What are reimbursable expenses?

Reimbursable expenses are business-related costs employees pay out of pocket, like travel, meals, and office supplies, that their employer repays. Having clear policies and documentation in place prevents disputes, promotes tax efficiency, and keeps reimbursements moving smoothly.

What are reimbursable expenses?

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

In professional services, the term can also describe costs a consultant or vendor incurs while working on a client project, such as travel, materials, or software fees, that are then billed back to the client.

The reimbursement process follows a straightforward cycle:

• Business purpose: The expense must directly relate to work activities
• Out-of-pocket payment: The employee pays first using personal funds
• Documentation required: Receipts or invoices prove the expense occurred
• Company reimbursement: The employer pays back the employee after verification

What to include in a reimbursable expense policy

When considering a reimbursement process for your small business, it's important to have a clear expense reimbursement policy in place to avoid confusion and potential disputes between team members and your company. Reimbursable expense policies should include information on the following:

• What qualifies: Reimbursable expenses need a clear connection to an employee's role or be vital for the regular functioning of the company
• Spending limits and boundaries: Businesses often set spend limits for reimbursements, especially for particular outlays such as dining or accommodation expenses
• Required documentation: Employees should provide valid receipts to support their expense reimbursement claims
• Budget constraints: You may allocate a certain budget for reimbursable expenses within a given period, and employees' claims shouldn't exceed this amount

These policies help standardize reimbursability, establish fairness across departments, and reduce confusion about what can and can't be claimed.

Reimbursable vs. non-reimbursable expenses

Reimbursable expenses are primarily those directly linked to business purposes, while non-reimbursable expenses aren't directly linked to a company's primary activities.

Reimbursable expenses

Common types of reimbursable expenses for small businesses include:

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

Non-reimbursable expenses

Not all employee expenses qualify for reimbursement, especially when the purchase serves a personal purpose rather than a business purpose. For example:

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

Here's a quick comparison to help you draw the line:

Some situations, like partially personal travel or using a subscription for both work and home, can fall into gray areas. To avoid confusion, clearly address these scenarios in your expense policy and outline how mixed-use purchases are handled and when exceptions may apply.

How to handle gray area and mixed use expenses

When an expense blurs the line between business and personal, run it through a two-part test before deciding:

• Would the employer require or expect this expense for the employee to do the job?
• Can the business portion be separated from the personal portion?

If the answer to both is yes, reimburse a documented percentage of business use, and keep the records that support that percentage so you can substantiate it later. Take a personal phone used for both work and personal calls: you reimburse the share tied to work at a documented business-use percentage rather than the full bill.

A written policy should pre-decide the gray areas your team hits most often, so mixed-use purchases don't land in the approval queue one by one.

Common types of reimbursable expenses

Reimbursable expenses can cover a wide range of business-related costs. Here are the categories your business is most likely to encounter:

Travel and transportation

Business travel expenses include airfare, trains, rental cars, rideshares, taxis, and mileage reimbursement for personal vehicle use on business trips. Many companies use the IRS standard mileage rate to calculate vehicle reimbursements, which simplifies tracking and keeps you aligned with federal guidelines.

Lodging and accommodations

Hotel stays during business travel qualify for reimbursement. You'll want to set expectations around reasonable nightly rates, and incidentals such as parking or resort fees may also be covered depending on your policy.

Meals and business entertainment

When an employee dines with a client or conducts a business conversation during a meal, those expenses are eligible for reimbursement. Company policies often set daily limits or per-meal caps to keep costs in check.

Office supplies and equipment

There are times when your office needs supplies quickly or new equipment is necessary to keep work moving. Remote employees may have additional eligible expenses in this category, such as monitors, keyboards, or ergonomic furniture needed to perform their job duties.

Professional development and conferences

When employees enroll in courses, attend workshops, or participate in industry conferences for professional development, those expenses are typically reimbursable. This also covers certification fees and membership dues for professional organizations or trade unions that benefit the employee's role.

Remote work and home office expenses

With the rise of remote work, it's common for employees to use their personal phones or home internet for work tasks. These utility expenses, when used for work, can be reimbursed by submitting an expense report. Some states actually require employers to reimburse necessary work expenses for remote employees, so check your local laws.

Software subscriptions

If an employee needs a paid software tool to perform their job, such as design software or project management platforms, those subscription costs may be reimbursed when pre-approved.

Are expense reimbursements taxable?

Generally, properly documented reimbursements are not considered taxable income for employees. When you reimburse an employee for a legitimate business expense, and they provide the required documentation in a timely manner, it's not treated as part of their taxable earnings.

To qualify for tax-exempt treatment, reimbursements must follow an accountable plan, or a system where employees return any excess reimbursements and submit receipts or other proof of payment. Without this structure, the IRS may consider the reimbursement taxable.

