Employee expense reimbursement: A guide for employers

A marketing manager at a growing startup spends her own money on a flight to attend an important client meeting. A new HR manager buys his own office supplies during his first week in his role. A startup vice president is out of town when his company-provided tablet stops working, so he buys a replacement. Whether a company is big or small, every business has expenses that employees need to cover and subsequently get reimbursed for. 

In this guide, we’ll walk you through everything employers need to consider regarding expense reimbursements—from understanding what to reimburse and how to create an effective reimbursement policy, to the legal considerations and common issues that can arise. By the end of this article, you’ll have a better understanding of how to manage expense reimbursements—plus, ideas for how to streamline the process to save time and effort spent on expense management.

What is expense reimbursement?

Expense reimbursement is the process through which employees are paid back for business-related expenses they have personally incurred. This typically includes costs that are necessary for the performance of their job duties, such as travel, meals, supplies, and other business activities. Effective expense reimbursement policies make sure employees aren’t financially burdened by costs they incur during their work for a company, which fosters a fair and supportive work environment.

What expenses should I reimburse?

Determining which expenses to reimburse can be guided by two primary factors:

• IRS guidelines: The Internal Revenue Service (IRS) provides guidelines that help define what constitutes a reimbursable business expense. IRS guidelines relate primarily to taxes, helping ensure that both employers and employees comply with federal tax laws. Expenses that fall within IRS guidelines are generally considered necessary and ordinary business expenses.
• Your company’s expense reimbursement policy: While IRS guidelines provide a general framework, each company has the flexibility to establish its own specific reimbursement policy. Your policy can outline which expenses incurred are eligible for reimbursement, setting clear expectations for employees while helping to manage your company’s budget. A well-defined policy creates fair, consistent ways to handle employee expense claims.

Expense reimbursement examples

There are many different types of expenses that employers might reimburse, depending on the type and size of business, industry, and other factors. Here are a few common examples:

Travel expenses

Travel expenses cover the costs associated with business trips. Examples of reimbursable expenses can include airfare, hotel accommodations, transportation (such as car rentals or mileage for personal vehicle use), and meals during business travel. Paying for travel reimbursement helps employees attend meetings, conferences, business trips, and other work-related events without incurring personal costs.

Supplies and equipment

Supplies and equipment necessary for an employee to perform their job duties are also reimbursable business expenses. This can range from office supplies (such as stationery and printer ink) to specialized equipment (like tools, software, or hardware).

Professional development and training

Investing in employees' professional development through training, courses, and conferences is a common reimbursable expense, because these types of activities help employees build their skills, stay current with industry trends, and improve their overall performance. By reimbursing training and development costs, companies show their commitment to their workforce.

Miscellaneous expenses

Miscellaneous business expenses cover a wide range of other costs that don't fall into the above categories of reimbursable expenses. These can include work-related phone calls, internet usage, uniforms, or even small fees and expenses incurred for banking and financial transactions. In order to qualify for reimbursement, these expenses should be necessary for business activities to operate smoothly.

How to create an expense reimbursement policy

There are many reasons to create a clear, comprehensive expense reimbursement policy: It helps ensure employees know what’s expected of them and it maintains consistency in how your organization handles reimbursement requests. 

Here are some key factors to consider when setting your company’s expense reimbursement policy, along with some steps to take to get started:

Regulate eligible business expenses

1. Identify categories: Start by identifying the categories of business expenses your employees commonly incur. Some examples of expenses might include transportation, meals, entertainment, supplies, professional development, insurance premiums or deductions—but keep in mind that common expenses vary by industry and business type, so take the time to analyze what your employees are truly most likely to spend their own money on to identify reimbursement categories that make the most sense for your policy.
2. Set clear guidelines: For each category, define what is considered a reimbursable business expense. For example, for travel expenses, you might specify that you’ll reimburse costs for airfare, hotel accommodations, transportation, and meals, as long as receipts are provided, and you might provide mileage reimbursement for business travel if an employee uses their own vehicle and provides proof and receipts showing how far they drove it.
3. Establish limits: Determine spending limits for each type of expense to prevent excessive costs. For example, you might set a maximum per diem allowance for meals or a nightly cap on hotel room rates.
4. Communicate your policy: Clearly communicate the guidelines you set to all employees through your employee handbook, a dedicated expense policy document,  other communication channels, or a combination therein.

