimbursement plan in writing. This includes corporations, sole proprietors, the self-employed, and non-profits. Non-profits should be extremely careful when reimbursing disqualified persons because nonaccountable plan reimbursements not properly approved or recorded can cause significant tax exposure to the charitable organization.
An accountable plan must follow the IRS guidelines for expense reimbursement. To qualify, the following rules must be met:
- Expenses must be for business purposes.
- Expenses must be adequately reported to the company in reasonable time.
- Any excess reimbursement or allowance must be returned in a reasonable amount of time.
Any expense that doesn’t meet these three criteria is considered a reimbursement under a nonaccountable plan.
This distinction between these two types of plans is important because accountable plan reimbursements are not taxable to the employee, whereas nonaccountable plans are taxable.
Expenses incurred as an employee while completing work for an employer have a business purpose. Examples include things like registration fees for a conference, taxi rides to the airport for a business trip, or meals while away on a business trip.
If however, an employer reimburses an employee for dinner when the employee works late, this does not qualify as a business purpose. This reimbursement would be taxable to the employee because it was made under a nonaccountable plan.
Reporting in a Reasonable Time
While what is considered a reasonable amount of time is subjective, the general rule is that all reimbursable expenses must be submitted within 60 days of when they were incurred.
Adequate reporting involves providing a record, like an expense report, of all expenses incurred and providing evidence, like receipts, to support the expenses.
If an employee receives a travel advance to cover travel expenses but spends less than the advance, the difference is an excess reimbursement and must be returned to the employer to not be taxable. If the excess isn’t returned in a reasonable amount of time, it’s taxable.
A reasonable period of time in this instance is generally deemed to be within 120 days of when the expense was incurred.
With a travel advance, employees should submit an expense report and receipts to substantiate all expenses.
Mileage and Business Use of Personal Vehicle
When an employee uses their personal vehicle for company business, you’ll need to reimburse them. You have three options.
- Standard mileage rate
- Actual costs
- Monthly allowance
Standard Mileage Rate
If you use the standard mileage rate, it is 57.5 cents per mile for 2020.
You can pay more, but the IRS’ safe-harbor threshold of 57.5 cents per mile will allow you a tax deduction without having to substantiate the rate.
Note that the IRS typically updates rates in December. So, you can expect to see the 2021 rate announced in December 2020. IRS 2021 Mileage Rates are here.
IRS Standard Mileage Rates 2020
Instead of using the standard rate, you can reimburse employees for actual expenses.
The employee will sum up all the costs of owning the vehicle including everything from fuel, maintenance, tolls, registration, and insurance. And based upon the percentage of business miles driven, that portion of the total actual costs is reimbursed.
Using the monthly allowance method is relatively easy. Each month you provide a set dollar amount to the employee.
If you require the employee to provide a mileage log at the end of the month, this will determine if any part of the allowance is taxable. If no mileage log is required, the entire allowance is taxable under an unaccountable plan.
If a mileage log is provided and the employee drove less than expected, they should return the excess allowance within 30 days. If they don’t, the excess becomes taxable to them.
An employee’s commute from their home to their normal place of business is not a reimbursable expense. Any business miles driven in excess of the commute miles is reimbursable.
For example, an employee’s normal round-trip commute is 20 miles. On Fridays, the employee works on-site at a client’s office that is 30 miles away from the employee’s home. So, the employee drives 60 miles round-trip on Fridays. Since this is longer than he would drive if he commuted to the office, you’ll want to reimburse the employee for 40 miles (60 miles – 20 miles).
Employees should keep mileage logs when using a personal vehicle for business use. The log should include:
- Employee’s name
- Description of vehicle
- Date of business use
- Purpose of business use
- Starting mileage on odometer
- Ending mileage on odometer
- Approval authorization
Here’s an example of a mileage log using Microsoft Excel.
Note that in this example, the employee drove from the office to a client and then back to the office. Therefore, there is no need to deduct commuting mileage.
But suppose, like in our example from above, that on Fridays the employee drives from home to the client’s location and back home. His mileage log would look like this:
But what if in this example, the drive to the client’s office from the employee’s home was shorter than his regular commute? In this case there is nothing to reimburse and the employee enjoys the benefit of less driving.
What would happen if this same employee didn’t normally work on Fridays or he always worked from home on Fridays? Then the entire drive to the client’s office would be reimbursable since the employee’s normal work schedule didn’t require him to commute on Fridays.