Following IRS reimbursement guidelines not only avoids tax issues for your employees but also allows your business to deduct those expenses, helping reduce your overall tax liability. When in doubt, consult a tax specialist or refer to the most current IRS guidelines for your region or business type.

The three requirements of an accountable plan

An accountable plan is what keeps reimbursements tax-free, and the IRS sets three requirements it must meet:

1. Business connection: the expense must have a genuine business purpose.
2. Adequate substantiation: records showing the amount, time, place, and business purpose of each expense. The IRS treats substantiation within 60 days as a safe harbor.
3. Return of excess advances: any advance beyond documented expense must be returned. The IRS treats a return within 120 days as a safe harbor.

The 60-day and 120-day figures are IRS safe harbors under the "reasonable period of time" standard, not hard statutory deadlines. If your plan fails these requirements, the reimbursements become taxable wages subject to income tax withholding and FICA.

How to account for reimbursable expenses

Reimbursable expenses are recorded on an income statement by debiting the specific expense account, such as travel expenses or office supplies, and crediting either cash or accounts payable.

Accurately recording these expenses is essential for claiming tax deductions and maintaining clean financial records. To stay compliant, your business should follow an IRS-approved accountable plan, which requires employees to submit timely, documented claims and return any excess reimbursement.

1. Collect and verify documentation

Your finance team reviews the submitted reimbursement request for compliance with company policies. This means checking for itemized receipts that show the vendor, purchase date, amount, and a clear business purpose.

In some cases, you may require additional proof such as full invoices, credit card statements, or canceled checks, especially for high-value or policy-sensitive purchases.

2. Categorize the expense

Assign the expense to the proper expense account (e.g., travel, meals, supplies) for accurate financial reporting and budget tracking. Consistent categorization makes it easier to analyze spending trends and prepare for audits.

3. Record the reimbursement

Once approved, your accountant debits the appropriate expense category and creates a payable to the employee. The reimbursement is booked as an expense on the income statement, not as employee wages, which is critical for proper tax treatment.

4. Reconcile with payroll or accounts payable

When payment is made, the payable is cleared from the books. Process the payment through payroll or a separate reimbursement check, and track outstanding reimbursements to make sure nothing slips through the cracks.

By following this process, you ensure all business-related expenses, even those initially paid out of pocket by employees, are accurately reflected in your company's financial statements and eligible for appropriate tax treatment.

Keep your substantiation records too. The IRS generally expects you to retain them for at least 3 years from the date you file the return, and 6 years if you fail to report income you should have reported and it's more than 25% of the gross income shown on your return.

Employee vs. contractor reimbursements

How you handle reimbursements depends on whether you're working with a W-2 employee or a 1099 contractor. The documentation, tax treatment, and payment process differ for each.

• Employees: Follow your company's expense policy and are reimbursed tax-free under an accountable plan
• Contractors: Often invoice expenses separately or build them into their project rate
• Tax reporting: Contractor reimbursements may need to be included in 1099-NEC reporting unless they follow an accountable plan with proper documentation

When contractors, vendors, or freelancers incur expenses on your behalf, it's important to document them properly on invoices for accurate reimbursement and compliance. Here's a step-by-step process for handling contractor reimbursements:

1. Require itemized invoicing: Ask contractors to list reimbursable expenses separately from their service fees. Each line item should include a description, date, amount, and supporting documentation (like mileage logs) and be grouped into standard categories such as travel, meals, lodging, or materials.
2. Include terms in your agreement: Spell out your reimbursement policy in the contractor agreement or scope of work. Be clear about which expenses are eligible, what documentation is required, any spending caps, and deadlines for submitting claims.
3. Keep service fees and expenses separate: Instruct contractors not to bundle reimbursable expenses with service charges. This simplifies your accounting and helps ensure proper 1099-NEC reporting—if a contractor's reimbursed expenses are properly documented and paid under a clear agreement (like an itemized invoice), those reimbursements usually don't need to be reported on their 1099-NEC.
4. Track 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 track your spending on third-party costs.

Separately documented, invoiced contractor reimbursements generally aren't compensation for services, so they may fall outside 1099-NEC income totals. Treatment depends on how the arrangement is structured, so confirm the specifics with a tax advisor.

State reimbursement laws to know about

Federal law doesn't require employers to reimburse business expenses, but some states do when the expense is a necessary cost of doing the job. If you employ people in more than one state, your reimbursement obligations can vary from one team to the next.

