Harvey was passed up for a promotion he felt he deserved and he was angry. So he decided to give himself a raise — by padding his expense reports. Unfortunately, Harvey’s actions are not uncommon.
According to the Association of Certified Fraud Examiners,* expense reimbursement was the third most frequent fraud scheme in the U.S. in 2012. Small companies (those with fewer than 100 employees) were victimized by expense reimbursement fraud more often than larger companies. What can small business owners do?
Make Employees Accountable
Start with an expense reimbursement policy that provides clear guidelines for appropriate credit card use and spells out your reimbursement procedures. If you have one, make sure it’s comprehensive. If you don’t have a policy, create one. Next, ensure compliance by regularly scrutinizing expense reports and credit card bills. Follow up on all questionable expenses. And always lead by example.
Make Your Plan Accountable
There is more than one way to reimburse your employees for their business-related expenses. If you use an “accountable” plan, it can save taxes for your business and your employees.
To be an accountable plan, the expenses employees submit for reimbursement must have a clear business connection. In addition, employees must provide an adequate accounting of their expenses (some type of log plus receipts or other substantiation) and return any excess reimbursement or allowance within a reasonable period.
Make sure you follow the business connection rule carefully. If you pay your employees the same amount regardless of whether they incur — or can reasonably be expected to incur — business expenses, your plan is not accountable.
Here’s an example of a plan that does not meet the business connection requirement: A construction company pays its workers a flat amount per pay period. The amount is treated as a nontaxable mileage reimbursement, and all workers receive this amount, even if they haven’t driven their personal vehicles for business purposes.
Tax Benefits for All
When the accountable plan rules are met, reimbursement amounts do not have to be treated as wages paid to employees. As a result, your employees don’t have to pay income or FICA tax on the reimbursements, and you won’t owe payroll taxes on those amounts.
* 2012 Report to the Nations on Occupational Fraud and Abuse