Business travel can be exciting for employees, but the travel expense reimbursement process can be a headache if you don't have the right procedures in place. An efficient travel reimbursement process ensures that employees aren't financially burdened by work-related travel and can focus on their duties.
In this article, Ramp covers all things travel expense-related—expense reports, business expense categories, and legal guidelines—plus tools and strategies that can help improve your company's travel expense reimbursement process.
Travel expense reimbursement is the process by which companies pay back their employees for the charges they incur while traveling for business. These charges can include airfare, hotel rooms, rental cars, rideshares, meals, client entertainment, and other travel arrangements.
Why doesn't the company simply pay for it all up front? That's nearly impossible—the company can book and pay for airfare, but other travel expenses are variable, and many of them are incurred during the trip.
As a result, many businesses use traditional expense management software that requires employees to use their own funds for purchases and submit their expenses for reimbursement when the trip is over. This is where some of the flaws in the system are revealed.
Travel and expense (T&E) costs are difficult to control when spending is left in the hands of employees and only realized weeks later. Assigning a travel budget and allocating a per diem for meals can help keep costs down, but that still requires reimbursement—and receipts the employee needs to organize. That isn't their primary focus while on a business trip, so original receipts are often mismanaged.
Travel expense reimbursement generally happens on a monthly or quarterly basis, creating another potential problem: business travelers must pay their credit card balances on time to maintain the bandwidth to travel again. If the bill comes due before the reimbursement is processed, they're under pressure to cover it out of pocket.
The inefficiencies in a traditional travel reimbursement process can lead to higher costs, increased employee turnover, and potential tax problems if costs like travel expenses, lodging expenses, and entertainment expenses aren't categorized correctly. Much of this can be avoided by using real-time expense management software—more on that below.
To show how travel expense reports work, here's a breakdown of a typical business trip.
Assume a company booked and paid for the airfare, car rental, and other transportation costs for one of its employees. When the employee lands, they go to the rent-a-car company, swipe their credit card, and drive away with a car. The final receipt comes when they return the car. Ditto with the hotel—the employee puts down a credit card when they check in, but they won't see a final bill with itemized charges until they check out.
All that happens in the first few hours after a traveling employee gets off the plane. For employee expense reimbursements on that car and hotel room, they'll need to collect the final bills on both and submit them in their expense report. They'll also need receipts for any itemized activity on the hotel bill and possibly a mileage rate report from the car rental agency.
The problem with expense reports
Are you starting to see the problems with this system? When the employee is the primary payer of travel costs during a business trip, the company is counting on them to be organized enough to list every expense on an expense report and provide proof of purchase receipts to back those entries up. If they lose a receipt, the expense can't be submitted and reimbursed. Now the employee is paying for business travel with personal money.
Let's assume the employee does everything right and submits a thorough, organized expense report for reimbursement. That reimbursement request then needs to go through an approval process that could take some time. The actual reimbursement will come in a few weeks or months after that, depending on the company's reimbursement policy.
The employee experience with expense reports is only one side of the equation. Their job is to make sure their expense report is accurate and well-organized. The company's responsibility is to double-check that against the business travel expense and reimbursement policy—for every single expense report. That takes time and resources.
This manual review of expense reports is another inefficiency in the expense approval process. It's meant to be a system of checks and balances to ensure accuracy and adherence to company policy, otherwise known as T&E management. Without automation, it can be extremely inefficient. And humans, no matter how experienced they are, can make mistakes.?
In the next few sections, Ramp goes over the areas where mistakes are most prevalent. These include travel expense categories, tax implications, and the challenges of manual reviews.
For now, here are the types of employee travel expenses that might show up on an expense report. Some of these may fall into the same business expense category, but this list is intentionally more granular to help you better understand what they are and why they should be reimbursed.
1. Per diem
Per diem is a Latin phrase that means "by the day." Businesses use per diem allowances as a cost control measure for employees going on multi-day trips. The employee is allowed to submit a flat-rate line item on their expense report that includes all their out-of-pocket expenses—incidental expenses and otherwise—up to an approved amount. Most travel and expense reimbursement policies don't allow meal expenses if they offer a per diem.
