How to write an expense reimbursement policy

1. Decide between an accountable or non-accountable plan

Your expense reimbursement policy can cover expenses either through an accountable or non-accountable plan. The plan you choose will have major business tax implications, so be sure to think this step through.

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Accountable plans

An accountable plan is a structured framework that adheres to IRS guidelines. While the IRS doesn’t require accountable plans, putting one in place ensures employee expenses aren’t considered taxable income, which allows you to write off these expenses on your tax return.

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To adhere to the IRS guidelines, make sure your policy sets the following requirements:

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• Employees can only be reimbursed for “ordinary and necessary” work-related expenses
• Employees must report these expenses with proper documentation within a reasonable amount of time (typically 60 days)
• Employees who receive excess reimbursements or allowances must return the money within a reasonable amount of time (typically 120 days)

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Non-accountable plans

Alternatively, you may choose to go with a non-accountable plan. In this arrangement, expenses don’t have to be related to the employee’s job duties or your business operations, and there’s no requirement for employees to provide documentation like receipts or invoices to verify their expenses.

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On the tax front, reimbursements under this plan are considered taxable income to the employees and are subject to payroll taxes. While you can still deduct expenses, you must report them as income to your employees, typically through a W-2 form.

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This type of plan may be simpler to administer, but comes with unfavorable tax implications and may lack the transparency and accountability of an accountable plan, potentially leading to misuse. Additionally, if employees receive reimbursements that exceed their actual expenses, they’re not required to return the excess amount to your company.

2. Outline what qualifies as a reimbursable expense (with examples)

One of the most important purposes of your expense reimbursement policy is to control spending. To that end, your policy should clearly define what qualifies as a business expense, what expenses will and won’t be reimbursed, and the maximum amount you’ll reimburse by expense type.

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Try to offer example scenarios so employees can visualize how they should use the policy in real life. For example, consider a scenario where an employee, Sarah, is required to travel out of town for a client meeting. According to the policy, her transportation and lodging are both reimbursable expenses, and she has a $75 per diem rate for meals. Before her trip, Sarah books a round-trip flight and a hotel room for two nights and keeps all the receipts.

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During the trip, she also has meals at local restaurants and uses a taxi for transportation, saving all the receipts. Upon return, she submits an expense report with all the itemized receipts attached, as per the policy guidelines.

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The report is then reviewed by her manager, who finds she spent $95 for meal expenses on her first day of travel, $20 more than the maximum allowable per diem. Sarah’s manager returns the report and asks her to amend it to reflect the policy’s travel meal guidelines. She resubmits and her manager approves it, after which she receives reimbursement for the approved amounts.

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This example scenario can help employees understand the process of incurring, documenting, and getting reimbursement for business-related expenses, demonstrating a practical application of the policy in a real-world setting.

3. Define how employees should report expenses

This is where you establish your expense reporting process, including your documentation requirements for reimbursable expenses, the timeline for submitting expense reports, and expectations for when and how employees will be reimbursed.

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If you have a modern expense management automation platform, the reporting process is usually quick and painless. A manual process typically requires more work for everyone involved. In either case, the reporting process will be similar:

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1. The employee incurs an expense
2. The employee prepares an expense report, with all required documentation attached
3. The employee submits the report
4. The report undergoes review
5. The report is approved or rejected

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It’s especially important that your expense reimbursement policy is clear about the need for documentation and receipts, particularly if you plan to write off deductible expenses on your taxes. The IRS requires companies to retain receipts for business expenses for at least seven years should your company ever be audited. Be sure to define what you’ll accept as proof of purchase, including physical receipts, e-receipts, or digital photos or scans.

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4. Establish your approval process and delegate responsibilities

You’ll also need a process for expense approval and reimbursement by your finance team. Some questions to think about include:

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• Who will review and approve expense reports?
• When will employees receive repayment?
• How will employees receive reimbursements—through direct deposit, cash, or some other method?

