State:

National
Air travel may represent the single biggest travel expense for employers. It is thus the item where cost-cutting measures probably will have the greatest impact. One effective step is to require employees to use the least expensive coach fare, or to do so if traveling less than a specified distance. If this tactic is adopted, the policy should be stated clearly and should be applied consistently to all employees. Where cost containment is a concern, centralizing ticket booking so that one person or department makes all arrangements is a clear advantage over requiring that employees, some of whom may rarely travel, wend their way through the airline system. Also, a policy for the use of frequent flier or bonus miles is advisable. Many employers give the credit to the individual employee to show that the employee's frequent travel is appreciated. According to BLR's Survey of Employee Benefits, 67 percent of responding employers allow their employees to redeem frequent flier miles in 2007. This percentage represents a drop from 87 percent the previous year.
Other cost-saving tips. Limiting first-class and business-class tickets is not the only way to save money on air travel. It is possible to obtain discounts by agreeing to use a particular travel agency or airline exclusively. Employees often avoid using nonrefundable airfares, fearing that their travel plans may change at the last minute, resulting in a wasted ticket. But the savings on nonrefundable tickets are so great that a company may still save money even if it uses only 60 percent of the tickets. If possible, encourage employees to purchase tickets well in advance of a scheduled trip to obtain a lower fare. Online purchases and electronic ticketing also may result in savings. Much lower airfares are also available by extending trips to include a Saturday night stay over either at the beginning or end of a trip.
Communicate. These money-saving practices will be effective only if the rationale for and value of policies are effectively communicated to employees.
Mileage allowance for automobile use. The easiest system for employers when reimbursing employees for business travel car expenses is to use a rate at or below the rate allowed by the Internal Revenue Service (IRS). This eliminates the need for extensive documentation of actual costs.
The IRS sets the rate it allows employers to deduct per mile for the reimbursement of employees who use their own cars (including vans and pickup or panel trucks) for company business. The IRS has decreased the rate for 2017 to 53.5 cents per mile for business miles driven, down from 54 cents in 2016. Please see the national Mileage Allowance section.
If the approved rate or a lower rate is used to reimburse employee automobile expenses, the IRS will consider that its substantiation and adequate accounting requirements are satisfied without extensive documentation of actual expenses. If a greater amount than the IRS allowance is reimbursed, the IRS requires detailed documentation of the expenses.
If employees travel long distances or travel frequently, a more complex system might be needed to accurately reimburse for actual costs. The employer may deduct reimbursements at a higher rate, but only if the reimbursements reflect the actual cost of the travel. Please see the national Mileage Allowance section.
Other means of travel available to employees engaged in company business include rail, taxis, parking, tolls, etc. This is an area in which a flexible policy may help save money. Air fares are often very high for travel to smaller cities, so employers might want to encourage rail travel. Employers might want to give employees incentives or rewards for choosing less expensive modes of travel. For very long rail trips or when exempt employees agree to travel by rail during their 2 days off to save the employer air fare, employers should consider a policy that covers first-class rail or sleeping berths, and only if the employer keeps adequate records to substantiate its outlays. Reimbursements for tolls, parking, etc., may be deducted in addition to the mileage allowance.
Employees who travel frequently, such as salespersons, may be provided per diem rates to cover hotels and meals. Other employers pay actual and reasonable lodging and meal costs for all employees. The difficulty with the last approach is that it requires more policing. The simplest policy is for employees to pay for hotel charges with corporate credit cards.
Customarily, employers pay the cost of three meals a day for the employee, but there may be a dollar limit total, or a dollar limit for each meal. For example, an employee might get $50 a day--based on $10 for breakfast, $15 for lunch, and $25 for dinner.