2. Plane tickets
This can be a tricky one because of credit card travel rewards. An employee booking their own airfare doesn't want to use their airline miles to pay for it, but they may earn miles for the booking—which they save for personal travel. Many companies have eliminated that problem by paying for airfare at the company level before the trip. If employees want to upgrade to first class, they generally need to pay the difference out of pocket.
3. Rental cars
Rental cars are generally regarded as a reimbursable employee travel expense. To keep costs down, some reimbursement policies put a per diem rate on rental car fees. If the employee wants to upgrade and get a luxury sedan or SUV, they'll have to pay the difference out of pocket. They could also opt for a rideshare or public transit to be more cost-efficient.
4. Rideshares
Apps like Uber and Lyft have created new transportation options for business travelers. They're particularly useful for trade shows and conferences where employees are only commuting from the airport to the hotel or conference center and back. In congested urban areas like New York and Los Angeles, ridesharing is often a more efficient option than renting a car.
5. Mileage
If your employees use their personal vehicles for business travel, your travel and reimbursement policy should include a section on mileage reimbursement—whether you use the standard mileage rate or the actual expenses method. This is a common employee travel expense that's often tricky to calculate, so it might require some special attention.
6. Lodging
Sending an employee off to another state or country without setting up lodging is a recipe for disaster. Hotels, motels, and lodges can be booked upfront on the company credit card or paid for by the employee and submitted on an expense report for reimbursement. Watch for those room service charges and movie rentals—they often slip through the review process.
7. Meals
There are several ways to handle meals from a travel reimbursement perspective. In addition to the aforementioned per diem option, another choice is to simply have the employee keep a receipt for the meal and submit it as a separate line item on the expense report. Gratuities may or may not be included, depending on company policy.
8. Client entertainment
This might be the most abused category of expenditures. Going out to a lavish dinner with some friendly competitors and mentioning who you work for does not constitute a meal you can include on an expense report. Taking a client out for a baseball game and closing the deal does. Expense auditors need to scrutinize expenses in this category carefully.
9. Business supplies and equipment
Business supplies and equipment could include a TV or monitor for presentations, pens and clipboards for clients to fill out forms, or signage for a trade show booth. This is a broad category that's different for every business. If a traveling employee needs supplies or equipment to do their job, it's normally a reimbursable expense.
10. Medical expenses
Medical expenses don't come up often, but the company is responsible if an employee requires medical care while traveling for the company. This category is for urgent or emergency care that results from a business-related injury. Insurance will cover the procedure, but the company may be responsible for the copay.
Regardless of what your internal expense policy states, the Internal Revenue Service (IRS) has determined what constitutes eligible travel expense deductions. There are also legal precedents in some states that require companies to reimburse employees for business-related travel expenses. The job of the expense auditor is to know about both.
Tax write-offs for travel expenses
Your expense policy should allow reimbursement only for employee travel expenses that you can then write off as a deductible business expense on your taxes. There are several of these, and each expense deducted will need an associated receipt to protect your company in the event of an IRS audit. These are a few of the acceptable categories related to business travel:
There have been several legal challenges over the years from employees who felt they were entitled to reimbursement for expenses. In California, the 2014 ruling in the case of Cochran v. Schwan's Home Service, Inc., established that employees forced to use their personal cell phones for business purposes are entitled to reimbursement from their company.
This is important. Setting up a travel and expense reimbursement policy without knowing the legal requirements in your state could lead to fines. Small business owners often believe reimbursement is something they can determine on their own. That's not the case. Before deciding what to approve or deny, check your state's guidelines.
There are some best practices you can follow to overcome the challenges covered above. Some of these will require some manual effort on your part, while others can be implemented by adding new tools to your tech stack. Here's what Ramp recommends to manage your travel and expense policies effectively:
The final item on this list, issuing corporate charge cards, solves several of the problems highlighted in this article. Corporate charge cards can have limits, and you can program cost control measures to kick in automatically if an employee tries to use the card for an unauthorized purchase.
This story was produced by Ramp and reviewed and distributed by Stacker Media.