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Your policy should be clear about who’s responsible for approvals to keep everything moving smoothly. Be sure to design your approval workflow in such a way that no one is responsible for approving their own expense report, which could present the risk of expense fraud.

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It’s also important to clarify your timelines for approval and reimbursement. Incurring business expenses with personal funds can be a burden for many employees, so your employee expense reimbursement process shouldn’t take more than a couple weeks. This helps to avoid unnecessary stress and frustration on the employee side.

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Whether you include reimbursement as part of an employee’s regular paycheck or issue a separate payment for reimbursements is a matter of preference—whatever works best for your organization and workflow.

5. Review and launch your policy

Once you’ve completed the documentation, you may want to run a trial with a small group of employees to see how the policy works in real life. This also gives employees the chance to provide feedback, which could yield some good recommendations for improvement.

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After incorporating feedback, you’ll be ready to release your reimbursement policy to the company. Make sure to communicate the new policy to all employees through channels like email, company meetings, or your company’s internal communication platform. Your policy should be clear, easy to follow, and readily accessible so employees can find it when they need to.

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Make sure that all necessary systems, like expense reporting software, are updated to reflect the new policy. From there, you can periodically review the policy to ensure it stays relevant and compliant, and update it as necessary based on continued feedback and any changes in company procedures.

Which business expenses are considered reimbursable?

Reimbursable business expenses typically include costs such as travel expenses, meals during business meetings, office supplies, and mileage covered while performing job-related duties.

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Here are some common types of expenses you’ll find in most reimbursement policies:

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1. Business travel expenses: Travel expenses incurred on business trips typically make up most of a company’s employee reimbursements. This includes airfare, hotel accommodations, rental cars, taxi fares, and even parking fees.
2. Mileage reimbursements: Employees who use their personal vehicle for work-related travel are usually entitled to mileage reimbursements. The mileage reimbursement rate set by the IRS encompasses gas, wear and tear, and car insurance and depreciation.
3. Office supplies: Office supplies deemed necessary to run your business fall under this expense category, including pens, printer paper, light bulbs, and cleaning supplies.
4. Training and development: If employees undertake training related to their job responsibilities, they can get reimbursed for their out-of-pocket expenses. However, only some educational expenses qualify as business deductions, so you'll want to consult your accountant beforehand.
5. Meals and entertainment: Meals and entertainment expenses are reimbursable if they are reasonable and have a clear business purpose. Business meals with clients or customers, meals with other employees during business meetings, and meals while traveling for work-related purposes are all fair examples.

How to enforce your expense reimbursement policy

After rolling out your expense reimbursement policy, you need to enforce it to maintain control over company spending and avoid expense fraud. Fair and consistent enforcement is crucial for financial health, compliance, and fostering a transparent working environment.

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The easiest and most effective way to enforce your policy is to use an automated expense management system that streamlines the submission, approval, and reimbursement processes. These solutions also allow you to track expenses in real time to monitor spend and ensure compliance.

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Expense management software is often used in tandem with company credit cards. When coupled with expense automation software, corporate cards allow you to enforce your expense policy through custom controls. And because purchases are made on a company card, you won’t have to deal with reimbursements.

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Some of the benefits of corporate cards include:

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1. Custom spending limits and category restrictions: Certain corporate cards allow you to set spending limits and rules for what types of purchases employees can make, blocking unapproved purchases before they’re made.
2. Real-time expense reporting: Corporate cards with expense management software categorize and report expenses in real time, so you always know where you’re at with your budget.
3. Financial insights: Having a centralized system provides a clear overview of all your business expenses. Cards like Ramp can even provide intelligent recommendations to reduce spending based on your financial data.

Managing your expense reimbursement policy is easy with Ramp

Once you have a solid expense reimbursement policy, Ramp can help you enforce it.

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Ramp’s expense management software offers automated expense tracking, management, and approvals. Together with our corporate cards, you can set spend limits at the employee, card, or vendor level to ensure every purchase stays within policy.

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See why Ramp customers save an average of 5% a year with our interactive demo.