How do employee expense reimbursements work?

Slow expense reimbursement can be a major drag on your 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.

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It's important to have an efficient system for reimbursing your employees quickly and accurately so they can focus on getting the job done without worrying about when they'll get paid back. In this guide, we'll explain how you can set up an expense reimbursement system that keeps your team happy and productive.

What are employee reimbursements?

Employee reimbursements are payments made by an employer to their employees to compensate them for any business expenses they paid out-of-pocket.

Examples of reimbursable expenses include:

• Travel expenses
• Meals with clients
• Equipment purchases
• Office supplies
• 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.

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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 overspending.

The manual expense reimbursement process

Generally, the manual expense reimbursement process involves the following steps:

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.

Here are some of the ways that slow employee reimbursements can hurt your company.

Puts financial stress on your employees

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

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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 sends a message that their financial wellbeing isn't a priority for your company. This leads to employees feeling undervalued and underappreciated, lowering morale and eroding relationships.

Lowers 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 making sure expenses are reimbursed quickly and accurately.

Creates financial liabilities

Slow reimbursement can also create financial liabilities for your business. For example, if reimbursements aren't posted when your business closes its books for the month, you may need to restate your financials to accurately reflect employee spending.

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To avoid these potential liabilities, you should make sure that reimbursements are processed quickly and accurately to be reflected in your business's records without any discrepancies.

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 reimbursements

One way to solve the problem of slow reimbursements is to eliminate them altogether by assigning corporate cards. When your employees use company cards, payments come directly from your company's bank account. Transactions are automatically tracked and reported to your finance team. Additionally, you can set limits on the cards to make sure 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 make sure 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

The taxability of employee reimbursements depends on whether the expense is considered a business expense by the IRS and whether you use an accountable or non-accountable plan.

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.

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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.

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By contrast, a "non-accountable plan" doesn't meet the requirements of an accountable plan. In this case, all reimbursements 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.

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The 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.

Ramp makes expense reimbursements faster

Ramp's corporate cards eliminate the need for most reimbursements by empowering employees to spend using pre-approved funds. But when out-of-pocket payments do come up, Ramp makes those easy too.

Our platform streamlines the entire expense reimbursement process, from submitting expenses to approving payments.

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

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