For many nonprofits, it’s very common to have employees pay out-of-pocket for program expenses with the expectation that they’ll be reimbursed later. This is especially true when it comes to mileage expenses. Whether it be driving to different service locations, delivering food and other supplies or traveling to a conference, nonprofits often ask people to drive their own cars and provide a nonprofit employee mileage reimbursement after the fact.
However, the way nonprofits manage expenses comes under much scrutiny, not just by the IRS but by their own board and donors. If you want to avoid probing questions or reimbursement payments counting as compensation by the IRS, there are specific rules and procedures that must be followed.
Adhere to an Accountable Plan
When nonprofits make reimbursements to employees or volunteers under the IRS rules of an “accountable plan”, these payments will not be included in their taxable compensation. To qualify for an accountable plan, there are a few rules you must follow in your expense management procedures. These rules are aimed at preventing organizations from misclassifying payments reimbursements if they’re actually compensation.
- Expenses must be related to your nonprofit.
- The employee or volunteer must account for the expenses within a reasonable amount of time (usually 60 days of incurring the expense).
- The employee or volunteer must return any excess reimbursement within a reasonable amount of time (usually no more than 120 days after receipt).
Providing employees with a standard expense reimbursement form will help them comply with these rules every time they submit an reimbursement request. The form you use for your nonprofit may look different from different organizations’, but as long as it answers these questions, it’ll be sufficient.
- Who incurred the expense?
- What was purchased?
- When and where did the expense occur?
- What was the business purpose of the expense?
In addition, employees must be able to submit documentation to prove the information on an expense report to be accurate. Receipts, invoices, card statements and in the case of mileage, mileage logs, are all acceptable.
What if You Don’t Use an Accountable Plan?
If your nonprofit uses an allowance or stipend rather than issuing a reimbursement, those payments will be considered nonaccountable by the IRS. What does this mean for you?
- You’ll need to include these payments on an employee’s W-2 or 1099 form.
- Income taxes and Social Security and Medicare taxes must be withheld from these payments.
- You’ll have to pay the employer’s share of an employee’s Social Security and Medicare taxes on the payments.
- If you aren’t using an accountable plan, you’re able to reimburse expenses that exceed the IRS time limit. However, these payments are still considered taxable.
Set Reimbursement Rates
To keep nonprofit expenses under control, it may be wise to set per diem and reimbursement rates for your employees. For expenses such as meals, incidentals and lodging, you can use the most recent per diem rates set by the General Services Administration (GSA). These rates vary by geographic area and travel destination. There are almost 400 destinations across the United States for which a special per-diem rate has been specified, and if you’re spending in any other areas, they also provide a general per diem rate.
For mileage reimbursement, the IRS sets annual mileage reimbursement rates. There are three rates, one for business, one for charity and one for medical moving. The rate set for charity is fixed at 14 cents per mile driven. This is the rate you should reimburse volunteers at. The rate you should use for nonprofit employee mileage reimbursement is the business rate (in 2021, it’s 56 cents). The business mileage rate changes from year to year and doesn’t vary based on geographic location like per diem rates.
If you reimburse mileage at the IRS rate, make sure you’re also following the rules of an accountable plan. This means ensuring employees are keeping a contemporaneous record of miles driven and reporting them to you for reimbursement in a timely manner. When issuing reimbursements, it’s also important to verify that you aren’t paying them back at a higher rate than what the IRS has specified. Anything exceeding that amount will be considered compensation.
Map Out the Approval Process
Accountability is crucial in any expense management process, but that’s doubly true in the case of nonprofits. After all, a fraud scandal is potentially damaging both reputationally and financially. One of the most common schemes seen at nonprofits is expense reimbursement fraud, especially misrepresentation of personal expenses as legitimate business expenses. While simply reviewing a receipt or card statement can reveal most instances of expense fraud, mileage reimbursement fraud can be particularly difficult to uncover without doing some math to determine if the trip mileage is truly accurate.
To ensure that fraud does not occur in the management of nonprofit employee mileage reimbursement, or any other types of expense reimbursement for that matter, your organization should determine a standard approval process and stick to it. Inform employees and volunteers of which expenses qualify for reimbursement, proper reporting procedures for each type of expense and how, when and to whom reports should be submitted. The approval process itself should ideally include more than one stage, offering multiple opportunities to catch an issue. Make sure the process also addresses conflicts of interest (i.e., an administrator being allowed to approve their own expenses).
Automate Nonprofit Employee Mileage Reimbursement
Nonprofit expense management is no easy task, and when you don’t have all the resources you need, it becomes much more difficult. In fact, many organizations still have their employees and volunteers manually track mileage and other expenses and submit paper reports for approval. This antiquated process puts a lot of stress on those employees tasked with reviewing and expenses, and it takes up much of their time. A better way to manage your nonprofit employee mileage reimbursement process is to automate it with expense management software.
With CompanyMileage’s suite of expense management software – SureMileage, SureMobile and SureExpense – your nonprofit will finally be covered. Rather than unreliable GPS systems or self reporting odometer readings, SureMileage works on a point-to-point system. Employees simply enter their starting and ending destination, and the system automatically calculates their mileage. To control employee expenses, set up daily per diems and flag certain behaviors in our system. Our software even integrates with all major accounting and payroll providers, so the process from reporting an expense to receiving an reimbursement is completely streamlined.
Not only will our solution save your employees countless hours each month they previously spent documenting, reporting and approving expenses, it’ll save your organization money. CompanyMileage customers have saved 20-30% on their nonprofit employee mileage reimbursement management costs, and with month-to-month contracts, you have the ability to control how many users use the system. If the number of employees and volunteers taking trips for your organization fluctuates throughout the year, you’ll be able to adjust your usage and costs accordingly.
Managing nonprofit employee mileage reimbursement — as well as other types of employee spending — may be time-consuming and cumbersome, but with CompanyMileage, the process can finally be streamlined and simplified. Request a demo to learn more about our suite of products.