As your company grows in size and success, the likelihood that you’ll empower some of your employees to spend its money increases dramatically. The typical scenario involves either traveling or wooing clients, when business-related expenses like gasoline, meals, hotels, entertainment, and so forth are incurred.
For various reasons (including that the IRS wants employees to pay income taxes on reimbursements unless they’re made under an accountable plan or detailed in extra paperwork), it’s best to reimburse these expenditures under an employee expense account policy.
Here’s how to establish an employee reimbursement policy that works:
- Focus on fairness. Reimbursable expenses should include everything that’s fair for the company to cover. If you limit how much an employee may spend on a nightly hotel stay, for example, what happens when your sales team hits the Big Apple (with its exorbitant rates)? If you reimburse by mileage vs. actual expenses, consider whether this approach is fair when gasoline prices skyrocket. Be ready to revise your policy when it treats any employee unfairly.
- Establish a single set of rules. The most effective expense account policies apply equally to everyone who’s eligible for reimbursement. Different rules for different employees are difficult to oversee and enforce — and often produce some degree of resentment.
- Ask for input. As smart and experienced as you are, there’s a chance you’ll overlook a sensible category or guideline that you’ll later wish you’d included. What’s more, by asking for input from employees, you’ll increase the odds that they’ll think your policy is fair (and therefore be less inclined to try to “game” it).
- Write a Statement of Purpose. This helps to clarify why you created the policy, to whom it applies, which situations it covers, what behavioral expectations you have, how to file for reimbursement (and with whom), and what happens if an expense is rejected or an employee violates the policy.
- Set deadlines for filing and repayment — and stick to them. You may think of your expense reimbursement policy as just another aspect of company management. But to those it covers, your policy is often critically important for recovering their personal funds advanced on your behalf. They’ll want it back as soon as possible, with little or no uncertainty about approvals and amounts.
- Include a “custom” component. Issues such as tipping, laundry, room service, rental car accidents and theft, parking and valet fees, and overall spending behaviors can vary considerably from one situation to another. Your reimbursement policy should have enough flexibility to cover every eventuality. For example, will you reimburse for drinks if your sales rep meets a buyer for lunch? How about when she takes a CEO to dinner to celebrate a big purchase contract?
- List rather than describe. Trying to describe or define the kind and caliber of expenses (first-class flights? five-star hotels? taxis? limousines?) you’ll cover at employees’ discretion is difficult and time-consuming. It also leaves your policy open to misinterpretation. Instead, offer detailed lists [PDF], which you can compile based on past receipts for actual expenses. When a new type of expense comes up (club memberships, smartphone data charges, a night on the town to celebrate a prospect’s birthday, etc.), add it to the list.
- Communicate clearly. Employees will be more likely to follow your expense reimbursement policy if they fully recognize and understand it. Post your policy on internal bulletin boards, email it once or twice a year to everyone it covers, and print it on
any expense reimbursement request forms.
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