Some employers set a total, but increase the amount for such cities as New York City and Los Angeles, where meals can be much more expensive. Other employers may request that workers who travel infrequently not go overboard or may provide flexible guidelines for various circumstances. For example, an employer's policy might say the employer pays for dinners up to $25. However, an employee may end up having dinner with a business group in an unknown city, and the dinner may end up being much more expensive. Because the trip and the dinner are business related, and the employee may have had little control or knowledge about the choice, an exception should be made.
Some employers, while reimbursing meal costs, will not reimburse for alcohol.
Employees who frequently work with clients to get business often are provided monthly, quarterly, or yearly budgets for entertainment. The budgets vary widely, again depending on the type of business and the image the employer wants to project.
Other employers have professional staff and management employees fill out a form, with appropriate receipts, after the entertainment is provided. This is a simple way to handle infrequent entertainment, as long as abuse is not a problem. A manager who notices more extensive use (or possible abuse) should work with individual employees on appropriate guidelines.
Business phone calls made during a trip are customarily covered. Employers sometimes pay for personal calls to the employee's home. Paying for one personal call a day, not to exceed a set time, such as 10 minutes, is a good morale booster for traveling employees. Such a policy may have to be expanded for frequent travelers. Providing employees with a telephone credit card may be a big money saver because it avoids expensive hotel phone charges. This is becoming a nonissue with the proliferation of cell phones. Employers should consider establishing policies regarding employees' use of personal cell phone for business purposes.
Employers' policies vary widely on reimbursement for miscellaneous expenditures such as newspapers, soft drinks, or dry cleaning. Employers sometimes provide workers with a small daily amount (such as $5) to cover miscellaneous expenses, especially if the employees are on extended trips. In addition, employers may choose not to reimburse expenses incurred by a spouse traveling with an employee.
Many employers provide employees the option of advance funds to pay for the business trips so that they will not have to pay out of their own pockets up front. Some employers charge all air travel and hotel expenses, in advance, on a company credit card (this may require preapproval or an established account with the travel agency or hotel).
Frequent travelers may be provided with their own business credit card. Other companies require their employees to pay all expenses and then be reimbursed.
Some employers provide departments or individual employees with yearly travel and/or entertainment budgets.
Whatever method you use, standardized forms should be developed to ease the processing for all involved. Those employees with established budgets still need to be accountable for the expenditures, and employers should have such employees fill out expense forms monthly or quarterly.
For less frequent travelers, an employer should use only a few forms. One form might be used for obtaining advance payments as well as travel authorization. This form should show the amount of the advance payments made, as well as approval signatures from appropriate managers.
The second form should be used after the trip is taken to document actual costs. If receipts are required, they should be attached to this form.
For entertainment reimbursement, a form might include the date and time of the event and those who were present. Receipts need to be attached.
Generally, all forms should be reviewed and signed by the employee's supervisor and then passed on for processing.
Some employers use electronic expense reports and computer-based systems to manage reimbursements to decrease costs associated with processing paperwork.
Some employers require receipts. However, requesting employees to provide receipts for items such as newspapers, short cab fares, or other miscellaneous small expenses can be cumbersome, time-consuming, and frustrating for employees. It also has the potential of causing a negative psychological effect on employees who are honest.
To make things easier all around, an employer may want to require receipts only for expenses above certain guidelines or over a certain amount--such as $10 or $25 for any one expense. An employee that has a receipt for items over $75 must substantiate expenses for exclusion from withholding taxes.
Advances and reimbursements paid to employees for ordinary and necessary business and travel expenses may be excluded from the employee's income and are not subject to income tax, Federal Income Contribution Act (FICA), and Federal Unemployment Tax Act (FUTA) withholding if they are paid under an “accountable plan.” The IRS defines an accountable plan as an arrangement under which the expenses are incurred while performing services as an employee, the employee can adequately account for or “substantiate” the expenses within a reasonable period of time, and the employee returns excess amounts within a reasonable period of time. The IRS has indicated that the hotel and meal costs for extended weekend stays to obtain lower air fares are exempt from withholding.