Many employees will forget to deduct their normal commute from mileage reimbursement requests. You’ll want to remind them.
Direct Expense Reimbursement of Travel Expenses
For employees who travel frequently, providing them with a company credit card is ideal. But for those times when an employee must use their own money for business expenses, you’ll want to reimburse employees quickly.
For easy recordkeeping, have employees complete expense reports when seeking reimbursements. Like the mileage log, it will detail who incurred the expense and when, what it was for, and the amount.
You can reimburse your employees with cash; however best practices would be to pay with check or some other trackable means, like ACH.
Here’s an example of an easy expense report in Excel.
For each expense, the employee should include receipts to support the amounts requested.
Receipts for purchases should contain the amount, date, place, and a brief description of the expense.
For example, hotel receipts should include:
- The name and location of the hotel.
- The dates stayed.
- Separate amounts for charges (i.e. lodging, meals, or food).
Restaurant and meal receipts should include:
- The name and location of the restaurant.
- The names of people in attendance.
- The date and amount of the meal.
You may choose to reimburse employees for meal tips. Be sure to have a clear policy of what will be reimbursed and what will not. For example, you’ll reimburse up to 20% for tips. Anything above that will not be reimbursed.
You’ll also need to consider your policy for lost receipts. You can still reimburse but have the employee fill out a missing receipt form to document the expense.
In lieu of direct expense reimbursement, consider using a per diem.
A per diem provides the employee with a specified dollar amount per day to use on meals, snacks, lodging, or other miscellaneous purchases. Larger expenses like airfare would be paid using the direct expense reimbursement method or paid for directly by the company.
Per diems should be prorated for partial days of travel. Acceptable methods include the ¾’s method or any other method you choose that is reasonable. The ¾’s method adds ¾ of a daily per diem rate on departure days and another ¾’s on return days.
The IRS sets per diem rates for cities and metropolitan areas. More expensive locales have higher daily rates than cheaper cities. For example, the daily rate for high cost cities like San Francisco, Vail, Colorado, and Nashville, Tennessee is $297. And many cities are designated high cost for only portions of the year. Miami and Park City, Utah are considered high cost only from December 1 – March 31.
And if you’re not in a high cost city, the daily rate is $200. These per diem rates are often updated each year. So you’ll always want to check for the current rates.
For example, Dave is travelling to Seattle for business. Seattle is a high cost locale. He’s leaving on Monday and returning on Thursday. Seattle’s maximum per diem rate is $297 per day. Dave will receive $222.75 ($297 x ¾) for Monday and Thursday and the full $297 for Tuesday and Wednesday.
Per diems are not taxable income to your employee if you use the IRS rates and your employee provides an expense report with receipts. However, using higher rates will create taxable income for the amount above the federal rate. And not submitting an expense report and receipts will make the entire per diem taxable because you’ll have an unaccountable plan and your company will not have the required receipts to support the tax deduction.
If your business operates in the transportation sector (i.e. shipping, trucking, or rail, etc…), it’s important to note that there are different per diem limits and rules you must follow.
With the 2017 Tax Cuts and Jobs Act, entertainment expenses are no longer tax deductible for companies.
As an employer, you may still reimburse your employees for entertainment expenses; however, these reimbursements will need to be segregated so that they are not included on your tax return. Examples of entertainment expenses include tickets to entertain clients at sporting events or country club fees for golf memberships.
What documentation you require for entertainment reimbursements is up to you but best practices suggest following the same requirements for travel or mileage reimbursements.
If travel or meals involve both a business and personal aspect, only the portion of the expense that is business related is reimbursable. Expense reports and receipts should indicate whether there are any personal expenses.
For example, an employee makes a business trip to California from Georgia and elects to stay two days after business is finished for a mini-vacation. Best practices would have the employee check out of his hotel room and check back in using his personal credit card to pay the hotel bill for his extended stay. This way he has two different receipts; one for business and one for pleasure. However, if he doesn’t do that and the entire hotel stay is charged on the same receipt, you’ll need to back out the charges related to his personal stay.
None of this information should be taken as legal or financial advice, nor should it deter you from seeking the assistance of a licensed attorney, accountant, or financial services professional. But if you want to make sure your company’s policies for employee reimbursements are consistent with best practices, implementing these policies is a great place to start!