The complete guide to expense reimbursement for employers

As a business owner, you know sometimes your team incurs expenses for travel, supplies, training, and more. But do you have a good system in place for the reimbursement of expenses? Building an expense reimbursement program at your company helps you stay compliant with state and local laws and keep spending under control.

In this article, we examine expense reimbursements in depth, providing examples, strategies, and alternatives 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 own personal funds.

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.

What is the expense reimbursement process?

The process for reimbursed employee expenses commonly follows these steps:

1. Employee incurs expense: Someone uses their funds or credit card to pay for a business expense, like a client dinner, travel expense, or office supply
2. Expense report is created: Following your stated policies, the employee generates an expense report including the expenditure, business purpose, vendor information, and proof of purchase (usually a receipt or invoice)
3. Submission: The report is submitted to their manager or the finance team for review
4. Report approval: Some approval workflows are longer than others, but the appropriate people or systems check the report to ensure the expense meets the proper criteria for reimbursement
5. Employee is reimbursed: When approved, the employee is paid back for their expense either in their paycheck or a separate payment

Why is employee expense reimbursement important?

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.

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

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

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

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 your company's long-term financial health.

What are common examples of reimbursable expenses?

While compiling a comprehensive list of every possible reimbursable expense is impossible, 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 includes business trips to meet with customers, clients, prospects, suppliers, distributors, and other partners. It may also involve other business meetings, like company retreats, all-hands meetings, networking events, and conferences.

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 costs related to:

• Flying: Airfare, baggage, travel documentation (such as passports), in-flight purchases
• 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)
• Lodging: Hotel bookings, long-term rentals, housekeeping fees, tips
• Communication: Cell phone data plans, Wi-Fi, hotspots
• Other travel costs: Train tickets, ferry fares, other forms of travel

Meals and entertainment

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

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.

Expenses include: 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 money to purchase supplies or tools necessary to complete their job, those costs are often considered reimbursable. This can include:

• 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

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 monthly, quarterly, or annual allowances.

Professional development and training

When your team 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:

• 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 expense reimbursements taxable?

Whether expense reimbursements are taxable depends on whether your business uses an accountable or non-accountable expense reimbursement plan.

When you use an accountable plan, as defined by the IRS, your employees' expense reimbursements aren’t considered taxable income. On the other hand, reimbursements paid out under a non-accountable plan are considered taxable income. Your business must withhold payroll taxes on any non-accountable reimbursements, and your employees must report them as income when filing their taxes.

In past years, employees could claim unreimbursed business expenses as deductions on their income tax returns. The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated these deductions until 2025 (with some specific exceptions).

Expense reimbursement policy basics

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:

• 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.

Read more about building a comprehensive expense reimbursement policy.

What are the benefits of an employee reimbursement policy?

There are several benefits to having a solid reimbursement policy in place:

• It improves your ability to keep accurate records
• Good policies save your company and your employees money
• You set proper expectations with your team about how to spend company funds
• It ensures you stay compliant with tax regulations and understand deductions
• You gain better visibility into your budget and spend management

Overcoming challenges to expense reimbursement

When employees cover 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 unfair.

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. If there are delays in reimbursing your employees, they could become frustrated or, worse, in debt while waiting for funds.

Other challenges can be more costly to your company, like maintaining outdated or overly complex expense policies or enforcing them unfairly or inconsistently. Likewise, if you’re not keeping meticulous records of your receipts, you may not be prepared for a future audit or may miss certain tax deductions.

Alternatives for expense reimbursement

One of the best ways to sidestep those challenges is by automating the process with an expense management tool. But in the meantime, these are a few alternatives to consider:

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.

Cash advances

A cash advance is a lump sum given to employees 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.

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. It may even lead to discounts on certain purchases, saving your business time and money versus a lengthy reimbursement process.

Easily manage employee expenses with Ramp

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

Plus, with Ramp Travel, you 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.

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