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May 10, 2024

Guide to employee expense claims

Ruchi Jindal
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P2P Analyst
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    Table of contents

      An expense claim allows employees to seek reimbursement for out-of-pocket expenditures made on behalf of their employer. These expenses can range from travel and dining to office supplies and medical costs. Streamlining this process requires better training, clearer communication of policies, adopting efficient technologies, and regular auditing to prevent misuse and ensure compliance.

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      In this blog, we will cover what expense claims are, outline some examples, and address how to efficiently manage them.

      What is an expense claim?

      Expense claims are requests from employees to get money back for business-related costs they paid themselves. These costs include travel, food, hotels, transportation, office supplies, medical costs, and more.

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      Employees must give specific details about each cost when they ask for reimbursement. That includes the date when they spent the money, a description of purchased items, how much they paid, and proof of the purchase. There are two types of expenses:

      Actual expenses paid with personal funds

      When employees pay for business expenses out of their own pockets, these are known as "out-of-pocket" expenses. For example, if you use your credit card for a business trip or buy office supplies with cash.

      Allowances based on rates

      This refers to set amounts of money given to cover certain costs, even if you did not spend that exact amount. For instance, getting money for using your car for work or getting a daily allowance for meals or lodging, regardless of the actual cost.

      What’s the difference between an expense claim and an expense report?

      An expense claim is typically a single reimbursement request made by an employee for out-of-pocket expenditures or charges to personal credit cards related to business activities. An expense report is a consolidated document that includes multiple claims and provides a broader overview of expenses for business or accounting purposes. Managing these through dedicated expense accounts helps in organizing and monitoring financial transactions more effectively.

      How should employees use expense claims?

      Employees should use expense claims to document and request reimbursement for business expenses initially paid using personal funds or credit. These claims form the basis of an expense report, a more comprehensive document that businesses use to track, approve, and reimburse these employee expenses. Covered expenses often include airfare, lodging, car rentals, meals, entertainment, business mileage, and professional fees for licenses and training courses.

      How to fill out an expense report for submitting claims

      1. Provide your name, department, and employee ID number.
      2. Date the expense report.
      3. Briefly describe the business purpose of each expense you are claiming.
      4. Enter each expense's date, type, and amount in the appropriate columns.
      5. Attach receipts for expenses paid by credit card or cash, or submit images of receipts.
      6. Total the expenses for each category and the total amount per row, and calculate a subtotal in the last column.
      7. Deduct any cash advances you have received from the company.
      8. Calculate the total balance due for reimbursement.
      9. Sign the expense report digitally if it is an online form.

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      Track expenses with Ramp's free expense report template
      Access Template

      Getting approval and verifications

      Once you submit your expense report, it is time for approval. This process usually involves HR and the finance team. They will review your expenses to ensure they comply with company policies and are accurately documented.

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      If everything checks out, you will receive reimbursement approval. However, you may be contacted for clarification if there are any discrepancies or missing information.

      Receiving Your Reimbursement

      Once your expenses are approved, you will receive your reimbursement. It could be a check, direct deposit, or another method specified by your company's reimbursement policy.

      While expense reports don’t necessarily follow a one-size-fits-all template, they should include essential details to comply with tax regulations. Specialized expense management software can help you to effortlessly maintain accurate records, ensure compliance, and simplify management.

      How are expense claims recorded?

      Expense claims affect an organization’s financial health in the following ways:

      1. Recording on the Income Statement: When an expense claim is approved, the company records it in the appropriate category, such as travel costs. This increases the expenses listed on the income statement.
      2. Impact on Net Income: Approved expense claims raise expenses, which are deducted from revenue to calculate net income. As a result, more claims lead to lower net income.
      3. Timing of Cash Outflows: Sometimes, the reimbursement to the employee happens in a different period from when the expense was approved and recorded. This discrepancy means the cash outflow is reflected in the cash flow statement at the time of payment, not when the expense is initially recorded.

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      Expense claims are crucial for managing employee reimbursements and play a significant role in how financial statements categorize and report a company's expenses.

      Are expense claims taxable income?

      Expense claims are generally not considered taxable income if they reimburse employees for business-related expenses paid out-of-pocket. These reimbursements cover costs incurred during business activities and are not intended as additional income.