Employees substantiate their reimbursed expenses by providing expense records that show the time, place, amount, and business purpose of an expense. Receipts, other than lodging, are required only for expenses that exceed $75. The IRS will not accept credit card receipts as documentary evidence, but require actual itemized bills. Per diem payments for meals and lodging that do not exceed the federal per diem rate for a particular city are deemed to be substantiated without accounting for actual expenses. Effective for 2012, Publication 1542 will no longer be updated by the IRS. Therefore, current per diem rates may be found on the Per Diem Rates page at the U.S. General Services Administration (GSA) website, http://www.gsa.gov/portal/content/104877?utm_source=OGP=print-radio=perdiem=shortcuts.Other information regarding per diem rates, such as substantiation methods and transition rules, may be found in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. There is also a simplified method of determining the federal rate for travel in the continental United States. Cities are classified as either high- or low-rate cities. The high and low rates are set for each year, and a list of the high-rate cities can be found in the Internal Revenue Bulletin: 2013-44, Notice 2013–65, Special Per Diem Rates, available at http://www.irs.gov/irb/2013-44_IRB/ar13.html.
If payments in excess of the amount that is deemed to be substantiated are made, the employee must provide actual substantiation for the entire amount or return the excess to prevent the entire amount from being treated as wages. Unless an arrangement that routinely pays allowances in excess of the amount that may be deemed substantiated without requiring actual substantiation of all the expenses or repayment of the excess amount has a mechanism or process to determine when an allowance exceeds the amount that may be deemed substantiated, the failure to treat the excess allowances as wages for employment tax purposes will cause all payments made under the arrangement to be treated as made under a nonaccountable plan and to be included as wages (Rev. Rul. 2006-56).
Previous versions of Publication 1542 are available on the Internet at http://www.irs.gov/formspubs. Employers may obtain other IRS publications on the website or by calling 800-829-3676. For more information on tax issues, call the IRS at 800-829-1040.
Reviewed February 16, 2017
Related Topics:
National
Air travel may represent the single biggest travel expense for employers. It is thus the item where cost-cutting measures probably will have the greatest impact. One effective step is to require employees to use the least expensive coach fare, or to do so if traveling less than a specified distance. If this tactic is adopted, the policy should be stated clearly and should be applied consistently to all employees. Where cost containment is a concern, centralizing ticket booking so that one person or department makes all arrangements is a clear advantage over requiring that employees, some of whom may rarely travel, wend their way through the airline system. Also, a policy for the use of frequent flier or bonus miles is advisable. Many employers give the credit to the individual employee to show that the employee's frequent travel is appreciated. According to BLR's Survey of Employee Benefits, 67 percent of responding employers allow their employees to redeem frequent flier miles in 2007. This percentage represents a drop from 87 percent the previous year.
Other cost-saving tips. Limiting first-class and business-class tickets is not the only way to save money on air travel. It is possible to obtain discounts by agreeing to use a particular travel agency or airline exclusively. Employees often avoid using nonrefundable airfares, fearing that their travel plans may change at the last minute, resulting in a wasted ticket. But the savings on nonrefundable tickets are so great that a company may still save money even if it uses only 60 percent of the tickets. If possible, encourage employees to purchase tickets well in advance of a scheduled trip to obtain a lower fare. Online purchases and electronic ticketing also may result in savings. Much lower airfares are also available by extending trips to include a Saturday night stay over either at the beginning or end of a trip.
Communicate. These money-saving practices will be effective only if the rationale for and value of policies are effectively communicated to employees.
Mileage allowance for automobile use. The easiest system for employers when reimbursing employees for business travel car expenses is to use a rate at or below the rate allowed by the Internal Revenue Service (IRS). This eliminates the need for extensive documentation of actual costs.
The IRS sets the rate it allows employers to deduct per mile for the reimbursement of employees who use their own cars (including vans and pickup or panel trucks) for company business. The IRS has decreased the rate for 2017 to 53.5 cents per mile for business miles driven, down from 54 cents in 2016. Please see the national Mileage Allowance section.