A handful of states enforce reimbursement requirements, and the rules differ in scope, covered categories, and timelines:

• States like California, Illinois, and Massachusetts each require reimbursement of necessary business expenses
• Covered categories can include remote-work costs such as internet or personal phone use
• Deadlines and the definition of a "necessary" expense vary by state

Because state statutes change, verify the current requirements for each state where you have employees with counsel or the state labor department before setting your policy.

Best practices for managing reimbursable expenses

An effective reimbursement process starts with clear expectations and consistent oversight. Here's how to get it right:

1. Create a clear expense reimbursement policy

Define what's reimbursable, what documentation is required, and when expenses must be submitted. Share your expense policy during onboarding and make sure it's easy to access for both employees and contractors. A well-documented policy eliminates ambiguity and gives your finance team a clear framework for approving or denying claims.

2. Set spending limits and approval workflows

Establish spending caps by category and require manager approval for expenses above certain thresholds. For example, you might auto-approve meals under $50 but require VP sign-off on anything over $500. This prevents overspending while keeping low-risk reimbursements moving quickly.

3. Require timely expense submissions

Set an internal submission deadline, such as within 30 days of the expense, to maintain accurate books and stay inside the IRS accountable plan safe harbors. The IRS treats substantiation within 60 days and return of excess within 120 days as reasonable, so a tighter internal window keeps you comfortably within those benchmarks. Late submissions create reconciliation headaches and can jeopardize the tax-exempt status of reimbursements.

4. Use expense management software

Automate receipt capture, approval routing, and reimbursement processing to reduce manual work and errors. The right expense management software can turn a multi-day process into one that takes minutes, freeing your finance team to focus on higher-value work. Ramp's Policy Agent, an always-on AI reviewer trained on your actual policy, reviews 100% of transactions and catches 7x more out-of-policy spend than rule-based systems at 99%+ accuracy.

5. Conduct regular expense audits

Review submitted expenses periodically to catch policy violations, duplicate submissions, or potential fraud. Even a quarterly spot-check can surface patterns, like consistently inflated mileage claims, that would otherwise go unnoticed.

Common expense reimbursement mistakes to avoid

Even with a solid policy in place, reimbursement processes can break down. Here are the most common pitfalls and how to steer clear of them:

Vague or outdated expense policies

Ambiguous rules lead to disputes and inconsistent enforcement. If your policy hasn't been updated in over a year, it's probably out of step with how your team actually works. Review and refresh it annually, and communicate any changes clearly to employees.

Missing or incomplete documentation

Lost receipts or a lack of itemization can delay reimbursement and create audit risk. Require complete documentation before approving any claim. If you're still relying on employees to hang on to paper receipts, that's a process problem worth solving.

Delayed reimbursement processing

Slow payments frustrate employees and can erode trust. In some states, delayed reimbursement may even violate labor laws. Set internal service level agreements (SLAs) for processing times, such as reimbursing within 10 business days of approval, and stick to them.

Ignoring tax compliance requirements

Failing to follow accountable plan rules can convert reimbursements into taxable wages, creating unexpected tax liability for both you and your employees. Make sure your process meets IRS substantiation and return-of-excess requirements to avoid penalties.

Treating IRS safe harbors as hard deadlines

The 60-day (substantiation) and 120-day (return of excess) figures are IRS safe harbors under the "reasonable period of time" standard, not absolute legal cutoffs. Use them as internal benchmarks and set shorter windows if you like, but don't frame them to employees as statutory deadlines they'll be penalized for missing.

How Ramp eliminates the headache of employee reimbursements

Most reimbursement tools try to make expense reports faster. Ramp makes them obsolete. There's no report to assemble, because every transaction is captured, coded, and reviewed the moment it happens.

Employees submit receipts however they already work, through SMS, the mobile app, web, email, Slack, or Teams. Each expense is auto-coded from context and synced to your ERP in real time, so your team never rekeys a line item or chases a missing receipt at month-end.

Policy Agent is what makes this run without adding reviewers. It's an always-on AI reviewer trained on your actual policy document, and it reviews 100% of transactions, routing only genuine exceptions to a human. Because enforcement happens before spend rather than after the fact, you catch issues at the source instead of untangling them weeks later.

When a reimbursement is approved, Ramp pays it to the employee's bank account in 1–2 business days, across 70+ countries and 40+ currencies. The card, expense, reimbursement, and approval layers all share one connected platform, a single data model that bolt-on expense tools sitting on top of someone else's card data can't replicate.

Set your reimbursement policy on autopilot

Ramp's modern finance operations platform enforces your expense reimbursement policy for you, saving your team time, headaches, and confusion. With Ramp, tracking reimbursable expenses is faster, more accurate, and easier to manage. More than 70,000 businesses have saved 27.5 million hours with Ramp. What could your team do with that kind of time savings?

Try an interactive demo to learn more.