Expense reimbursement policy tips and best practices

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Does your company have an expense reimbursement policy? Did you even know you need one? A clear reimbursement policy is really important when you’re trying to effectively manage expenses. In particular, it helps reduce excess spending, control costs, and maximize your business tax benefits.

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In this article, we explain what an expense reimbursement policy is, best practices to consider when creating a policy for your business, and tips for enforcing your policy.

What is an expense reimbursement policy?

An expense reimbursement policy is a set of guidelines that specify how employees are reimbursed for out-of-pocket expenses they incur on behalf of your business. The policy defines which expenses qualify for reimbursement, how to report expenses, and how and when employees will get reimbursed.

‍Why do you need an expense reimbursement policy?

There are many reasons why your business needs an expense reimbursement policy, particularly if your employees are spending their own money on behalf of the business. 

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Here are a few of the top reasons why creating a policy is in your best interest:

1. Promote fairness and transparency: A good policy ensures that all employees are treated fairly when they spend their money for business purposes and provides transparency around how reimbursement requests are approved
2. Effectively manage expenses: By setting clear guidelines around which expenses are reimbursable and to what extent, the policy helps control and manage costs
3. Optimize tax benefits: The policy aids in accurately accounting for tax-deductible expenses, ensuring your business can take full advantage of tax benefits
4. Prevent expense fraud: Through clear documentation requirements and approval processes, the policy helps you detect and prevent expense fraud.

What are examples of reimbursable business expenses?

Reimbursable business expenses typically include costs like travel expenses, meals during business meetings, office supplies, and mileage covered while performing job-related duties. Here are some common types of expenses you’ll find in most reimbursement policies:

1. Business travel expenses: Airfare, hotel accommodations, rental cars, taxi fares, and even parking fees for business trips
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, including pens, printer paper, light bulbs, and cleaning supplies
4. Training and development: Employee reimbursement for any out-of-pocket expenses for trainings related to their job responsibilities 
5. Meals and entertainment: Business meals with clients or customers, with other employees during business meetings, or while traveling for work-related purposes, and entertainment expenses related to business goals

Best practices for creating an expense reimbursement policy

Creating an effective expense reimbursement policy requires a thorough understanding of your company’s needs as well as the employment and tax laws in your jurisdiction.

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Certain states, and even some municipalities, require employee reimbursements by law. As you get started, you should always be aware of any legal obligations you have based on your location, or locations where you have remote employees working so you can tailor your expense reimbursement policy to meet them.

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With that in mind, here are some best practices to get you started on your expense reimbursement policy.

1. Outline what qualifies as a reimbursable expense (with example)

One of the most important purposes of your expense reimbursement policy is to control spending. That means 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.

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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 eats meals at local restaurants and takes taxis for transportation. 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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An example scenario like this 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.

2. Define how employees should create expense reports

This is where you establish your expense reporting process, including requirements for proper documentation of 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:

1. Employee incurs an expense
2. Employee prepares an expense report, with all required documentation attached
3. Employee submits the report
4. Report undergoes review
5. 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.

3. 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:

• 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 people, 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.

4. 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’re ready to release your reimbursement policy. 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 easy to locate or bookmark 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.

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Ali Mercieca

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Finance Writer and Editor, Ramp

Ali Mercieca is a Finance Writer and Content Editor at Ramp. Prior to Ramp, she worked with Robinhood on the editorial strategy for their financial literacy articles and with Nearside, an online banking platform, overseeing their banking and finance blog. Ali holds a B.A. in Psychology and Philosophy from York University and can be found writing about editorial content strategy and SEO on her Substack.

https://www.linkedin.com/in/ali-mercieca-4443b3121