How to Create an Employee Travel Budget for Small Businesses

By: / August 25th, 2021 / Business Travel Guide, Tech & Trends

A lot of companies rely on being able to travel to perform crucial business functions.

But here’s the thing — traveling isn’t necessarily cheap.

There is no shortage of ways to spend money while traveling away from your home base between:

  • Airfare
  • Corporate credit card expenditures
  • Car rentals
  • Lodging expenses
  • Public transportation
  • Business meals
  • Commuting, etc…

That’s why creating an employee travel budget for your small business is absolutely essential. Not to mention, it’s necessary for tax purposes! Your small business needs to be able to write off expenses correctly so that you get all the tax write-offs you’re entitled to.

In this article, we’ll look at how to successfully create an employee travel budget for your small business so you can not only streamline the entire travel process, but ensure you receive all the benefits you qualify for as well.

Let’s jump in.


What are the Most Common Types of Employee Travel Budgets For Small Businesses?

The four overarching goals for creating a successful travel budget are:

  • Choose your expense reimbursement method and set it up with your tax professional.
  • Create a business travel budget plan that you can afford.
  • Communicate this plan to your team, and get them up to speed on it.
  • Make sure that your travel expenses get correctly written off as business expenses (Obviously, you want the IRS to give you all the write-offs your business can get!).

As you can see, the first step is to decide which method you’re going to use to write off travel expenses with the IRS. This should be the first decision you make, and you’ll design your travel budget around it.

So, figure out whether you’re going to use the Per Diem Method or an Accountable Plan.

Let’s dive in and explore both options.


Per Diem Method Vs. Accountable Plan

Man holding phone and credit card

You basically have two different options for keeping track of reimbursement for travel expenses when your employees travel for business purposes.

There is the Per Diem method and the Accountable Plan method.

The Per Diem method is the simpler option, but the Accountable Plan gives you more control over exactly how much money you budget for specific things.

Most small businesses will find that the Per Diem method is an easier way to do things. But the Accountable Plan may work better for some companies in super specific situations or when Per Diem may not be sufficient to cover everything (more expensive hotels, fancy restaurants, high-end activities, etc.).

Let’s go over each of these methods and discuss how they work.

While we’re going to give you a basic rundown of how these methods work, a conversation with your accountant or tax professional is the best way to determine which option will serve the individual needs of your business.

The actual tax prep work that’ll go into each method is more complicated than the straightforward explanation we’re about to give.

Long story short: Be sure to discuss these issues with your tax professional before moving forward and creating your actual strategy.

Per Diem Method

The Per Diem travel reimbursement method is super simple.

Instead of tracking individual expenditures for business-related expenses, you’ll use the IRS Per Diem tables.

These will help you determine reimbursements for things like:

  • Lodging expenses
  • Business meals
  • Incidental expenses

With the Per Diem method, you need to be careful not to pay employees more than the allotted amount listed.

Why?

Because doing so can incur heavy penalties from the Internal Revenue Service (IRS).

Because the Per Diem method is so simple, it tends to work best for most small businesses (especially small businesses with limited business trip employee travel expenses).

Accountable Plan

An Accountable Plan follows IRS regulations for the itemized reimbursement of travel expenses. The reimbursement doesn’t count as taxable income.

There are a few extra rules that you’ll need to follow if you’re going to use the Accountable Plan.

This plan will also require employees to substantiate the actual costs of expenses with detailed receipts. The receipts should describe the amounts, times, and places of purchase.

A caveat: If the business fails to meet the proper conditions and rules, or if the company reimbursement policy doesn’t follow IRS guidelines, the IRS can treat the plan as non-accountable. This turns reimbursements into wages, which are then subject to income tax and employment taxes. In the long run, that would cost the company and the employee more.

If you plan to use this method for employee business travel-related expenses, it’s crucial to execute it correctly.

Talking Through Your Plan With Your Accountant

You’ll need to clear your plan with your accountant/tax professional before you get started.

Why?

Because your business wants all the write-offs it can get.

Your tax professional will be the best source of information to help you determine how to set up this system on the back end. You need it to work for your unique travel policy and company infrastructure.

You can look up the GSA.gov Per Diem rates independently, or you can try to deploy your own Accountable Plan without consulting a tax professional.

But here’s the issue:

It’s very risky to try doing these things yourself if you’re not exceptionally well versed in tax code.

You may end up missing out on crucial write-offs. You may fail to file proper records on time.

Or, worst-case scenario, you could end up making costly mistakes on expense reports or Per Diem allowance and end up getting fined or audited by the IRS.

This is why the first step, before choosing your accounting method, is to sit down with your tax professional to determine the best strategy for you. Once you’ve determined which system you’re going to use, it’ll be time to assess your budget.


How Much Money Are You Going To Allow For Travel?

