The complete guide to employee expense reimbursement

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As a business owner, it’s a good idea to get a handle on how expense reimbursement programs work—not just because some state and local laws require employee expense reimbursement, but because it can help you keep spending under control.

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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 today.

What is expense reimbursement?

Employee expense reimbursement is exactly what it sounds like: the process of reimbursing an employee for work-related expenses they paid for with their personal funds.

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

The importance of employee expense reimbursement

Technically speaking, at the federal level, employers aren’t required to reimburse employee business expenses unless those expenses drop an employee’s wages below the federal minimum wage. However, some states and even certain cities have their own employee reimbursement laws.

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Regardless of whether you’re legally required to do so, if you don’t reimburse your employees for legitimate expenses they incur as a part of their job, you risk:

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• Eliminating your employees’ incentive to make purchases, even when they’re business-critical
• Hurting your business’s ability to attract and retain customers, stay competitive, and turn a profit in a fast-moving economy
• Hurting employee morale and making it harder to maintain an engaged workforce

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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.

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This doesn’t mean you shouldn’t reimburse 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.

Common examples of reimbursable expenses

While it’s impossible to compile a comprehensive list of every possible reimbursable expense, 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 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 meetings, networking events, conferences, and more.

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

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• Costs related to flying: Airfare, baggage, travel documentation (such as passports), in-flight purchases
• Costs related to driving: Rental cars, taxi and rideshare fares, gas, parking fees, tolls, mileage reimbursement for use of a personal vehicle (whether you choose to reimburse the standard mileage rate or actual expenses)
• Costs related to lodging: Hotel bookings, long-term rentals, housekeeping fees, tips
• Costs related to communication: Cell phone data plans, Wi-Fi, hotspots
• Other travel costs: Train tickets, ferry fares, other forms of travel

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As a side note, costs related to employee commuting typically aren’t considered a business expense.

Meals and entertainment

Reimbursing employees for meals and entertainment can sometimes get tricky. Generally speaking, though, these expenses are considered reimbursable if they have a clear business purpose or you can directly tie them to the employee’s duties. 

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

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You’d usually reimburse expenses for restaurant meals, tips, and service charges. You can also reimburse ready-made meals, groceries, or ingredients if an employee cooks for themselves during travel.

Supplies and tools

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

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• Office supplies: Pens and pencils, paper and other stationary, cleaning supplies
• Electronics: Computers, monitors, printers, fax machines, business phones or smartphones, software subscriptions
• Tools and equipment: Plumbing tools, electrical tools, carpentry tools, or any other tools your employee needs
• Uniforms and work gear: Including dry cleaning or laundering costs during travel

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

Professional development and training

When an employee completes additional 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 they put toward costs like:

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

Are reimbursed expenses taxable?

The taxability of employee reimbursements depends on whether the purchase is considered a business expense by the IRS and what kind of expense reimbursement plan you use: namely, an accountable or non-accountable plan.

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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 taxable income.

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Under an accountable plan, there must be a business connection between the expense and the employee's job duties. That means your employees need to submit adequate documentation and a "statement of business purpose" that defines the connection between the expense and their job duties.

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A non-accountable plan doesn't meet the same requirements as an accountable plan. In this case, all reimbursed expenses are taxable and should be reported as wages. That means you must withhold payroll taxes on any non-accountable reimbursements, and employees must report them as income when filing their taxes.

Understanding the 30/60 rule

The so-called 30/60 rule requires employees to submit reimbursement requests within 30 days of incurring expenses. If you fail to reimburse an employee within 60 days, the amount will appear on their W-2, and they'll be responsible for paying the taxes.

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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 shouldn't exceed 2% of the employee's adjusted gross income, so it's essential to keep accurate records and documentation to claim them.

Managing employee expense reimbursements

To effectively manage the reimbursement of expenses, you need a comprehensive expense reimbursement policy. This policy should outline every step of the reimbursement process, including:

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• 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, and how long will it take your company to pay them back? This should be a reasonable period of time for both parties.
• 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 with their own money, they’re essentially fronting their employer’s cost of doing business. Some might consider that requirement an ethical gray area, and others might think it’s outright unfair.

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On top of that, managing reimbursements can be time-consuming—for your employees, who must compile and submit expense reports; for your human resources or finance team, who must reconcile and approve expenses; and for your accounts payable department, who must issue payment.

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With that in mind, you might want to consider these alternatives:

1. Per diems

A per diem is a daily amount you allow an employee to spend, typically while traveling. Employees can use their per diem 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.

2. Cash advances

A cash advance is a lump sum given to an employee before they incur expenses. 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 help cover expenses when a merchant or vendor doesn’t accept a company credit card.

3. Corporate cards

A corporate card is a credit or charge card employees can use to cover business expenses with pre-approved funds. Giving an employee access to a corporate card makes it possible to avoid reimbursement of expenses altogether and may even lead to discounts on certain purchases, saving your business time and money versus a lengthy reimbursement process.

Ramp: Employee expense management made easy

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

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Plus, with Ramp Travel, you can consolidate all your business travel spending and all but eliminate the need for travel expense reimbursements. Set pre-approved budgets and spend limits at the individual, trip, or department level, and enforce your T&E policy automatically.

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Want to learn more? Watch a demo video and see why businesses that choose Ramp save an average of 5% a year.