Employee Expense Reports are More Important Than Ever
No one likes to keep track of their receipts, fill out expense reports or keep track of their mileage--especially the very people in your business who spend a lot of their time on the road.
But thanks to changes in the tax law, failure to require those employees to keep track of their expenses and to provide support for any business expenses they incur could subject them to additional income tax (starting in 2018 and continuing through 2025).
Structure Your Plan Carefully
There are two ways an employer can provide compensation for business expenses incurred on your behalf by employees:
- Record keeping required by employer (which makes reimbursement or allowances a nontaxable benefit).
Expenses managed this way are called an “accountable plan” in IRS terminology and include the following elements:
- An expense report submitted by the employee – including mileage log, expense receipts, as well as documentation of the business purpose and details and of the meeting.
- A requirement that the employee reimburse the employer for any portion of a payment that is spent on non-business expenses.
c. Per-diem reimbursement using standard federal per diem rates (which are location specific), standard meal allowances and simplified substantiation rules (they must still track the time, place and business purpose of the travel or meal.)
- Record keeping not required by employer (which makes reimbursement or travel allowances a taxable benefit.)
If employees receive reimbursements or stipends without providing records, those amounts are considered taxable wages, reportable to them on their W-2. This is what the IRS calls a “nonaccountable plan” .The change, starting in 2018 has to do with the employee’s ability to claim those expenses as deductions on their own individual income tax return. Under current tax law, there is no longer an option for employees to deduct unreimbursed employee business expenses as an “itemized deduction.” This means there can be a tax cost to not requiring record-keeping by employees.
Automating Record Keeping
While there is resistance to record keeping, there is even greater resistance to paying more income tax than necessary. Automated expense tracking applications can help reduce the pain of record keeping, reporting and employee reimbursements so more employees are able to be reimbursed tax-free.
Consider two leading expense apps: Concur and Expensify. These phone apps can be loaded on each employee’s phone. They integrate with the phone’s camera and can be used to take a photo of a receipt (while at the event), record the business purpose and other details, match the receipt to the credit card transactions, and then submit a report to the employer for reimbursement. These apps offer affordable per user price points and easy integration with leading credit cards. In addition, they offer direct links to employee bank accounts so an employer can make an electronic transfer of the funds directly to their employee’s designated bank account.
To simplify mileage tracking, there is an app called MileIQ that runs on your smartphone. It runs continuously in the background and tracks starts and stops automatically during the course of your day. At the end of each day, your employee can swipe left for personal miles, right for business miles and then create a report for reimbursement.