Suzanne Lucas

Employee Expenses 101: What Should Your Business Cover?

Creating a budget for your business involves a delicate balance. You want to keep employee expenses down, but have your finances on too tight a leash and you could end up with unhappy employees — and maybe even a broken law or two.

Here’s your guide to creating a small business finance plan that keeps your money working for you.

Typical Employee Expenses

Let’s get one thing straight right off the bat — businesses should pay for everything directly when possible, from office rent to the monthly staff birthday cake. Those are examples of consistent costs, and even if they don’t always incur exactly the same dollar amounts from month to month, it’s usually easy to predict how they’ll fit into your budget.

The rest are variable expenses. Travel costs, for instance, could be relatively small, but car miles, plane tickets, hotel rooms, food and event charges can run up the bill. Depending on your type of business, these costs may arise once a day or once a year.

Expenses Your Business Should Always Cover

Federal law sets a basic standard for pay under the Fair Labor Standards Act, but individual states have more leeway when it comes to expenses. You’ll never be faulted for paying an employee for mileage when they drive their own car, for instance, but in California, it’s the law. Your state may have its own laws requiring reimbursement. When in doubt, check with your local employment lawyer.

Even if the law doesn’t require it, though, you should still cover any business-related expense. The IRS suggests reimbursing $0.58 per mile when your employees drive their own car for business reasons. This doesn’t apply to your staff’s daily commute, but it does include traveling to clients. Cover or reimburse the cost of attending conferences, training or other activities that will ultimately benefit the business, as well as any related airplane tickets, rental cars, hotels and food.

As a general rule, pay for or reimburse anything that’s required for the business. If you expect employees to use their own devices at work, then you should be responsible for at least a portion of the employee’s phone bill, as well as repairs and maintenance on the computer. Keep in mind that devices undergo much more wear and tear in business settings than when they’re only for personal use.

Why Paying Upfront Matters

Reimbursing workers for their purchases requires employees to keep receipts, fill out forms and then sit around waiting for money. For employees with the enviable combination of good credit, a high income and no debt, this might pose no problem. However, fronting the cash for that $700 plane ticket may cause financial hardship for some of your staff members.

Remember, they’re often not shelling out for just the sticker price on these expenses — if they have to put the trip on a credit card, they may end up paying interest that most businesses don’t reimburse. Your company’s business expenses should never create a large financial burden for your employees, so plan to pay major expenses upfront when you can.

Preventing Fraud

Small business finance aims to control spending as much as possible. You might want to limit how much money exits the organization, but chances are that’s a lower priority for your employees. So, when an employee goes to book a hotel room near a conference, do they opt for the single room or the upgrade? If they’ll be reimbursed equally either way, they may not always pick the most affordable option.

Lay out clear expectations for your workforce about what counts as a legitimate business expense. Alternatively, having a travel agency or designated administrative assistant book travel can keep costs down and prevent employees from claiming unnecessary expenses. You might also consider setting a per diem for food to avoid the hassle of collecting receipts.

Once an employee has submitted their expenses, take a good look. Two people should review everything to make sure the reimbursement requests are fair game. Check, too, that every expense is tied to a client or project so that you can keep accurate records of your profits and losses.

What If You Can’t Afford a Business Expense?

If you can’t afford something — for example, to send an employee to a conference — let employees know that you’ll make it easy for them to participate, even though you’re not covering the fees. That’s totally fine as long as you’re clear that there will be no negative consequences if they choose not to attend. Send an employee on an airplane to meet with a client, though, and you’ll need to foot the bill. If you can’t afford it, then change the meeting to a teleconference. Above all, never expect your employees to pay business expenses. It’s your business, and you should go into debt before you ask them to cover those costs.

Running a business isn’t cheap. The normal costs of business add up quickly — which is why they need to be built into your business plans. Having clear rules for reimbursement keeps your business running smoothly and your employees happy.

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