How to manage employee travel and entertainment expenses
September marks the back-to-school season. This time of year many businesses also ramp up business activities. As employee activity increases, they often incur expenses to travel to meetings, client offices, conferences, training programs, sales calls, etc.
If your employees generate travel expenses, we provide below an overview of the IRS rules on travel reimbursement and tips on how to manage and monitor these costs.
Out-of-Town and Local Travel
The IRS uses a concept called “tax home”, which is not where the employee lives. The IRS defines an employee’s tax home as their regular place of work. The tax home includes the entire city surrounding the workplace.
Under IRS rules, the agency allows a favorable tax treatment when the employer reimburses travel expenses away from the employee’s tax home.
To deduct the out-of-town travel expenses, employees must travel longer than an ordinary day’s work and need to sleep or rest away from home. This travel also must be short-term, lasting less than one year.
For this distant travel, employers can reimburse employees for expenses such as:
- Auto expenses for use of a personal car (paid by the mile or actual expenses)
- Car-rental (if not using personal auto)
- Taxi charges, bus fares or limo fees
- Lodging and Meals
Generally, employers can reimburse employees out-of-town expenses on a tax-free basis. Employees do not need to declare these payments as compensation. These expenses must be ordinary and necessary.
If you reimburse employees for commuting expenses from their residence to the office (tax home), you must record this as taxable income for the employee.
Even if the employee lives a long distance from the office, the IRS considers the payment of commuting expenses as taxable income. The agency’s philosophy is that the employee chose to live a far distance from the workplace.
Employers can reimburse employee’s travel from their tax home to attend local meetings, training, sales calls, etc. You can reimburse local travel expenses on an actual cost basis or pay mileage at the current allowable IRS rate, which is $0.58 in 2019.
Employers can reimburse employees for meal and entertainment costs only if the expense has a clear business purpose.
For employers, the IRS allows employers to deduct 50% of the cost of meals. Employers with an accountable plan (see below), should pay employees 100% of the cost. You will need to report the over 50% payment to the IRS as income to the employee.
Employers with a non-accountable plan (one not meeting the requirements below) must treat expense reimbursements to employees as income. Employers must pay payroll withholdings on these expense reimbursements to employees.
An accountable plan is an employer’s plan to reimburse employees for business expenses. This plan must comply with IRS regs, which includes these four requirements:
1. The expenses must be business-related
2. The employee must provide documentation to substantiate the expense
3. The employee must repay any advance that exceeds the actual expenses incurred
4. Both employers’ reimbursements and employees’ repayment of excessive advancements must happen in a reasonable time. You can read more about accountable plans here.
How to pay Employee Reimbursements
You can reimburse employee expenses one of three ways.
You can issue credit cards to employees who travel frequently for your business. Your employees can then charge their business-related expenses to the card. To meet accountable plan requirements, employees will still need to submit documentation for their expenses.
Employers can write a check to employees to reimburse them for business-related expenses. To keep the payments acceptable to the IRS, request an expense report with supporting receipts.
If your employees travel on regularly to distant places, you can pay a per diem to cover daily expenses.
As long as your company policy conforms to the IRS per diem rules, your traveling employees won’t have to provide a record of every meal they purchase.
Each year the Government Services Administration (GSA) specifies how much federal employees can spend on two travel categories (lodging and meals & incidentals).
The IRS allows private sector firms to use the GSA per diem rates as a “safe harbor”, which means employees getting this rate of per diem do not need to document each expense. In 2019, the national per diem rates are $94 for lodging and $51 for daily meals and incidentals (tips). The IRS does allow firms to provide a higher per diem in high-cost cities. You can see that list here.
Tips for Managing and Controlling of Employee Expenses
Employee travel expenses can be a large expense item. To help you keep track of this spending and to spot issues you need to manage, we list a few tips below.
1. Have a Clear Expense Policy
Make sure you carefully spell out what expenses are reimbursable business expenses. Also, specify the paperwork they must submit. Follow the four required IRS rules to develop your accountable plan.
If you are going to pay a per diem, set your rate at or slightly below the GSA’s Federal rate. While you won’t need travel receipts for employees receiving per diem payments, you do need to keep a travel log. In the log, track the employee’s travel dates, destination, and business purpose for each trip. Some mobile travel apps allow employers to place their travel expense policies literally in the palm of their employee’s hands. American Express reviews several travel apps at this page.
2. Create an Efficient Process (apps can do this)
Make it easy for employees to submit paperwork. Many apps on the market can capture and categorize each expense as employees incur them. You can sync some of these apps directly to mobile payment systems such as Apple Pay.
3. Track Expense Data and Review Trends
If you use an App for employees to submit expense reports, you can quickly capture data on expense trends. For example, you might notice that your sales team is renting so many cars that you could save money with a national account from a car rental company.
4. Pay employees promptly
To adhere to the IRS rules, make sure you pay employees promptly. Of course, this keeps your employees cheerful too.
If your processes take to long to reimburse employees, look at what you can streamline. For example, you could use a bill management system (such as bill.com) to send payments directly to employees’ checking accounts via ACH.
If you need help establishing your company’s accountable plan or other accounting needs, please contact us