One-third of British workers have reported feeling “financially unstable” for absorbing large or unexpected business expenses. Since enterprise employers are more likely to have expense policies, employees that work for small and midsize businesses are at greater risk—and that’s not the only expense-related challenge.
If you know which deductions to make, and have an expense management tool, your small business can save a substantial amount at tax time. But the opposite is true as well: You risk taking a fiscal hit if you’re caught off-guard at the end of each year.
As a small business owner, you’re entitled to make a range of tax deductions: Employee travel, meals, and entertainment are among the top 20. However, these expenses are also among the most likely to earn IRS scrutiny because they’re often abused.
If your employees need reimbursement for work expenses, the burden’s on you to prove that these expenses are valid. And although collective chances of earning an audit are less than 1 percent, they spike if your small business:
- Earns more than $1 million each year
- Fails to report all of its income
- Claims business deductions that are disproportionate to your income
Employee expenses fall under the third risk. If you ask your employees to manually track and submit their work-related expenses, this inconsistency causes confusion.
Instead of submitting in a timely manner, employees might delay their requests until the year’s end. If you find yourself with a range of receipts right before the tax deadline, claiming large amounts of employee expenses in your tax deductions can look suspicious.
This problem’s scope revealed itself in a survey conducted by Allstar earlier this year. It found that the less income respondents made, the less likely they were to claim business expenses.
Collectively, 1 in 10 respondents also said they pay for their own expenses despite the fact that their companies have expense policies. Of the survey’s 2,000 respondents, more than a third said that they forget to claim expenses, and nearly 6 in 10 said they don’t claim expenses if they’re less than £5 (about $7).
There were also substantial differences in how men and women claimed expenses. While men reported claiming an average of £184.34 per month, women said they claim an average of £92.95 each month.
According to Quartz, the survey also found that:
- More than 60 percent of women said they had no monthly hotel expenses, compared to 47 percent of men.
- Women were far more likely to have average monthly meal expenses under £10, while men were almost twice as likely to claim meals over £100.
- Women were also more likely to say their expenses were too little to justify claiming or that they felt embarrassed to ask if they could claim them.
Above all else, Allstar’s survey showed how little employees know about their companies’ expense policies. Two-thirds of employees said they haven’t read their companies’ policies, and those at larger companies were more likely to have done so.
Allstar didn’t reveal how many large organizations with 1,000+ employees have and share expense policies with colleagues versus small businesses with fewer than 100 employees. In some sense, it’s not surprising that enterprise employees are more likely to claim expenses: Most of them have more tools to do so.
These resources range from company-issued credit cards to uploading receipts in expense management software. By contrast, if a business needs employees to pay for their own work expenses out of pocket, then manually upload them on personal devices and email accounts, it makes sense that fewer people will do so.
Luckily, this doesn’t have to be your own small business’s fate. Setting a strategy to help employees know what the rules are and how to follow them might not sound exciting, but it can save substantial time and money. It can also close the gender gap in expense reporting by empowering all employees.
Write an expense policy
If you worked alone for several years before hiring your first team, creating an expense policy might not have been top-of-mind. The challenge is that once your small business has team members who must claim expenses, you can’t be reactive: The financial risks for your small business are too great.
Expense fraud committed by employees costs U.S. businesses more than $2.8 billion per year. This puts small businesses at risk, even if employees don’t mean to misrepresent how much they’ve spent.
“[Small business owners] could be liable in the event of legal dispute,” explains Chris Pang, a research director who leads Gartner’s coverage of expense management software. “They do not have an accurate fix of outgoing expenditure so cannot properly budget. If everyone claims at the end of the year and the cost isn’t expected, that could be a big problem.”
To avoid this, write an expense policy for employees as part of your small business budgeting and forecasting process. Write down the number of employees you have, how many of them must travel or spend money for work, and include their projected expenses in your business budget.
Exact numbers will vary based on several factors: Sales reps who must take clients out on the town will likely need more funds than folks who need stipends to attend local conferences. The main point is to estimate and create budgets per employee/department based on how much of their roles need travel expenses.
This will help you write an expense policy that’s helpful and specific (such as capping meal expenses at $30 per day). If all employees know what the rules are, they’re less likely to disregard them by either claiming too much or not claiming anything.
Share this expense policy with employees and contractors
Writing your expense policy is the easy part: The bigger challenge is sharing this policy with your team and confirming compliance. If you want folks to follow your lead, everyone must know what your expense policy’s rules are and where they can find it.
It’s important to share this with anyone who works for your small business, whether in a full-time or freelance role. You can deduct contracted labor at tax time but will need to send Form 1099-MISC to anyone who earned $600 or more from you in a given year.
Misclassifying employees is another risk that puts your small business in line for an audit. The IRS considers anyone who works for you an employee unless you prove otherwise. So, if your contract workers claim business expenses, you’ll need to prove their status.
To keep everyone informed, use the document storage feature in your expense management software. If your small business expense report policy is kept in a space where everyone can access it as needed, the risks of noncompliance drop. And if everyone in your small business knows where the policy is, they can access it when in doubt.
Add this policy to your small business onboarding
Large companies have a habit of overwhelming new employees with material. Frustrating as this is, the process gives new team members the knowledge they need to excel in their roles.
The next time you onboard new employees—whether they’ll work for you full-time or on a contractual basis—share your expense policy with them and tell them where to find it.
If you have a point of contact (like a head of HR) whom they can rely on, share that person’s contact details as well. Otherwise, confirm that they can ask you questions prior to traveling and claiming expenses.
“Enterprise employees generally are more aware and are generally guided by an expense system already implemented by their employer,” Pang explains.
Guiding new employees through your policy upfront can prevent questions later on. It can also make them feel confident that they’re able to claim expenses within policy, rather than worrying that these are “too small” to claim.
Make the most of your expense management software
You already know that accounting software’s a must-have for your small business. Whether you use single or double-entry accounting, it’s essential to track your small business financials.
The right software can help ease the pain of expense management as well. Pang says the most successful tools provide:
- Mobile apps for smartphones and tablets
- Ability to pull in a credit card feed
- Digital capture of receipts
Not sure if your accounting software has enough expense management features? Check if your accounting software offers the features above or integrates with apps that specialize in expense management.
For example, several expense management apps —including Zoho Expense, Certify, SAP Concur, and Expensify—integrate with QuickBooks Online. This allows the popular accounting software to help users track their expenses as well. Having two systems that talk to each other can help everyone stay on the same track.
Which software helps you manage small business expenses?