This is a tricky business, and it’s best to approach it with a pragmatic, solution-oriented mindset.

On the one hand, you need your employees to travel to do business. On the other hand, they’re going to have some actual expenses that you can’t avoid, such as:

  • Transportation costs
  • Registration fees
  • Meal expenses
  • Overnight travel expenses

But other expenses aren’t so black and white, like:

  • Entertainment expenses
  • Dry cleaning
  • Traveling with family members or other non-employees

When delving into these different travel costs, it’s easy to see how they can quickly get out of hand. Therefore, you need to decide here and now what your company can (and can’t) accept as substantiation for reimbursable expenses.

Again, some of this will be solved when you choose your accounting method.

If you’re using the Per Diem method of accounting, your work will be pretty simple. You’ll just figure out how much the IRS Per Diem table has set for that specific locale and reimburse accordingly.

But if you want to keep more careful track of how much they spend (and where), the Accountable Plan will be a better system. However, it does tend to be a bit more complicated.


How to Create an Employee Travel Budget for Small Businesses

Desk with computer

Alright. Now let’s go over the four-step plan for actually setting up your travel budget for your small business.

Regardless of work location, this plan will help you to know ahead of time what kind of travel advance budget you’re actually able to afford. It’ll also help you see what kinds of deductible expenses you can get to help you recoup your costs.

1. Set Your Budget

This part is relatively simple.

You need to look at your income vs. current expenses and decide how much money you have available for travel expenses. In some cases, you may need to cut other things to pay for it, especially if your business is really small.

You may need to cut a few corners at first until your budget grows to match your need to pay for employee travel expenses.

But the crucial question to ask yourself is this: Is this something that I need to pay for in order to conduct business?​

If the answer is “yes,” then it’s something you need to find the money for.

Once you’ve figured out your budget, double-check to make sure that it’ll cover all necessary travel expenses. Then you’ll be ready to move on to the next part: training your employees.

2. Make Sure Your Employees Understand The Budget, And What They Should And Shouldn’t Use Company Money For

Making sure that your employees understand your reimbursement policy in and out will save you (and them) a lot of time, hassle, and frustration.

Imagine — an employee spends $10,000 on the company credit card for entertainment expenses that they can technically explain as business expenses.

Yet, it wasn’t strictly necessary for the business trip, and your actual budget for such expenditures was actually closer to $500?

It’s easy to see how this sort of spending could get out of hand. Especially if the employee doesn’t understand your reimbursement of travel expenses policy.

This is why it’s key to ensure that your team understands the policies and knows exactly what is and isn’t allowed.

You know what woodworkers say — measure twice, and cut once.

Well, the same applies to explaining travel expense reimbursement to your employees.

Explain twice, spend once!

You’ll Need To Cover Important Expenses — But You Don’t Necessarily Have To Cover Extravagant Expenses

Finding a healthy medium for travel expenses is important for every small business.

You certainly don’t want to crack down to the level of Ebenezer Scrooge, nitpicking over every little expenditure. But you also don’t want to spend a ton of money on things that won’t help move the needle on business goals.

So keep it simple. Figure out “must-haves,” and then see how much you have left to add in for incidental expenses.

3. Find Ways To Cut Down On Travel Costs

There are several ways that you can cut down on travel costs, like:

  • Planning out the entire travel itinerary beforehand
  • Using a service like Hotel Engine to get the best deals on hotel rooms
  • Choosing a company credit card with a great travel rewards program
  • Using services like Rentalcars.com to find the best deals on car rentals

Once again, try to be pragmatic.

Many Businesses Plan Out the Itinerary Beforehand

They buy all required tickets, lodging, and rental cars beforehand. Then give out a Per Diem allowance for incidentals, meal expenses, etc.

This is a simple way to handle it. The business maintains control over how much gets spent while ensuring that team members have all they need to conduct business successfully.

4. Launch, Analyze, Revise

Another thing to take into account is that you may revise your travel budget plan after getting started.

You may start with one particular budget or method and then realize that you over or under-estimated on some things.

You may find more economical ways to do things. Or you may find that you were being too conservative and need to budget more money to make essential business travel possible.

It isn’t always easy to figure these things out at first. Once you get started, you’ll quickly learn what works for your unique business and what just doesn’t work. Then, you can analyze and revise to make the process even better for your company and your team members over time.

Don’t think of it as rocket science. But thinking of it as business travel science may help you as you hypothesize, test, and adjust for greater future success.


Conclusion

Now you’ve got the basic information needed to create an employee travel budget for your own small business.

Just remember that when it comes to matters that involve the IRS, an ounce of prevention is worth a pound of cure.

But as long as you get your ducks in a row, keep meticulous records, and consult with a tax professional — you should be golden.

Now get out there, do some business, and enjoy the journey!

Join Hotel Engine for free and save up to 60% on business lodging.


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