Guide to reimbursable expenses for small businesses

There are times when employees need to make business-related purchases with their own money. It could be for office expenses, travel costs, or something else. When these types of charges are for legitimate business purposes, they are known as reimbursable expenses, meaning they are subject to repayment by the company.

Some examples of reimbursable expenses are:

• Travel expenses
• Phone and internet expenses
• Membership fees for professional organizations
• Training and education

In this article, we take a deep dive into reimbursable expenses. We explain how they function in accounting and an overall general expense management program, distinguish them from non-reimbursable expenses, and show how to effectively manage expense reports and reimbursements.

What are reimbursable expenses?

Reimbursable expenses are costs that an employee initially spends on behalf of your business, with the understanding that they will later be reimbursed. Sometimes it’s just more practical for an employee to quickly and directly purchase items or services they need with their own credit card, rather than navigating prolonged procurement channels.

But how this works is at the discretion of every business owner. When considering the reimbursement process for your small business, it's important to have a clear expense policy in place to avoid confusion and potential disputes between your team members and your company.

When considering reimbursable expenses for your small business, it's important to have a clear expense policy in place to avoid confusion and potential disputes between your team members and your company.

What’s considered reimbursable?

When you put your expense reimbursement policy into place, it should clearly explain to your team which expenses are and aren’t reimbursable. Guidelines also clearly explain what makes an expense reimbursable and what they need to provide to be reimbursed.

Some criteria for reimbursable expense policies include:

• Essential for business activities: Reimbursable expenses should have a clear connection to an employee's role or be vital for the regular functioning of the company
• Within set boundaries: Businesses often set spend limits for reimbursements, especially for particular outlays like dining or accommodation expenses
• Proper documentation: Usually, employees must provide valid receipts or proof of purchase to support their expense reimbursement claims
• Within budget allocations: You may allocate a certain budget for reimbursable expenses within a given period, and so employees must ensure their claims don’t exceed amount

These policies help standardize reimbursability—ensuring fairness across departments and reducing confusion about what can and can’t be claimed.

Examples of reimbursable expenses

Reimbursable expenses can range from business trips to things like membership fees for professional associations or expenditures for training sessions to enhance skill sets.

Types of reimbursable expenses include:

• Travel expenses: Business travel costs like airfare, accommodation charges, dining costs, and ground transport. These arise when an employee goes on a conference or trip primarily for business purposes and could be subject to a per diem rate instead.
• Meals and entertainment: When an employee dines with a client or conducts a business conversation during a meal, these expenses are considered eligible for reimbursement.
• Membership fees: If an employee's membership in a professional organization or trade union benefits their role or the company at large, the associated fees can be considered for reimbursement.
• Necessary office equipment: There are times when the office needs supplies quickly or new equipment necessary to keep work moving, and those could be reimbursable
• Company cars: If you provide a company car, costs for gas, tolls, and company car repairs could reimbursable, depending on your policies
• Phone and internet expenses: With the rise of remote work, employees using their personal phones or home internet for work tasks isn’t uncommon. These utility expenses, when exclusively used for work, can sometimes be reimbursed.
• Training and education: When employees enroll in courses, attend workshops, or participate in conferences that bolster their professional skills, these expenses might be reimbursable.

“Ordinary and necessary” expenses defined

The IRS also has their own guidelines for what counts as reimbursable. They define reimbursable expenses as those that are “ordinary and necessary” for an employee’s job duties. This can also serve as a guide for you as you create your expense reimbursement company policy.

Business vs. personal expenses

When employees are using their personal credit cards or funds for business expenses, there are times when the line between business and personal expenses can be blurry. So it’s important to also define what counts as reimbursable expenses versus non-reimbursable.

Reimbursable expenses are primarily those directly linked to business purposes. On the other hand, non-reimbursable expenses aren't directly linked to the primary activities of a company.

These are some examples of expenses tend to be considered non-reimbursable by companies both large and small:

• Rental car upgrades
• Personal vacation flights
• Extravagant personal dining
• Personal entertainment gadgets
• Personal gym membership
• Medical expenses not covered by employee provided health insurance benefits

A simple way to avoid any confusion could be to provide your team with corporate cards, if they’ll be spending on behalf of the company often. These often come with built-in expense policy guardrails so they won’t be able to include personal expenses with the business ones.

Documentation requirements

One of the most important pieces of reimbursement is having the documentation to substantiate the expense. So it’s crucial to lay out very explicitly what you expect from your employees for back-up when creating expense reports.

For most expenses a simple itemized receipt including the vendor, date of purchase, and costs will suffice. But in some cases you may also require full invoices, credit card statements, cancelled checks, or some other proof of payment.

While this may seem like a tedious step for your employees, it’s important documentation you need for your business tax deductions. These are records of payment you’ll need to show if ever audited.

Are reimbursed expenses considered income?

As a general rule, properly documented reimbursements are not considered taxable income for your employees. When you provide reimbursement to an employee for a legitimate business cost, this compensation is generally not considered part of the employee's taxable earnings, so long as the employee submits the necessary proof or records in a timely fashion. However, if you’re not sure about local guidelines, be sure to consult with a tax specialist for the full picture.