If the approved rate or a lower rate is used to reimburse employee automobile expenses, the IRS will consider that its substantiation and adequate accounting requirements are satisfied without extensive documentation of actual expenses. If a greater amount than the IRS allowance is reimbursed, the IRS requires detailed documentation of the expenses.
If employees travel long distances or travel frequently, a more complex system might be needed to accurately reimburse for actual costs. The employer may deduct reimbursements at a higher rate, but only if the reimbursements reflect the actual cost of the travel. Please see the national Mileage Allowance section.
Other means of travel available to employees engaged in company business include rail, taxis, parking, tolls, etc. This is an area in which a flexible policy may help save money. Air fares are often very high for travel to smaller cities, so employers might want to encourage rail travel. Employers might want to give employees incentives or rewards for choosing less expensive modes of travel. For very long rail trips or when exempt employees agree to travel by rail during their 2 days off to save the employer air fare, employers should consider a policy that covers first-class rail or sleeping berths, and only if the employer keeps adequate records to substantiate its outlays. Reimbursements for tolls, parking, etc., may be deducted in addition to the mileage allowance.
Employees who travel frequently, such as salespersons, may be provided per diem rates to cover hotels and meals. Other employers pay actual and reasonable lodging and meal costs for all employees. The difficulty with the last approach is that it requires more policing. The simplest policy is for employees to pay for hotel charges with corporate credit cards.
Customarily, employers pay the cost of three meals a day for the employee, but there may be a dollar limit total, or a dollar limit for each meal. For example, an employee might get $50 a day--based on $10 for breakfast, $15 for lunch, and $25 for dinner.
Some employers set a total, but increase the amount for such cities as New York City and Los Angeles, where meals can be much more expensive. Other employers may request that workers who travel infrequently not go overboard or may provide flexible guidelines for various circumstances. For example, an employer's policy might say the employer pays for dinners up to $25. However, an employee may end up having dinner with a business group in an unknown city, and the dinner may end up being much more expensive. Because the trip and the dinner are business related, and the employee may have had little control or knowledge about the choice, an exception should be made.
Some employers, while reimbursing meal costs, will not reimburse for alcohol.
Employees who frequently work with clients to get business often are provided monthly, quarterly, or yearly budgets for entertainment. The budgets vary widely, again depending on the type of business and the image the employer wants to project.
Other employers have professional staff and management employees fill out a form, with appropriate receipts, after the entertainment is provided. This is a simple way to handle infrequent entertainment, as long as abuse is not a problem. A manager who notices more extensive use (or possible abuse) should work with individual employees on appropriate guidelines.
Business phone calls made during a trip are customarily covered. Employers sometimes pay for personal calls to the employee's home. Paying for one personal call a day, not to exceed a set time, such as 10 minutes, is a good morale booster for traveling employees. Such a policy may have to be expanded for frequent travelers. Providing employees with a telephone credit card may be a big money saver because it avoids expensive hotel phone charges. This is becoming a nonissue with the proliferation of cell phones. Employers should consider establishing policies regarding employees' use of personal cell phone for business purposes.
Employers' policies vary widely on reimbursement for miscellaneous expenditures such as newspapers, soft drinks, or dry cleaning. Employers sometimes provide workers with a small daily amount (such as $5) to cover miscellaneous expenses, especially if the employees are on extended trips. In addition, employers may choose not to reimburse expenses incurred by a spouse traveling with an employee.
Many employers provide employees the option of advance funds to pay for the business trips so that they will not have to pay out of their own pockets up front. Some employers charge all air travel and hotel expenses, in advance, on a company credit card (this may require preapproval or an established account with the travel agency or hotel).
Frequent travelers may be provided with their own business credit card. Other companies require their employees to pay all expenses and then be reimbursed.