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      To avoid taxation, reimbursements must comply with accountable plan rules established by tax authorities, like the IRS in the United States. Under an accountable plan, reimbursements must be for legitimate business expenses, properly documented within a reasonable timeframe, and any excess must be returned to the employer. When these conditions are met, the reimbursements are excluded from the employee’s gross income and are not subject to income or employment taxes.

      Cashless expenses vs. expense reimbursement claims

      Understanding different approaches to handling business expenses is key to optimizing financial management within a company. 

      Expense reimbursement claims

      Occasionally, employees must pay out-of-pocket for company expenses. They can file an expense reimbursement claim, but the manual process can be slow. First, the employee compiles a detailed expense report, which then requires approval from various departments. This lengthy process demands considerable time and effort, and the manual data entry involved is susceptible to errors.

      Cashless Claims

      Picture a scenario where employees no longer need to use their own money for business expenses. Employees can spend company money directly with corporate credit cards or prepaid business expense cards. These cards come with spending limits so that employees can stay within the bounds of their company’s expense policy. This also makes it easier to track expenses because everything is already in the system.

      The best part is employees do not have to wait for reimbursement. Since it is all done electronically, waiting for approval or worrying about losing receipts is unnecessary.

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      Tips for how to simplify the expense claim process

      Create a clear policy

      Start by creating a clear expense reimbursement policy outlining which business expenses qualify. This clarity will help avert disagreements and ensure smooth settlements. Define expenses, set budgets, and categorize expenses. Treat employees equally with spending allowances. Keep the policy simple and update it as your company grows. Stay compliant with local regulations and use software to automate expense reporting.

      Expense management software

      Expense management software helps businesses and individuals track, control, and optimize expenditures. Many software tools are available to electronically track and organize receipts, seamlessly integrating with accounting software.

      Organize by expense type

      To effectively organize business receipts, it's crucial to implement a robust filing system that categorizes each type of expense, including meals, operating costs, payroll, and business travel expenses. Here are key steps to streamline this process:

      1. Categorization: Arrange receipts by expense category in designated folders. This aids in quick access and organization.
      2. Cloud Storage: Utilize cloud-based platforms for secure and remote storage of receipt scans.
      3. Efficient Retrieval: Ensure each receipt is accurately tagged and easily searchable within the system.

      This approach not only maximizes efficiency but also ensures better compliance with financial auditing standards and enhances document security, allowing for quick retrieval and management from any location.

      Apps to organize receipts

      Fortunately, various receipt scanning apps are available that simplify this entire process. These apps are designed to accommodate both individuals and teams, offering customizable features and a variety of pricing options. When choosing a receipt organization app, it's crucial to determine if your company needs the following functionalities:

      • Real-time notifications
      • Automated receipt data extraction
      • Receipt scanning capabilities
      • Support for multiple users
      • Integration with accounting software
      • Compatibility with various payment services

      Corporate cards for convenience

      Corporate cards offer a convenient solution, especially for employees who travel frequently. By integrating corporate cards into the expense management system, businesses can ensure spending limits are adhered to and transactions are authenticated. It’s a win-win for employees and employers, making expense management hassle-free and efficient.

      Automate employee expense claims with Ramp

      Managing the intricate manual processes involved in reimbursement claims can be taxing, and automation is the key to solving your expense management challenges. Ramp offers a comprehensive solution to streamline corporate spending, all within one convenient platform. Our mobile-first approach offers the following benefits:

      1. Prevents cash leakages, whether cash advances or international payments.
      2. Real-time visibility into expenses, with the ability to generate reports at the push of a button.
      3. Ramp's Smart Audit feature uses AI to flag anomalies like duplicate bills and incorrect claims.

      Effectively managing expense reimbursement claims is essential for an organization's financial health. Automation can expedite reimbursements, improve visibility, and reduce costs. Let Ramp help you eliminate leaks, enhance visibility, and minimize errors as you strive for better financial well-being.

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      Ruchi Jindal
      P2P Analyst
      An experienced P2P Analyst with over six years of experience, my expertise lies in the nuanced field of accounting and financial operations, particularly in managing and optimizing accounts payable processes. My journey has been marked by a deep dive into the intricacies of P2P operations, where I have honed my skills in data analysis, problem-solving, and process enhancement. My writing encapsulates the lessons and insights gained from streamlining financial procedures, enhancing revenue growth, reducing costs, and ensuring compliance across diverse regions.
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