Be transparent about the expense reimbursement steps

1. Create an expense report submission process: Describe the exact steps employees need to follow to submit their expense reports. Include information on where to find expense report forms or software, and how to fill them out correctly.
2. Document the approval workflow: Explain the reimbursement approval process, including who is responsible for reviewing and approving expenses. This could be direct managers, department heads, or the finance team.
3. Establish a timeline for reimbursement: Provide a timeline for when employees can expect to be reimbursed after submitting their claims. Being transparent about the process helps manage expectations and reduce employee frustration.

Determine what proof of purchase you require

1. Outline acceptable documentation: Clearly state the types of documentation required to support expense reimbursement claims. This can include original receipts, invoices, and any other relevant proof of purchase you choose.
2. Provide examples: Offer examples of acceptable documentation for different types of expenses. For example, a hotel bill for lodging or a receipt from a restaurant for meals.
3. Establish a policy for lost receipts: Decide now what you’ll do about reimbursing expenses if an employee submits an expense report, but doesn’t have any way to provide the proper documentation. Some common ways for employers to handle lost or missing receipts include having the employee sign an affidavit stating that the charges they incurred are complete and correct, or creating a detailed explanation of each charge to submit along with their expense report.

Set a timeframe to request reimbursements

1. Set submission deadlines: Decide on a suitable time frame for employees to submit expense reports. Many businesses use the 30/60 rule, which requires employees to submit reimbursement requests within 30 days, but no later than 60 days after incurring expenses.
2. Monitor compliance: Track compliance with submission deadlines and follow up with employees who miss deadlines to make sure they get reimbursed in a timely manner.

Automate reimbursement tracking

Choose an expense management software that fits your company’s needs. For example, Rippling:

• Automates approvals by allowing you to set granular rules based on employee data
• Automatically blocks reimbursement for out-of-policy expenses
• Reimburses employees globally in their local currency
• Catches and flags receipt mismatches and duplicate expenses for review

Legal considerations about expense reimbursement

When developing your own organization’s expense reimbursement policy, it’s important to consider the legal implications, not only to protect your company, but also to treat your employees fairly under the law. Here are some legal aspects to keep in mind:

The per diem rate

The General Services Administration (GSA) sets standard per diem rates for travel expenses, which include lodging, meals, and incidental expenses. While the GSA’s per diem rates provide a helpful benchmark or starting point, companies can (and should) tailor them to better fit their specific needs and budget constraints.

Review the current GSA per diem rates and adjust them as needed to align with your company’s budget and policies. Then, clearly communicate the tailored per diem rate to your employees. Establishing clear per diem rates within your reimbursement policy is one way to help your organization manage travel costs and provide consistency for employees when they travel for business purposes.

Health-related reimbursements

Due to rising healthcare costs, healthcare reimbursement plans (HRPs) are becoming more popular, especially for small to mid-sized businesses. These are a type of healthcare benefit that differs from traditional group health insurance—rather than choose and administer a healthcare plan, the employer offers a monetary allowance that employees can use to cover their own healthcare expenses, including insurance premiums and other qualifying out-of-pocket costs. 

HRPs are tax-advantaged employee benefits that offer employees the flexibility to choose healthcare that’s more tailored to their needs than a group health insurance plan might be. However, HRPs are also subject to regulations, and employees can only be reimbursed for certain qualifying healthcare expenses as outlined in IRS Publication 502.

