How to write an expense reimbursement policy—and why you might not need one
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Ideally, expense reimbursement policies deter fraud and reduce business spending. But in reality, they often bog down employees with confusing processes and personal financial repercussions.
In this article, we explain what an expense reimbursement policy is, what it should include, and how to write a well-planned policy for your business.
With that said, you may want to avoid reimbursements altogether. We’ll also delve into the problems with reimbursement policies and suggest company cards as an alternative.
What is an expense reimbursement policy?
An expense reimbursement policy is a document that outlines how employees will be reimbursed for out-of-pocket expenses incurred on behalf of the company.
The policy dictates which expenses will and will not be reimbursed, the process for requesting reimbursements, and how reimbursements will be paid back to employees.
A well-planned expense reimbursement policy helps meet the following objectives:
- Fairness and transparency: A good policy ensures that all employees are treated fairly regarding the reimbursement of work-related expenses, while promoting transparency in how these expenses are reported and approved.
- Cost management: By setting clear guidelines on what expenses are reimbursable and to what extent, the policy helps in controlling and managing costs effectively.
- Tax optimization: The policy aids in accurately accounting for tax-deductible expenses, ensuring that you can take full advantage of tax benefits.
- Fraud prevention: Through documentation requirements and approval processes, the policy helps in detecting and preventing expense fraud.
What’s considered a reimbursable business expense?
Reimbursable business expenses typically include costs such as travel expenses, meals during business meetings, accommodation for business trips, office supplies, and mileage covered while performing job-related duties.
Here are some business expense categories you’ll find in most reimbursement policies:
Travel expenses incurred on business trips typically make up most of a company’s employee reimbursements. As a result, organizations often have a separate T&E reimbursement policy document just for this expense category.
This includes airline tickets, hotel accommodations, rental cars, taxi fares, and even parking fees. Mileage reimbursements for employees using their personal vehicle for work-related travel—even for trips to and from the office supply store—also fall under T&E management.
Office supplies deemed necessary to run your company fall under this expense category, including:
- Printer paper
- Light bulbs
- Cleaning supplies
Compared to office expenses like software and computers used for general business operations, supplies refer to low-ticket items that are replenished regularly.
Training and development
If employees undergo training, they can get reimbursed for their out-of-pocket expenses. However, since only some educational expenses qualify as business deductions and guidelines vary depending on your situation, you'll want to consult your accountant beforehand.
Meals and entertainment
Meals and entertainment expenses are reimbursable if they are reasonable and have a clear business purpose. Examples of meals that may be considered a business expense include meals with clients or customers, meals with employees during business meetings, and meals while traveling for work-related purposes. Typically, businesses only get a 50% deduction on this type of expense.
How do I write an expense reimbursement policy?
Creating an effective expense reimbursement policy requires a clear understanding of both your company’s needs and the tax laws in your jurisdiction.
Here's a step-by-step guide to help you draft 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.
An accountable plan in an expense reimbursement policy is a structured framework that adheres to IRS guidelines. While the IRS doesn’t require accountable plans, putting one in place ensures that employee expenses are not considered taxable income, allowing you to deduct these expenses on your tax return.
To follow the IRS guidelines, make sure your policy sets the following requirements:
- 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)
Alternatively, you may choose to go with a non-accountable plan. In this arrangement, expenses don’t have to be directly related to the employee’s job duties or your business operations. There's also no requirement for employees to provide detailed documentation like receipts or invoices to verify their expenses.
Additionally, if employees receive reimbursements that exceed their actual expenses, they’re not required to return the excess amount to the company under a non-accountable plan. On the tax front, reimbursements under this plan will be 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.
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 or abuse of the reimbursement process.
2. Define reimbursable expenses
Clearly define which business-related expenses will and won’t be reimbursed according to your policy. 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, lodging, and meals during the trip are reimbursable expenses. Before her trip, Sarah books a round-trip flight and a hotel room for two nights, and keeps all the receipts.
