Employers and employees should understand the business’s guidelines for travel expense reimbursement policies so that neither runs into any issues over business-related expenses down the road. The IRS is pretty flexible with employers when it comes to employee reimbursement for travel expenses while away on a business trip.
Does travel expense reimbursement qualify as a deductible travel expense?
What the IRS is not flexible about is whether or not the travel-related expenses incurred on the business trip qualify as a deductible travel expense. Employers can deduct “ordinary and necessary expenses” of employees traveling away from their tax home. According to the IRS, any reimbursement that does not qualify as a deductible travel expense is considered employee wages.
What are “accountable” and “non-accountable” plans?
There are two methods for reimbursing workers for expenses incurred when traveling for business. These are the “accountable plan” and the “non-accountable” plan. An “accountable plan” is based on the Internal Revenue Service’s guidelines for reimbursing employees for the actual costs of travel so that the reimbursable expenses incurred are not counted as income. This means that the reimbursements are not subject to W-2 reporting or withholding taxes. The expenses, however, must be business-related. To qualify for the “accountable plan,” expenses must be business-related, reported accurately, and excess reimbursements issued.
If the company’s reimbursement plan doesn’t meet the IRS’s guidelines for the “accountable plan,” then the expenses fall under the “non-accountable plan.” If a reimbursed cost is non-accountable, then it is subject to being taxed as part of the employee’s compensation, therefore, it must be reported on the W-2 form and is subject to withholding.
What is travel expense reimbursement?
Travel expense reimbursement is when you pay employees back for business expenses incurred while traveling. The expenses that are reimbursed are dependent upon the reimbursement policies determined by your business.
A travel reimbursement policy should be set up by your business that specifies the rules and procedures regarding reimbursement for travel-related expenses. Many companies are using traditional expense management systems where staff can use a credit card and submit refunded trip expenses after the trip ends. The use of credit cards prevent employees from having to make on-the-spot payments using their personal funds for the out of pocket expenses when traveling.
What common types of travel expenses qualify for deductible expense reimbursement?
As an optional reimbursement provider, you have a choice on whether or not to reimburse employees for travel expenses. Regardless, a clear reimbursement policy should be established within the company. Some of the most typical reimbursable expenses include the following:
- Transportation costs between your home and the business destination
- Transportation between airport/station and hotel
- Transportation between the hotel and the work location
- Sending company-related supplies from your regular work location to your travel work destination
- Business use of a rental car or the actual expenses of operating your personal vehicle when traveling away from home on business such as mileage reimbursement
- Lodging and meal expenses
- Dry cleaning and laundry
- Business communication expenses
- Business related tips
- Parking fees and tolls
How do expense reports play a role in a business’s expense reimbursement policy?
To prevent fraud and to keep company records updated and accurate, companies should use expense reports as part of their expense reimbursement policy. The expense report should be used by employees to report incidental expenses such as travel expenses, business meals, and small purchases of supplies or equipment for the office.
Employees fill out these expense reports, which require the information of a typical transaction. Some of the information found on an expense report include the vendor’s name, date paid, expense description, amount paid, and totals for each expense category. Then the expense report is submitted to the company and according to the reimbursement policy, the employee is reimbursed.
It’s important to always have proof or documentation of the expenses that you incurred. The best proof is to provide the original receipt. Therefore, when turning in an expense report, always attach any supporting documentation such as your receipts to the expense report. This safeguards the company against fraud and ensures that the company will have the documentation needed for tax deductions and any audits if requested.
Processing expense reports for travel reimbursements
Once expense reports are submitted to the company, the company is responsible for the accuracy of the expense reports. The company has an obligation to check the expense report against its business travel and reimbursement policies. This is meant as an assurance system for ensuring accurate compliance with corporate policies.
Deadlines for expense reimbursement
Businesses should establish monthly or quarterly deadlines for expense reports. This ensures that the business can claim the expense as a tax deduction. It also ensures that records are kept more accurate and up-to-date, that an expense doesn’t fall through the cracks, and that the company maintains a more efficient cash flow. Not only should there be a deadline for the employee to submit an expense report, but there also should be a deadline for when the employee will be reimbursed by the company.
Frequently asked questions
The IRS offers two plans for reimbursing workers for travel expenses that are deductible:
(1) employers don’t have to pay employment tax by not including the reimbursement for travel-related expenses from the worker’s wages with the accountable plan; or
(2) employers will have to count all payments to workers as wages under a non-accountable plan.
Travel compensation consists of reimbursements for out of pocket expenses by employees when they travel for work. The employee typically fills out an expense report and turns it into the employer. Your employee’s costs will be affected according to your company and reimbursement policies. Travel insurance policies provide you with guidelines for reimbursement of travel expenses.
During business travel the actual cost of transport is 100% deducted—whether it is a flight ticket, train ticket, or bus ticket. Similarly, renting a motor vehicle can make your travel expenses deductible.
The best way to establish an accurate reimbursement strategy for your employee and your company is to ensure that you have an expense reimbursement policy in place and that it is covered with all applicable employees during the onboarding process. Providing an expense report template makes it much easier for the employees and for those processing the expense reports. The expense reports will also help to maximize tax deductions, make the audit process much smoother, and ensure that the employee is being reimbursed the correct amount.
Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.
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