April 11, 2022

How do employee expense reimbursements work?

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Slow expense reimbursement can be a major drag on a business's productivity and profitability. Employees often wait for weeks or months to receive the money they need to cover their business expenses. This can lead to cash flow problems, delays in projects, and decreased morale among staff.

Your organization must have an efficient system for reimbursing employees quickly and accurately so they can focus on getting the job done without worrying about when they'll get paid back. This guide will explain how you can set up an effective expense reimbursement system that keeps everyone happy and productive.

What are employee expense reimbursements?

Employee expense reimbursements are paid to employees by employers to cover expenses incurred while conducting work-related activities. This could include travel expenses, meals, equipment purchases, supplies, and other items necessary for the employee to do their job.

Typically, businesses will provide employees with an allowance or set a maximum amount they can spend on these items. The employee must then track their expenses and submit them for reimbursement at the end of a certain period, such as a month or quarter.

Employers are typically obligated to reimburse any legitimate business-related expense that's in line with their company's policies, so companies must set clear rules and guidelines to ensure costs are kept in check.

By setting up an effective expense reimbursement system, businesses can provide employees with the funds to do their jobs while staying within budget and avoiding potential overspending.

Typical expense reimbursement process

The typical expense reimbursement process involves several steps to ensure accuracy and efficiency:

  1. Documenting expenses. Employees should carefully document their expenses. This typically involves keeping receipts and other documentation of any work-related purchases they make. These documents should be kept in a secure place, such as an organized folder or file cabinet, so they can be easily accessed when needed.
  2. Submitting expenses for reimbursement. Businesses should have a transparent process for employees to submit their expenses for reimbursement. Typically, this involves submitting a form online or via email with the documentation attached.
  3. Processing reimbursements. Once all the necessary documents are submitted, employers must review them and approve or deny each expense. They usually do this through a software system that automates the processing of expenses.
  4. Making payments. After all expenses are approved, employers must make the appropriate payments to employees. Depending on your organization's preferences, you can do this through direct deposit or via check.
  5. Keeping track of reimbursements. Employers should keep track of all repayments to ensure they are appropriately filed and accounted for in the organization's records.

The negative effects of slow employee expense reimbursement

Slow reimbursement may seem like a minor issue, but it can have significant repercussions for your business. By understanding how slow reimbursement can affect productivity and profitability, you can work to ensure that your company is reimbursing expenses on time.

Adversely affects employees' personal finances

Employees rely on reimbursement to cover business expenses like meals and travel. When reimbursements are slow or late, employees may struggle to cover the cost of these items out of pocket, which can lead to cash flow issues and financial stress.

With 40% of employees experiencing cash flow issues due to slow reimbursement, businesses should prioritize quick and accurate payments to employees to reduce financial strain.

Harms employee relationships

When you don't reimburse employees on time, it can damage their relationship with your company. Employees may begin to feel undervalued and unappreciated, leading to lower morale and engagement levels.

Decreases employee productivity

Financial stress can have a detrimental effect on employee productivity. In a recent survey, 78% of employees with high financial pressure indicated that it impacts their work. While it's impossible to completely eliminate financial stress from employees' lives, you can help by ensuring expenses are reimbursed quickly and accurately.

Creates financial liabilities

In some cases, slow reimbursement can create financial liabilities for the organization. For example, if reimbursements are not posted when your business closes its books for the month, it may need to restate its financials to accurately reflect employee spending.

To avoid these potential liabilities, you should ensure that reimbursements are processed quickly and accurately to be reflected in your business's records without any discrepancies. Late or inaccurate reimbursements can put organizations at risk of legal action or fines, so implementing a streamlined expense reimbursement process is vital.

How to speed up expense reimbursement

No matter the size of your business, it's crucial to have an efficient process for managing expenses. Luckily, you can speed up your expense reimbursement process in several ways.

Issue corporate cards to eliminate reimbursement

Businesses can issue corporate credit cards to employees to make tracking and managing expenses easier. This eliminates the need for manual reimbursements, as all payments will be directly debited from your company's bank account. In addition, you can set limits on the card to ensure employees don't exceed their budget and customize reports to quickly identify spending trends.