During the trip, she also has meals at local restaurants and uses a taxi for local transportation, saving all the receipts. Upon return, she submits an expense report with all the itemized receipts attached, as per the policy guidelines. The report is then reviewed and approved by her manager, after which she receives reimbursement for the approved amounts.
This example scenario can help employees understand the process of incurring, documenting, and getting reimbursement for business-related expenses, demonstrating the practical application of the policy in a real-world setting.
3. Establish your approval process
You’ll also need a process for employees to submit expense reports for approval and reimbursement by your finance team. Some questions to think about include:
- Who will review the reimbursement forms?
- When will employees receive payment?
- How will employees receive reimbursements—through direct deposit, cash, or some other method?
Employees must also submit receipts for documentation of their expenses, but you’ll need to be clear about your requirements here to avoid confusion. Typically, you’ll need details like the purpose, vendor, cost, and date of purchase on the receipt. Finance teams may also require itemized receipts to make review easier and reduce fraud.
4. Review and launch your policy
After careful review, release your reimbursement policy to the entire company. Make sure to communicate the new policy to all employees through channels like email, company meetings, or your company’s internal communication platform.
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 feedback and any changes in company procedures.
With all that said, there’s an alternative way to approach expense management for small businesses. Here are 3 reasons why employee reimbursements aren’t ideal and how to solve this dilemma.
The problems with employee reimbursements
Employees must front cash for reimbursable expenses
Most employees don’t have the resources to make the kinds of purchases businesses do, so it’s often unreasonable to ask them to pay out-of-pocket for expenses—especially since companies can get discounts on purchases made with company accounts or corporate credit cards.
A 2019 report found that 38% of US employees pay out-of-pocket for business expenses at least once a month. Two in 5 of those respondents experienced cash flow issues as a result of delayed reimbursements.
Your employees work to fund their own livelihoods. So, if your workforce fronts money for your business, it’s best to ensure they’re paid back as quickly as possible to avoid causing them financial hardship.
Expense reimbursements are time-consuming
Collectively, employees, managers, and finance professionals spend hours on reimbursements alone—time that could be better spent elsewhere. After all, reimbursement activities don’t provide much additional value to your company aside from reducing spending.
Incorrect submissions result in more time spent reviewing claims, resulting in an even longer reimbursement process. Lost productivity doesn’t come cheap—Hubspot found that companies lose $1.8 trillion each year because of reduced employee productivity.
Unclear policies leave employees without reimbursement
A reimbursement policy that makes sense to your finance team may not be clear to everyone else. Employees often encounter vague or confusing policies that they follow to the best of their ability, only to find they can’t get reimbursed because their purchases fall outside the policy.
These misunderstandings can breed frustration and resentment among your employees. In order to maintain positive employee relationships, it’s important to create clear and understandable policy guidelines for your organization.
Company cards as an alternative to reimbursements
Implementing company-issued cards is a simpler alternative to the traditional reimbursement model, where employees make purchases on their personal cards and later seek reimbursement.
Corporate cards with expense automation software allow you to implement your expense policy through custom controls, so only approved purchases can be made in the first place. Since they’re on a company card, you also won’t have to deal with reimbursements.
Some of the benefits of corporate cards include:
- Custom spending limits and category restrictions: Set spending limits and rules for what types of purchases can be made, eliminating unapproved transactions.
- 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.
- Financial insights: Having a centralized system provides a clear overview of all expenses, and cards like Ramp can even provide AI-powered insights based on your financial data to help you find ways to reduce spending.
Ramp: A simpler alternative to expense reimbursement
Ramp eliminates the need for reimbursement with corporate cards and spend controls that prevent employees from spending out-of-policy.
But if you prefer to keep your existing program, our software simplifies the reimbursement process and gets payments to employees within 3 business days—making it the fastest reimbursement tool on the market.
Explore our product demo to learn how Ramp can simplify expense reporting for your company.