Fraud prevention

As an employer, managing expense reimbursements also means taking steps to prevent fraud. Depending on the size and nature of your business, you may need to implement certain fraud prevention measures to help protect your company’s financial resources and maintain the integrity of your reimbursement process—requiring detailed documentation, conducting regular audits, and establishing consequences for fraudulent reimbursement claims are some common steps.

You may also consider implementing a whistleblower policy to protect employees who report fraudulent activities. As you establish new policies and procedures, always take steps to educate employees on what’s expected of them and what resources are available to them.

Common issues when dealing with reimbursable expenses

Handling reimbursable expenses can be challenging for both employers and employees. Addressing common issues—like the ones listed below—will help keep your processes as efficient and transparent as possible.

Delay in submission of expense claims

Delays in submitting expense reports and reimbursement claims can cause many issues, including cash flow problems and administrative bottlenecks, which is why it’s so important to encourage employees to submit their claims in a timely manner by setting clear deadlines and sending regular reminders when needed. It’s also a good idea to monitor compliance and follow up with any employees who frequently miss deadlines to understand and address any underlying issues.

Manual and inefficient processes

Manual expense reimbursement processes can be time-consuming and prone to errors. Inefficiencies caused by these types of processes can also contribute to delays and increase the administrative burden—both on employees and the teams responsible for overseeing expense reimbursements and policies.

Automating your expense management process can significantly improve its efficiency and accuracy, making expense management software like Rippling a worthwhile investment.

Non-compliance with the company’s reimbursement policies

From unauthorized, out-of-policy spending to increased costs that go over department budgets, non-compliance with reimbursement policies can lead to a lot of financial headache. Making sure employees understand and adhere to your organization’s reimbursement policy is an essential step when it comes to maintaining control over company expenses.

Here are some steps you can take to mitigate this:

• Clearly communicate the reimbursement policy to all employees, including guidelines and limits.
• Provide training sessions to help employees understand the policy and its importance.
• Implement a system for monitoring compliance and addressing non-compliance issues as quickly as possible.
• Regularly review and update the reimbursement policy to reflect any changes in company practices or regulations.

Are expense reimbursements taxable?

To understand which expense reimbursements are taxable (and which are not), you need to understand the difference between accountable and non-accountable reimbursement plans.

Accountable reimbursement plans

An accountable plan is a non-taxable expense reimbursement model that must meet IRS guidelines to qualify for tax exemption. Under an accountable plan, employees must:

• Incur ordinary and necessary business expenses.
• Provide proof to account for their expenses within a reasonable amount of time (typically 60 days).
• Return any excess reimbursement they receive that’s more than the costs they incurred.

An accountable plan can benefit employers because reimbursed expenses paid back to employees are tax deductible as business costs. They’re also beneficial to employees since the reimbursed amounts are not taxed.

Non-accountable reimbursement plans

Non-accountable plans are simpler to manage but offer fewer tax benefits for employees and employers.

For non-accountable plans, employees don’t have to submit expense reports documenting their expenses. Reimbursements are paid as part of their income, and therefore taxed. But employers can only deduct documented business expenses from their taxes—not the entire reimbursement amount.

Streamline your processes with Rippling’s expense reimbursement software 

While most expense management solutions only allow for basic employee-manager approval chains, with Rippling expense management’s advanced policy engine, you can set hyper-custom reimbursement policies based on the vendor, dollar amount, and expense category, helping you block out-of-policy expenses with ease. You can also tee up automated workflows that help you control spend, like triggering an alert when a department’s expenses sharply increase. 

In Rippling, you can manage all of your company spend—expense reimbursements alongside vendor bills, payroll, and corporate cards—together on one intuitive platform. This gives companies unprecedented control and visibility over spend. With Rippling, you can create customizable reports, approval chains, and policy enforcements—all on an intuitive platform.

What's more, if your company has an international presence or eyes global expansion, Rippling’s expense management solution lets you reimburse employees around the world in their local currency—all while reviewing transactions in your native currency.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.