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Expense reimbursement is the practice of businesses repaying employees for the charges they incur on behalf of the company. Travel costs, meals, office supplies, and professional training are just a few of the business expenses that employees tend to seek reimbursement for. 

As a business owner, it’s a good idea to get a handle on how expense reimbursement programs typically work, and create your own expense reimbursement policy, so you can keep spending under control within your company. 

In this article, we’ll take a deep dive into the topic of expense reimbursements, with examples, strategies, and alternatives that you can apply to your business immediately.

What is expense reimbursement?

Expense reimbursement is exactly what it sounds like: The process of an employer reimbursing an employee for any work-related expenses that they used their personal funds to pay for. 

In other words, it’s a payment you make to your employees to compensate them for any out-of-pocket expenses they incur while carrying out the duties of their job. Typically, this will be a dollar for dollar match, which can be added on to an employee’s regular paycheck or as a separate payment via either check or direct deposit. 

These payments are also sometimes called employee reimbursements.

Importance of expense reimbursement

If you don’t reimburse your employees for legitimate expenses they incur as a part of their job, you: 

  • Remove your employees’ incentive to make purchases, even when it’s business critical
  • Hurt your business’s ability to attract and retain customers and clients, compete with the competition, and turn a profit in a fast moving economy 
  • Potentially affect employee morale and make it harder to maintain an engaged workforce 

As a bonus, when you reimburse your employees for work-related expenses, you may be able to deduct many of those expenses come tax time—effectively lowering your taxable income for the year. 

That said, this doesn’t mean you shouldn’t imburse legitimate expenses incurred by your employees, just because they aren’t deductible. But limiting non-deductible expenses whenever possible is important to the long-term financial health of your company.

What makes an expense reimbursable?

In order to deduct employee reimbursements on your tax return, the IRS requires you to implement an accountable plan—a reimbursement plan specifically designed to adhere to the guidelines established by the IRS. Under this framework, businesses are only allowed to reimburse employee business expenses that are considered “ordinary and necessary” work-related costs. 

A non-accountable plan offers more flexibility, but doesn’t come with the same tax benefits as an accountable plan.

Common examples of expense reimbursement

While it’s impossible to compile a comprehensive list of every single possible reimbursable expense, below we’ve pulled together examples of some of the most common types of expenses—including travel and non-travel expenses.

Business travel

Many employees travel as a part of their job. Business travel can include trips to meet with customers, clients, prospects, suppliers, distributors, and other partners. It can also involve other types of business meetings, such as company retreats, all-hands-on-deck meetings, networking events, conferences, and more. 

If your employees pay out of pocket to cover any travel costs, those will typically be reimbursable so long as they meet the requirements outlined in your company’s travel reimbursement policy. Examples of business travel expenses can include:

  • Costs related to flying: Airfare and airplane tickets, baggage and other airport fees, travel documentation (such as passports), in-flight purchases
  • Costs related to driving: Rental cars, taxi and rideshare fares, gas, parking fees, tolls, and mileage reimbursement (typically the standard mileage rate for use of a personal vehicle)
  • Costs related to lodging: Hotel bookings, long-term rentals, housekeeping fees, tips
  • Costs related to communication: Cell phone plans, wifi, hotspots
  • Miscellaneous costs: Train tickets, ferry fares, and other forms of travel

As a note, costs related to employee commuting are typically not considered a business expense.

Meals and entertainment 

Reimbursing employees for meals and entertainment can sometimes get a little tricky. Generally speaking, though, these expenses are considered reimbursable so long as they have a clear business purpose or can be clearly tied back to the employee’s duties. 

Usually, meals that an employee purchases while traveling are considered reimbursable, as long as they are not considered extravagant. The same goes for meals and entertainment related to business meetings, customer or client meetings, and team building activities. 

Reimbursement may include restaurant meals, tips, and service charges. It can also include ready-made meals, groceries, or ingredients, if an employee chooses to cook for themselves during travel.

Supplies and tools

If an employee uses their own money to purchase supplies or tools that are necessary for them to complete their job, those costs are often considered reimbursable. This can include things like:

  • Office supplies: Pens and pencils, paper and other stationary, cleaning supplies
  • Electronics: Desktop or laptop computer, monitors, printer, fax machine, business phone or smartphone, software subscriptions
  • Tools and equipment: Plumbing tools, electrical tools, or carpentry tools, or any other tool your employee needs 
  • Uniforms and work gear: Including dry cleaning or laundering costs during travel

Many small businesses offer employees a home office stipend to cover these and other business-related expenses. Stipends can be a one-time deal, or can take the form of monthly, quarterly, or annual allowances.

Professional development and training

When an employee completes training or learns new skills, it can empower them to do their job more efficiently and effectively. With this in mind, many employers offer their workers professional development stipends that can be used to fully or partially reimburse costs like:

  • Tuition for workshops, courses, certificates, and even advanced university degrees
  • Exam fees related to certification and recertification
  • Educational supplies, such as textbooks, software subscriptions, and other educational materials
  • Attendance at conferences, seminars, and other types of networking events

Managing employee expense reimbursements

In order for your business to effectively manage employee reimbursement requests, you need to have a comprehensive reimbursement policy in place. This policy should outline every step of the reimbursement process, including:

  • Eligible expenses: Which out-of-pocket costs does your business agree to reimburse? Are there any exceptions that employees should be aware of?
  • Timeframe: When are employees expected to submit their expense reports? What is a reasonable period of time in which they can expect to be reimbursed? 
  • Proof: What proof of purchase do you require an employee to submit along with their expense reimbursement requests? Examples can include receipts, invoices, and credit card statements. 

Alternatives to expense reimbursement

When an employee covers an expense out of their own pocket, they’re essentially fronting their employer’s cost of doing business, which may or may not be fair or ethical for an employer to require. Likewise, managing reimbursements can be a time consuming affair—for your employees, who must submit their expense reports; human resources, who must reconcile and approve any expenses; and your accounts payable department, who must issue the payments. 

With this in mind, a few alternatives you might want to consider include:

Per diems

A per diem is a daily amount that an employee is allowed to spend, typically while traveling. It can be used to cover everything from meals and transportation to lodging and other accommodations. Many businesses prefer per diem rates and allowances because they remove the need for more detailed expense tracking and approval.

Cash advances

A cash advance is an amount of cash given to an employee before an expense—most often a travel expense—is incurred. Advances can be especially helpful when an employee is unable or unwilling to cover business expenses out of pocket, or when an employer doesn’t want to require an employee to do so. They can also be helpful for covering expenses when a merchant or vendor does not accept a company credit card.

Corporate cards

A corporate card is a credit card that employees can use to cover business expenses with pre-approved funds. Giving an employee access to a corporate card makes it possible to avoid most reimbursements altogether, and may even translate into discounts on certain purchases—saving your business time and money versus a complicated reimbursement process.

Ramp: Expense management made easy

Ramp makes it easier to manage employee expenses. Our expense management software helps to categorize, review, and approve employee reimbursements. Plus, our suite of automation tools help to streamline everything from receipt collection to request approvals. 

Thinking about making the switch to corporate cards? Ramp makes it easy to issue cards to your employees, set custom spending limits and category restrictions.

Try Ramp for free
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Contributor Finance Writer
Tim Stobierski is a writer and content strategist focused on the world of finance, investing, software, and other complicated topics. His friends know him as a bit of a nerd. On the side, he writes poetry; his first book of poems, Dancehall, was published by Antrim House Books in July 2023.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

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