Some employers provide departments or individual employees with yearly travel and/or entertainment budgets.
Whatever method you use, standardized forms should be developed to ease the processing for all involved. Those employees with established budgets still need to be accountable for the expenditures, and employers should have such employees fill out expense forms monthly or quarterly.
For less frequent travelers, an employer should use only a few forms. One form might be used for obtaining advance payments as well as travel authorization. This form should show the amount of the advance payments made, as well as approval signatures from appropriate managers.
The second form should be used after the trip is taken to document actual costs. If receipts are required, they should be attached to this form.
For entertainment reimbursement, a form might include the date and time of the event and those who were present. Receipts need to be attached.
Generally, all forms should be reviewed and signed by the employee's supervisor and then passed on for processing.
Some employers use electronic expense reports and computer-based systems to manage reimbursements to decrease costs associated with processing paperwork.
Some employers require receipts. However, requesting employees to provide receipts for items such as newspapers, short cab fares, or other miscellaneous small expenses can be cumbersome, time-consuming, and frustrating for employees. It also has the potential of causing a negative psychological effect on employees who are honest.
To make things easier all around, an employer may want to require receipts only for expenses above certain guidelines or over a certain amount--such as $10 or $25 for any one expense. An employee that has a receipt for items over $75 must substantiate expenses for exclusion from withholding taxes.
Advances and reimbursements paid to employees for ordinary and necessary business and travel expenses may be excluded from the employee's income and are not subject to income tax, Federal Income Contribution Act (FICA), and Federal Unemployment Tax Act (FUTA) withholding if they are paid under an “accountable plan.” The IRS defines an accountable plan as an arrangement under which the expenses are incurred while performing services as an employee, the employee can adequately account for or “substantiate” the expenses within a reasonable period of time, and the employee returns excess amounts within a reasonable period of time. The IRS has indicated that the hotel and meal costs for extended weekend stays to obtain lower air fares are exempt from withholding.
Employees substantiate their reimbursed expenses by providing expense records that show the time, place, amount, and business purpose of an expense. Receipts, other than lodging, are required only for expenses that exceed $75. The IRS will not accept credit card receipts as documentary evidence, but require actual itemized bills. Per diem payments for meals and lodging that do not exceed the federal per diem rate for a particular city are deemed to be substantiated without accounting for actual expenses. Effective for 2012, Publication 1542 will no longer be updated by the IRS. Therefore, current per diem rates may be found on the Per Diem Rates page at the U.S. General Services Administration (GSA) website, http://www.gsa.gov/portal/content/104877?utm_source=OGP=print-radio=perdiem=shortcuts.Other information regarding per diem rates, such as substantiation methods and transition rules, may be found in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. There is also a simplified method of determining the federal rate for travel in the continental United States. Cities are classified as either high- or low-rate cities. The high and low rates are set for each year, and a list of the high-rate cities can be found in the Internal Revenue Bulletin: 2013-44, Notice 2013–65, Special Per Diem Rates, available at http://www.irs.gov/irb/2013-44_IRB/ar13.html.
If payments in excess of the amount that is deemed to be substantiated are made, the employee must provide actual substantiation for the entire amount or return the excess to prevent the entire amount from being treated as wages. Unless an arrangement that routinely pays allowances in excess of the amount that may be deemed substantiated without requiring actual substantiation of all the expenses or repayment of the excess amount has a mechanism or process to determine when an allowance exceeds the amount that may be deemed substantiated, the failure to treat the excess allowances as wages for employment tax purposes will cause all payments made under the arrangement to be treated as made under a nonaccountable plan and to be included as wages (Rev. Rul. 2006-56).
Previous versions of Publication 1542 are available on the Internet at http://www.irs.gov/formspubs. Employers may obtain other IRS publications on the website or by calling 800-829-3676. For more information on tax issues, call the IRS at 800-829-1040.
Reviewed February 16, 2017
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