What is an expense policy?

Why do businesses need an expense policy?

An expense policy gives businesses a way to effectively manage employee expense claims, ensuring that company resources are used appropriately for business purposes.

By defining clear rules in a defined policy, businesses can safeguard company funds, streamline the expense management process, and reduce the risk of unauthorized or excessive spending. A well-crafted expense policy also adheres to legal and financial standards and promotes consistency and transparency in employee spending. This helps build trust between employees and employers.

What to include in an expense policy

A business expense policy should clearly outline the types of expenses your business will reimburse, the reimbursement process, and compliance expectations for employees. Implementing an expense policy will help employees understand their responsibilities—plus, it simplifies the approval and reimbursement process for your finance team.

Qualifying expenses

Clearly list qualifying expenses so employees know what costs are reimbursable. While the IRS defines certain types of expenses as reimbursable, others are left up to the discretion of individual companies to define in their expense policies. Some examples of commonly reimbursed expenses include:

• Travel expenses, when they’re related to business trips, including airfare, rental car costs, and mileage reimbursement for personal vehicle use.
• Business meals, including client lunches and employee meals during travel.
• Certain entertainment expenses, when they’re directly related to business activities.
• Office supplies, including items like notebooks, pens, or printer ink. Some subscriptions for software or tools required for work can qualify under this category as well.

Non-qualifying expenses

To help avoid confusion, your policy should also list non-reimbursable expenses. Some commonly non-reimbursable costs include:

• Personal expenses during business trips
• Upgraded travel options like business class, unless pre-approved
• Costs that exceed company per diem allowances
• Non-business-related purchases using cash advances

Defining these exclusions prevents unnecessary reimbursement requests and protects company resources.

Procedures

Your policy should outline the procedures employees are required to follow for timely and accurate reimbursement. This might include:

• Your approval process for expense claims, including who can authorize them
• Guidelines for handling expenses incurred by non-employees, such as contractors or consultants
• Consequences for violating the policy, including potential disciplinary action
• Clear timelines for submitting expense claims and when to expect reimbursement

Relevant laws, regulations, and compliance information

Lastly, your expense policy should cover applicable laws and compliance requirements to ensure adherence to financial and legal standards. This might include tax laws, reimbursement rules, and reporting expectations. Involving stakeholders when you create your policy can help align your company goals with any legal obligations.

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How to create an expense policy

Creating a comprehensive expense policy helps your employees know what is reimbursable and how to claim it. Follow these steps to create an expense policy for your company.

1. Define who is eligible for expense reimbursement

Identify which employees qualify for expense reimbursement, taking your entire workforce into consideration (full-time staff, contractors, interns, etc.). Clearly outline eligibility criteria to avoid confusion and keep the policy fair across the organization.

2. Define expense categories

Define allowable expense categories so employees will know what they can and can’t claim. For example:

• Business travel, like airfare, accommodation, transportation, and meals during trips
• Office supplies and tools needed for work
• Meals and entertainment for client or team activities

Providing clear categories and examples helps employees align their spending with the company’s expectations.

3. Set spending limits

Establish spending limits for each category, such as per diem rates for meals or maximum reimbursement for flights. Tailor these limits to align with business needs and industry standards, so you can balance cost control with what your employees actually need in order to perform their jobs.

4. Define your expense submission process

Lay out the steps for employees to submit expense reports for reimbursement. Make sure the process is clear so employees know what to do. Include:

• How to use credit cards, including corporate cards versus personal credit cards
• The timeline for submitting reimbursement requests
• Required documentation, such as receipts or invoices, for verification

If your procedures are clearly defined, employees will be more likely to follow them. This will minimize errors and help make sure everyone receives accurate and on-time reimbursements.

5. Communicate the policy to your employees

Distribute your policy across the organization. This should be a team effort—work with different departments, like the finance and human resources teams, to make sure everyone has a chance to learn the policy and ask questions if they have any. Use training sessions, onboarding materials, and accessible documentation to make sure employees have access to the policy and can refer back to it as needed.

6. Refine your policy over time

Regularly review and update your expense policy to reflect changes in company priorities, tax laws, or industry standards. Gather feedback from employees to identify pain points and improve the policy to make it more effective over time.

Expense policy best practices

Once you’ve implemented a company expense policy, follow these best practices to streamline your expense management and promote compliance.

1. Make your policy as clear as possible

In your written policy documents, avoid jargon and “legalese” to make sure your expense policy is as clear as possible. Provide clear guidelines to eliminate ambiguity around allowable expenses and submission procedures, and use examples to clarify the reimbursement process and make sure employees know what’s expected of them.

2. Apply your policy fairly and consistently

A reimbursement policy should treat all employees equally, regardless of their department or role. Apply your expense policy consistently to build trust across your organization and avoid disputes over denied claims.

3. Use technology to automate expense reimbursement

Leverage an expense management tool to streamline and simplify workflows. Expense management software comes with many benefits, including:

• Automation that can streamline approvals and reimbursements and remove manual work
• Real-time expense tracking for better visibility into company spending
• Integrations with financial systems and accounting system providers

A spend management solution can help your organization save time and reduce errors, benefiting both your company and its employees.

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Frequently asked questions about expense policies

Are reimbursed expenses tax deductible?

Reimbursed expenses that meet IRS guidelines are generally not considered taxable income for employees. For employers, reimbursed expenses can often be claimed as business deductions during tax filings.

What should employees include in an expense report?

Employees should include all relevant receipts, the purpose of the expense, and any supporting documentation to justify the claim. For larger amounts or recurring expenses, providing a breakdown by category can help streamline approval.

How can small businesses manage expenses effectively?

Small businesses can adopt an expense management tool to automate reimbursements, set spending limits, and track expenses in real-time. Clearly defined policies tailored to their size and budget also help manage employee expenses efficiently.

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