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Watch Out for Expense Account Fraud

The vast majority of employees are honest. However, those employees who arereceipts predisposed to theft and fraud can wreak financial havoc on a business. Expense reimbursement fraud is a common form of fraud that particularly targets small companies. Are there steps small business owners can take to protect themselves from this form of fraud?

Provide Clear Guidelines

Start with an expense reimbursement policy that provides clear guidelines for appropriate credit card use and spells out your reimbursement procedures. If you have a policy, make sure it’s comprehensive. If you don’t have one, 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.

Consider Offering an Accountable Plan

If you use an “accountable” plan to reimburse your employees for their business-related expenses, it can save taxes for your business and your employees. With 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.

No Payroll Taxes Owed

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.

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