What are reimbursable expenses?

Sometimes employees are in situations where they need to spend their own money on things that are business-related, whether it's office expenses or something else. These types of charges, made via the employee’s cash or credit card, are referred to as reimbursable expenses if they serve legitimate business purposes and are subject to repayment by the company. 

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Some examples of reimbursable expenses are: 

• Travel expenses
• Phone and internet expenses
• Professional organization membership fees
• Training and education

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

What are reimbursable expenses?

Reimbursable expenses are costs that an employee initially bears for the company, anticipating later reimbursement from the organization. Such a system exists because employees sometimes need to quickly acquire items or services for their roles, and it's often more practical for them to make these purchases directly instead of navigating prolonged procurement channels.

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When considering reimbursable expenses for your small business, it's important to have clear policies in place to avoid confusion and potential disputes between employees and your company.

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Access Ramp's free PDF example and template of the employee reimbursement policy in our Accounting Documents Library.

Why do reimbursable expenses matter?

Reimbursable expenses matter in business for several reasons:

• Enhancing operational speed: One of the primary benefits of reimbursable expenses is that they allow employees to act quickly. Whether it's procuring essential tools, reserving a venue for discussions, or embarking on a business trip, swift choices and steps can be undertaken without needing extensive company permissions or protocols.
• Precise documentation: Financially, when companies compensate employees for business expenses, it guarantees that all related costs are meticulously logged in the organization's financial records. This is vital for gauging the company's fiscal stability and setting out budgets.
• Building employee confidence: When companies reliably reimburse employees for work-related expenses, it builds a sense of trust. Employees feel valued and are more likely to take initiative in their roles, knowing they won't be left out of pocket for business-related expenses.

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In sum, reimbursable expenses intertwine operational efficiency with fiscal responsibility and employee welfare, creating a balanced ecosystem. Hence, it's important for enterprises to manage these outlays smoothly.

Examples of reimbursable expenses

Reimbursable expenses can range from trips or tools required for a particular task to more nuanced expenses like memberships to professional associations or training sessions to enhance skill sets.

What is an example of a reimbursable expense?

A classic example would be travel expenses. Imagine an employee is participating in a business seminar. They arrange their air travel, secure lodging, and perhaps dine out several times during the event. After concluding their trip, they present the accumulated bills, and the organization compensates them for these expenditures.

More examples of common reimbursable expenses:

• Travel costs: Business travel expenses like flights, accommodation charges, dining costs, and ground transport. These arise when an employee goes on a trip primarily for business purposes. Sometimes, a per diem allowance is given instead.
• Meals and entertainment: When an employee dines with a client or conducts a business conversation during a meal, these expenses can be marked as eligible for reimbursement.
• Membership fees: Many professions have associated organizations or bodies. If an employee's membership in such a group benefits their role or the company at large, the associated fees can be considered for reimbursement.
• Phone and internet expenses: With the rise of remote working, employees using their personal phones or home internet for official tasks is not 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.

What is considered reimbursable?

Companies typically have an expense reimbursement policy in place that determines their list of reimbursable expenses. These policies and guidelines often 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 thresholds for reimbursement, 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: Some companies may allocate a certain amount per employee for reimbursable expenses within a given period. In such cases, employees must ensure their claims don’t exceed this allocated budget.

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.

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

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

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To start, let's look at some examples of the types of reimbursable expenses that are common in small business situations:

Reimbursable expenses

• Company car repairs
• Business conference airfare
• Meals during client meetings
• Necessary office equipment
• Membership to professional organization

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

Non-reimbursable expenses

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

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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 typically responsible for any medical expenses above and beyond this. 

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Are reimbursements taxable income?

Generally, properly accounted reimbursements are not considered taxable income to 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.

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.

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Accounting for expenses properly is important for making sure you can claim tax deductions for your deductible expenses. To do so, you’ll 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 reimbursements.

How does accounting for reimbursed expenses work?

• Upon receiving an expense claim from an employee, the finance team reviews the submitted costs, checking for adherence to organizational 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.

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By following this method, businesses ensure that all expenses, even those initially paid for by employees, are accurately reflected in the company's financial statements.

Managing reimbursements with Ramp

Managing reimbursements can be time-consuming, especially with a large workforce. Fortunately Ramp’s expense management and accounting software can streamline this process.

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Here are some of Ramp’s features that you can use to handle your employee expenses:

• 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: With many businesses reimbursing employees for travel, accurate mileage rate calculations become essential. Ramp's integration with Google Maps facilitates this. 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: Recognizing that businesses have diverse requirements, Ramp allows a tailored approach to both submission and approval. Companies can set guidelines on what details a team member needs to provide during reimbursement submission. Similarly, there's flexibility in setting up approval hierarchies based on the amount being claimed.