SOP Friday: Employee Expense Reports
Karl Palachuk / Karl Palachuk
Employee Expenses in a Nutshell
From time to time, employees incur expenses on behalf of your company. Even if the employee is just you, it is best to submit those expenses and get them in the system as a business expense.
As a general rule, employees will have four kinds of expenses:
2) Out-of-pocket expenses related to service delivery (parking, or the occasional meal)
3) Minor equipment or materials (e.g., cables, network cards)
4) Out of town travel
We’ll cover out of town travel in a few weeks. Today let’s look at the first three. Mileage is different in nature from the other two, so we’ll address that first. You’ll need policies to define what is a legitimate expense and how the employee is reimbursed.
Note: I’m not an accountant, tax attorney, enrolled agent, etc. So I’m giving my advice here. Check the latest facts and policies with the IRS or whatever agencies you need to report to. Most of the tax side of this has been surprisingly common sense. But the government can change anything at any time. 🙂
Assuming you and your crew drive around down from time to time visiting clients, your mileage is a legitimate business expense. With the current price of gas, this becomes a very visible expense. That’s good for you because it allows you to be very clear with employees that that driving across town significantly increases the cost of delivering service.
If an employee is not reimbursed for mileage, and they are eligible to take deductions, then the mileage rate they can claim on their taxes is determined each year by the Internal Revenue Service (“service” is their word, not mine). For 2013 this rate is 56.5 cents per mile.
You can find the latest rates at http://www.irs.gov/uac/2013-Standard-Mileage-Rates-Up-1-Cent-per-Mile-for-Business,-Medical-and-Moving. Or just Google “Standard Mileage Rates” plus the year.
Personally, I think it’s good to pay mileage. Most folks can’t take the itemized deductions any more because the threshold is so high. So they really will be out of pocket for this expense. Second, the cost can be significant, which really reduced the employee’s effective pay rate. Third, it’s a legitimate business expense. You ask them to drive as part of their job, so you should foot the bill for that.
Please look at the diagrams below (1 and 2). We’re going with the IRS’s general guidelines here. The first trip of the day and the last trip of the day are your “commute.” So no mileage is paid for that. It’s legitimate that everyone has to get to work. Neither you nor the employee made decisions about work and home locations based on the mileage paid.
Notice, in diagram 2, that the first leg of travel is a commute even if the employee is going straight to a client’s office. It’s a very simple rule: The first and the last trip of the day are your commute.
When an employee takes time to head to lunch, pick up their kids from school, run a personal errand to the bank, etc. that is also not covered. A wise employee will eat somewhere along the route between Client A and Client B so that there is no additional mileage.
There are several ways you can log miles. The most important thing is to be consistent. You can’t guess. You can’t make stuff up. Just like tracking time in your PSA, you need to track mileage accurately in real time.
The old school method is still perfectly acceptable: Keep a log in your car. You can buy little travel log books at any office supply store. Enter the date, beginning odometer reading, ending odometer reading, client name, and business reason if necessary. Logs such as this need to be turned in with mileage reimbursement requests.
Alternatively, you can set up a standard set of miles from each client office to all the others. This can be quite complicated to set up (so I don’t recommend it). But if you have a chart like this, employees can just look up each leg they drove and enter those miles.
My favorite modern method is to rely on Google Maps or Microsoft MapPoint. Enter addresses and get “directions” for each leg. The total mileage will pop up. Microsoft MapPoint is actually significantly better at this, but only available on machines where it is installed. It interacts nicely with a spreadsheet of addresses.
Once you and your employees track mileage, it will help make you more profitable in certain areas. For example, when the employee sees that an eight mile trip to the store (16 miles round trip) costs you half an hour of labor plus $9 in mileage, I hope they’ll stop to think about whether it’s necessary.
I had a conversation with a partner just a few days ago about an employee who drove 50 miles back to the office (and then 50 miles back to the client) to pick up a monitor he’d forgotten. That’s $56.50 plus labor. It would be much wiser to stop at a store and buy a monitor.
Approved and Pre-Approved Expenses
Some expenses should automatically be pre-approved. For example, parking on the street or in paid parking lots should be reimbursed. Employees should park in Visitor Guest parking as designated. It is better to have your staff park in a for-pay parking lot rather than on-street metered parking. This is because you cannot always get back to the car in time and you might get a ticket.
The company should pay for all regular parking fees while the employee is on the clock. The company does NOT pay for in and out fees if the employee chooses to go somewhere for lunch other than what is available. The company does not pay for parking tickets.
Ideally, small parts and materials will be in the Technician’s Supply Box. So there will be no out-of-pocket expenses for these.
But from time to time, things come up. It is a good idea to have a reasonable, low limit on purchases for a job. For example, if an employee is on site and needs something real quick from the local office supply store or electronics warehouse, what is he authorized to spend without asking permission? I think $100 is too high, but $25 or $50 seems reasonable. You can even have different levels for different technicians, based on their experience with your company.
The goal here is to spend zero time worrying about tiny purchases. If the tech needs a $9 adapter and doesn’t have it, no amount of time should be spent worrying about whether he’ll be reimbursed.
Above the limit, whatever the limit is, you need a process for approving expenses. For example, the employee gets on site, a monitor is smoking, and you have none in stock. You need to have a process, write it up, and train your employees. But it’s probably something like this:
– The technician contacts the service manager and asks what should be done
– The technician may have a proposal, based on client feedback and proximity to a store
– A decision is made by the service manager
– You need to decide whether the employee will be reimbursed ASAP or via the regular schedule for reimbursement
There may be a limit over which you require a formal client approval or pre-payment. For example, $100 requires the service manager to send an email to client and receive an affirmative approval before work can proceed.
Cell Phone, etc.
You may have other regular payments to employees such as cell phone or parking for your office. These may be available to all employees or just to certain employees (e.g., managers). We used to have all cell phones on our account but it became easier to just pay a stipend. For those who are eligible, we pay a flat $50 per month. That’s enough to cover a basic unlimited local calling plan, so employees can use it to help pay for whatever plan they’ve got.
Ideally, reimbursements will be very small. Nowadays, most peripherals are built into the motherboard, so we don’t end up delivering modems, NICs, and video cards. In addition, the scary box holds little things we expect to deliver such as network cables.
Mileage should be entered into the PSA and paid through the Employee Expense module. This is one more encouragement to use the system. If possible, all other out-of-pocket expenses are also entered into the PSA and paid through the Employee Expense module.
In all cases, employees should submit a reimbursement request along with any receipts they have. Because you’ve already got paper receipts, this can be a paper request form. At the bottom it should say something like “I affirm that these expenses are an accurate representation of costs incurred” followed by the employee’s signature. For purely electronic submissions, you should have a similar statement by the employee.
We pay reimbursements on the same schedule as our payroll. So for the first pay period of the month, expenses are paid on the 25th. For the second pay period of the month, expenses are paid on the 10th of the following month.
When we pay for regular monthly payments such as cell phone, those employee expenses are paid with the first payment of the month (on the 10th).
As you grow, policies like this can represent a significant expense. Therefore, it makes sense to take it seriously and have policies in place.
As mentioned earlier, out of town travel has some other guidelines, so we’ll deal with that separately.
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About this Series
SOP Friday – or Standard Operating System Friday – is a series dedicated to helping small computer consulting firms develop the right processes and procedures to create a successful and profitable consulting business.
Find out more about the series, and view the complete “table of contents” for SOP Friday at SmallBizThoughts.com.
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Next week’s topic: Moving a Client Office
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All material Copyright (c) 2006-2012 Karl W. Palachuk unless otherwise noted.