What is expense reimbursement?

Expense reimbursement occurs when an employer repays an employee for an eligible business expense paid with personal funds. Reimbursement practices can reflect the organization’s policy and applicable tax or employment requirements.

An employee expense reimbursement policy typically includes the following details:

• Which expenses qualify for reimbursement
• How employees document purchases
• Spending limits for each expense category
• Which expenses you won’t cover
• Submission deadlines

A detailed policy can make spending more predictable and help employees document purchases correctly.

Common types of reimbursable business expenses

Depending on your policy and applicable requirements, reimbursable business expenses may include the following categories.

Travel expenses

Employees who travel for business use their personal funds to pay for transportation, lodging and other related costs. Depending on your policy and the reason for the trip, reimbursable costs might include:

• Airfare
• Hotel accommodations
• Transportation, such as car rentals, taxi fares and subway fares
• Tolls and parking
• Business-related internet or telephone charges
• Mileage for qualifying use of a personal vehicle
• Baggage fees

A clear policy can distinguish business travel from regular commuting and explain booking rules, spending limits and advance approval. For example, require manager approval for airfare above a stated threshold rather than relying on an unwritten limit.

Employee meals

Your organization may reimburse meals associated with business activities, such as qualifying travel, conferences or client meetings. Consider defining which business meals qualify, along with required documentation and spending limits.

Some employers reimburse actual meal costs, while others use a per diem, or daily allowance, for meals and incidentals during qualifying travel.

A per diem can make spending more predictable, but the amount and tax treatment may depend on location, travel details and applicable rules.

Tax treatment depends on the circumstances. Review current IRS guidance or consult a tax professional before deciding how meal reimbursements will be handled.

Uniforms, equipment and supplies

Employees may occasionally purchase items used to perform work-related tasks. Examples may include:

• Tools and equipment
• Uniforms or work gear
• Office supplies
• Printing and copying expenses
• Postage
• Business telephone charges
• Business cards and approved marketing materials

Whether an employer reimburses work-related costs depends on federal, state and local requirements, contracts, policies and the type of expense.

Education, dependent care and other expenses may be governed by separate benefit and tax rules. Consult an HR, tax or legal professional before adding these categories.

How employee expenses are reported

An expense report gives employees a consistent way to document business purchases. Consider collecting:

• Date incurred
• Business purpose
• Vendor name
• Amount spent
• Category (e.g., travel, meals, transportation)

After submission, accounting or HR can compare the report with the policy. Receipts, invoices and travel confirmations may help verify the purchase, amount and business purpose.

Handling incomplete or incorrect expense reports

An expense report may occasionally contain missing documentation, incorrect information or an expense that doesn’t clearly fit your company’s policy. Establishing a consistent review process can help your team resolve these situations.

Ask the employee for missing or inconsistent information before processing an unclear request. For example, a claimed amount that exceeds the receipt may require additional documentation.

Expense management software can support this process by allowing employees to photograph receipts, categorize purchases and submit documentation electronically. Some platforms can also highlight missing information before employees submit their expense reports.

You may also want to develop a policy for correcting overpayments. Explaining how your company handles reimbursement errors gives employees and administrators a consistent process to follow when mistakes occur.

Are employee reimbursements taxable?

Tax treatment depends on the reimbursement arrangement. Under an IRS accountable plan, an expense generally must have a business connection, be adequately accounted for within a reasonable period and include the return of excess reimbursement within a reasonable period.

Reimbursements that don’t meet accountable-plan requirements may receive different tax treatment. Consult a tax professional before publishing or changing the policy.

How to manage employee reimbursements

A consistent reimbursement system can reduce administrative work and clarify expectations. Consider your organization’s size, expense volume and accounting process when developing the system.

Consider these practices when developing your system:

• Establish a central method for submitting expense reports.
• Define the documentation employees provide with requests.
• Explain which purchases require advance approval.
• Set reasonable submission and approval timelines.
• Assign responsibility for reviewing and approving expenses.
• Maintain reimbursement records according to the guidelines in your area.
• Review spending to identify unusual activity.
• Coordinate reimbursement procedures among HR, payroll and accounting teams.
• Train employees and managers on your expense policy.
• Review the policy periodically as business practices or applicable requirements change.

State and local reimbursement requirements vary. Remote and hybrid work may also raise questions about internet, mobile-phone and home-office costs, and applicable requirements can vary by jurisdiction.

Create a clearly defined policy

A written policy helps employees identify eligible expenses before spending personal funds. Include a contact for purchases that don’t fit an existing category and explain how to request advance approval.

Automate when possible

Automation may reduce administrative work by routing reports, identifying missing fields or sending review reminders.

Some systems integrate with accounting platforms. When evaluating a system, consider security, access, retention and compatibility before implementation.

This article is for informational purposes only and does not constitute financial advice. Consult a licensed financial professional about your specific circumstances.