What is a cost-reimbursable expense?

A cost-reimbursable expense refers to a reimbursement method where the amount refunded to the employee directly reflects the actual expenses they've incurred. In this setup, the company repays the precise sum the employee has spent on work-related tasks rather than a fixed or estimated amount.

Reimbursable expenses for contractors and vendors

When working with freelancers, consultants, or independent vendors, it's not uncommon for them to incur expenses on your behalf—especially for travel, materials, or third-party services. Unlike employee reimbursements, these outlays are usually handled through the invoicing process and can have different tax and documentation implications.

Here's how to handle contractor reimbursements:

• Require itemized invoicing: Contractors should clearly list reimbursable expenses separately from their service fees. Each item should include a description, date, amount, and supporting documentation (such as receipts or mileage logs).
• Use written agreements: Include reimbursement terms in your contractor agreement or scope of work. Specify which types of expenses are eligible, what documentation is needed to submit reimbursable expenses, caps or limits (e.g., “up to $100/day for meals”) and deadlines for submission
• Avoid mixing fees and expenses: Keeping service fees and expenses distinct helps streamline accounting and ensures proper treatment for tax reporting. It also helps avoid confusion around 1099-NEC thresholds (you generally don’t include reimbursed expenses in the reported total if properly documented).
• Track separately in your accounting software: Set up separate categories in your general ledger for reimbursed contractor expenses versus service fees. This helps with audit readiness and makes it easier to see how much you’re spending on third-party costs.

Reimbursable vs. non-reimbursable expenses

What's the difference between reimbursable and non-reimbursable expenses?

Reimbursable expenses are primarily those directly linked to business purposes. On the other hand, non-reimbursable expenses aren't directly linked to the primary activities of a company.

To start, let's look at some common types of reimbursable expenses for small businesses:

Reimbursable expenses

• Company car repairs
• Business conference airfare
• Meals during client meetings
• Necessary office equipment
• Membership fees for trade unions or professional organizations

Non-reimbursable expenses

By contrast, these types of expenses tend to be considered non-reimbursable by companies both large and small:

• Rental car upgrades
• Personal vacation flights
• Extravagant personal dining
• Personal entertainment gadgets
• Personal gym membership

Health insurance isn’t typically treated as a reimbursable expense, but rather a direct benefit provided to employees. Companies typically pay premiums directly to health insurance providers as part of their benefits package rather than reimbursing employees for purchasing their health insurance. The employee is usually responsible for any medical expenses above and beyond this.

Are expense reimbursements taxable?

Generally, properly accounted reimbursements are not considered taxable income for the recipient. When a company provides reimbursement to an employee for a legitimate business cost, this compensation is generally not considered part of the employee's taxable earnings, provided there's an organized protocol in place and the employee submits the necessary proof or records in a timely fashion.

However, it's always advisable to consult with a tax specialist or check IRS guidelines pertinent to your region.

While reimbursements aren’t taxable income for your employees, if you follow the IRS guidelines, they can serve as tax deductions for the business, lowering your potential tax burden at the end of each year.

How do you account for reimbursable expenses?

Reimbursable expenses are recorded on an income statement by debiting the specific expense account (like travel expenses or office supplies) and crediting cash or accounts payable.

Properly accounting for expenses is important for ensuring you can claim the appropriate tax deductions. To do so, you need to follow an accountable plan as laid out by the IRS. You can read about how to reimburse employees for tax purposes in our guide on taxable employee expense reimbursements.

In a nutshell, the accounting process for reimbursable expenses looks something like this:

• Upon receiving an expense claim from an employee, the finance team reviews the submitted costs, checking for compliance with company guidelines
• Once verified, the accountant will record the expense, increasing the expense category and recognizing a payable to the employee
• When the reimbursement is paid to the employee, the payable is cleared

By following this method, you can make sure all expenses, even those initially paid by employees, are accurately reflected in the company's financial statements.

Managing expense reimbursements with Ramp

Managing reimbursements can be time-consuming, especially with a large team. But, fortunately, Ramp’s expense reimbursement software can streamline this process.

Some of Ramp’s features that help manage your employee business expenses include:

• Versatile reimbursement options: Ramp offers flexibility in how reimbursements are processed. For businesses that prefer direct bank transfers to an employee’s bank account, Ramp provides an ACH option.
• Automated mileage calculations: If you reimburse employees for the use of their personal vehicle, accurate mileage rate calculations are essential. Ramp's integration with Google Maps makes it a breeze. When an employee logs a start and an endpoint, the system determines the most efficient route and calculates the reimbursement based on the company's set rate per mile.
• Customizable submission and approval protocols: Ramp allows a tailored approach to both expense submission and approval. Companies can set guidelines on what details employees need to provide during reimbursement submission. Similarly, there's flexibility in setting up approval hierarchies based on the amount being claimed.

See how Ramp can help you manage your financial obligations.