Expense reimbursement 101: Time to get back to basics

Trip to Italy? Nope

Bear rug? Nope

Pogo stick? Nope

Taxes? Maybe

Chief operating officers who were recently surveyed by the Robert Half outplacement firm said they’ve encountered employees putting in for the above reimbursements. More than half also report there’s been an increase in employees attempting to abuse their company’s expense reimbursement policy.

Well, with reimbursement request like these, that’s pretty obvious.

The vast majority of respondents—85%—said their companies use technology to track employees’ expenses.

Accountable plan rules

A sharp-eyed Payroll manager doesn’t need technology to test whether an expense is reimbursable tax-free. The accountable plan rules, which set the rules for tax-free reimbursements of employees’ business expenses, require the following:

  • Employees incur expenses in connection with their performance of services for their employers (i.e., there’s a business connection)
  • Employees substantiate their expenses within a reasonable period of time
  • Employees return excess reimbursements or allowances within a reasonable period of time.

It would be quite difficult to show the business connection for European trips, bear rugs or pogo sticks. So nix those reimbursements right away.

Employees and the company may come to an agreement about reimbursements for taxes. That’s got nothing to do with the accountable plan rules. If you choose to reimburse an employee’s taxes, you’ll have to gross up the payment, because reimbursing an employee’s taxes is itself taxable.

The basic formula for grossing up federal taxes is:

Fair market value of item

0.7035

If the employee has maxed out on Social Security taxes, the denominator is 0.7655.

If the employee is subject to the 0.9% additional Medicare tax, the denominator is 0.7565.

What we have here is a failure to communicate

Now is the perfect time to take a look at your expense reimbursement policy. It should clearly state what the company will and won’t pay for and should require that employees’ managers sign off on reimbursement requests. Here’s an example:

Employees who incur or approve business-related expenses must exercise prudent judgment to ensure the expenses are for legitimate Company business. Employees may seek reimbursement for the following expenses:

  • Food and refreshments, including alcoholic beverages
  • Meals while in travel status or when travel extends the employee’s work day (i.e., extended day travel)
  • Conferences
  • Business mileage
  • Professional dues/memberships.

Equally important, it’s important to specify what won’t be reimbursed.

Employees who incur the following expenses will not be reimbursed:

  • The personal portion of any trip
  • Family expenses, including those of a partner when accompanying the employee on a business trip, child or pet care
  • Entertainment expenses, including theater, shows, movies, sporting events, golf or spa treatments
  • Personal automobile expenses including repairs, insurance, gasoline or traffic citations
  • Personal losses incurred while on Company business.