What are reimbursable expenses? A guide for small business owners

There are times when employees need to make business-related purchases with their own money, whether it’s office expenses, travel costs, or membership fees for professional organizations. If the purchase serves a legitimate business need, it’s treated as a reimbursable expense, meaning it’s subject to repayment by the company.

Reimbursable expenses play a key role in maintaining smooth operations, particularly for small businesses that lack formal procurement processes. It’s important to have clear policies and documentation practices in place to prevent confusion, promote tax efficiency, and keep operations running smoothly.

We break down which expenses are reimbursable, how to document them properly, and how to streamline your reimbursement process while staying tax-compliant.

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.

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 like 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

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.

Examples of reimbursable expenses

Reimbursable expenses can cover a wide range of business-related costs, from travel and client meals to office equipment and training. Below are some of the most common types of reimbursable expenses your business might encounter:

• Travel expenses: Business travel expenses include things like airfare, accommodation charges, dining costs, and ground transport. These expenses arise when employees take business trips or attend conferences primarily for business purposes and may 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 as a whole, the associated fees can be considered for reimbursement
• Necessary office equipment: There may be times when your office needs supplies quickly or new equipment is necessary to keep work moving, and those could be reimbursable
• Company cars: If your business provides a company vehicle, expenses like gas, tolls, and repairs may be reimbursable, depending on your company’s policies
• Phone and internet expenses: With the rise of remote work, it's not uncommon for employees to use their personal phones or home internet for work tasks. 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 for professional development, these expenses might be reimbursable
• 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

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 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.

Here’s a simplified breakdown of how the accounting process typically works:

1. Review the submitted expense claim: Your finance team checks that the reimbursement request complies with company policies and includes proper documentation, such as itemized receipts that show the vendor, purchase date, and amount
2. Record the expense: Once approved, your accountant debits the appropriate expense category and creates a payable to the employee
3. Reimburse the employee: When the payment is made, the payable is cleared from the books

Maintaining thorough documentation is critical for internal tracking, audit readiness, and tax reporting. In some cases, you may require additional proof of payment, such as full invoices, credit card statements, or canceled checks, especially for high-value or policy-sensitive purchases.

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.

How to manage contractor and vendor reimbursements

When contractors, vendors, or freelancers incur expenses on your behalf, it’s important to document them properly on invoices for accurate reimbursement and compliance. Unlike employee reimbursements, these outlays are typically handled through the invoicing process and may carry different tax and documentation implications.

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 receipts or mileage logs) and be grouped into standard categories like 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.

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.

Best practices for managing reimbursable expenses

An effective reimbursement process starts with clear expectations and consistent oversight. Here are a few best practices to help you manage reimbursable expenses:

• Create a clear policy: Define what’s reimbursable, what documentation is required, and when expenses must be submitted
• Communicate the policy: Share your expense policy during onboarding and make sure it’s easy to access for employees and contractors
• Review and audit regularly: Spot errors or policy violations early with periodic audits
• Use expense management software: Consider using expense management software to automate submissions, approvals, and recordkeeping to save time and reduce manual errors

How Ramp eliminates the headache of employee reimbursements

Managing reimbursable expenses is one of those necessary evils that can quickly spiral out of control. You know the drill: Employees submit crumpled receipts weeks after the fact, finance teams chase down missing documentation, and everyone wastes time on manual data entry and approvals. The whole process creates friction between employees who need their money back and finance teams trying to maintain proper controls.

Ramp transforms this traditionally painful process through automated expense management that works for everyone involved. When employees make purchases, they can instantly capture receipts using Ramp's mobile app, which automatically extracts merchant details, amounts, and categories using OCR technology. No more lost receipts or manual entry—the system captures everything in real time and matches it to the corresponding transaction. This means your team spends zero time on data entry and can focus on more strategic work.

The real game-changer is how Ramp handles the approval workflow. Instead of emails bouncing between managers or expenses sitting in limbo, Ramp automatically routes reimbursement requests based on your company's approval policies.

You can set up rules based on transaction amount, expense categories, or specific merchants, ensuring the right person reviews each expense without manual intervention. Finance teams gain complete visibility into pending reimbursements through a centralized dashboard, making it easy to spot policy violations or unusual spending patterns before approval.

Perhaps most importantly, Ramp integrates directly with your accounting software, automatically syncing approved reimbursements with the correct GL codes and cost centers. This eliminates the month-end scramble to reconcile expenses and ensures your books stay accurate in real time. By automating the entire reimbursement lifecycle—from receipt capture to accounting sync—Ramp turns a multi-day process into simple task that takes minutes, keeping both employees and finance teams happy.

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 40,000 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.