Have clear processes in place

It's also important to have a straightforward process for submitting, approving, and reimbursing expenses. By setting up protocols that employees can easily follow, your business can reduce the time spent on administrative tasks and keep reimbursements moving quickly. Ramp's expense policy generator can help businesses create policies that are easy to understand and follow.

Automate expense policy enforcement

Enforcing an expense policy can be difficult without guidelines and reminders. Automate the process by using software to flag discrepancies and alert employees about policy violations to ensure expenses are being reported correctly. This will help your business minimize errors and save time by automatically approving or denying payments that meet its requirements.

Use expense management to track spending

Finally, you can use expense management to generate reports and quickly identify irregularities in employee spending. Expense tracking tools like Ramp can provide detailed visibility into employees' expenses, allowing you to spot issues and take corrective action before it's too late.

What you need to know about expense reimbursement taxes

To ensure compliance with tax laws, you must understand the different regulations around expense reimbursements. You should report expenses considered "ordinary and necessary" for your company's business operations as deductible business expenses.

Generally, these expenses are not considered wages or benefits and are not subject to payroll or withholding taxes. However, you must be aware of the nuances in different regulations, as some expenses may be taxable depending on the situation.

An "accountable plan" is a reimbursement arrangement that meets certain IRS requirements. With an accountable plan, employers can reimburse employees for business-related expenses without having to report them as income.

Under an accountable plan, there must be a business connection between the expense and the employee's job duties. To be considered an accountable plan, you must also require your employees to submit adequate documentation and a "statement of business purpose" that defines the connection between the expense and the employee's job.

By contrast, a "non-accountable plan" does not meet the requirements of an accountable plan. In this case, any reimbursements are taxable and should be reported as wages. That means employers must withhold payroll taxes on any non-accountable reimbursements, and employees must report them as income when filing their taxes.

Reimbursing employees for business expenses requires employers to understand IRS regulations and stay up to date on changes in tax law. The 30/60 Rule requires employees to submit reimbursement requests within 30 days of incurring expenses. If an employer fails to reimburse an employee within 60 days, the amount will appear on their W-2, and they will be responsible for paying taxes.

Employees may claim unreimbursed business expenses as deductions on their income tax returns, but they must include them in their gross income first. These expenses should not exceed 2% of the employee's adjusted gross income, so it's essential to keep accurate records and documentation to claim them.

Ramp makes expense reimbursements faster

With Ramp, your business can manage, track, and reimburse employee expenses quickly and easily. We make it easy to streamline the entire expense reimbursement process, from submitting expenses to approving payments.

Ramp's user-friendly platform allows employers to issue corporate cards to employees with spending limits so they can make purchases without waiting for approval. This eliminates manual processing, simplifies submitting and tracking expenses, and helps get employees paid faster.

Ramp also provides automated tools to remind employees to submit their expenses on time so businesses can comply with expense policies and tax regulations. Our real-time reporting allows employers to monitor spending easily and ensure accurate financial records.

We help businesses save time and money by automating the expense reimbursement process. Get started with Ramp today to pay your employees faster.

Head of Content, Ramp

Fiona Lee is the Head of Content at Ramp, overseeing content marketing, customer education, and customer marketing. She brings over a decade of editorial experience developing high-quality B2B content. Prior to Ramp, she led content teams at companies large and small, including Google and Intercom, where she developed a strong interest in small businesses growth topics. Fiona graduated from UC Berkeley with a degree in English.


What is considered an employee expense?

Employee expenses are any costs incurred by an employee in relation to their job duties. These can include costs for travel, meals, supplies, equipment, and other business-related activities. Depending on the organization's policy, expenses must meet specific criteria to be reimbursed.

What is an accountable expense reimbursement plan?

An accountable expense reimbursement plan is an arrangement that meets specific IRS requirements. This type of plan allows employers to reimburse employees for business-related expenses without having to report them as income or withhold payroll taxes.

How can I make sure my expense reimbursement process is compliant?

To ensure compliance, employers must have an accountable expense reimbursement plan and require employees to submit adequate documentation for their expenses. Employers should also provide clear guidelines for acceptable expenses and how to submit them.

How do you record expense reimbursements?

Expense reimbursements should be recorded on your company's books as business expenses. However, depending on the type of plan, you may also need to include reimbursements as wages or taxable income.

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