Business expense reimbursement is made easy with Expensify
Ever had an employee pick up coffee, office supplies, or lunch for the team, only to be left wondering how to properly reimburse those little expenses — or how those reimbursements actually affect your business? You’re not alone.
Managing employee expense reimbursements can sometimes feel like juggling with too many balls in the air. It's about more than just paying back employees; it's about making the process smooth and hassle-free for everyone involved.
In this guide, we’ll walk you through everything you need to know about employee expense reimbursement, so no balls are dropped and everyone is paid back on time.
Key takeaways
- Expense reimbursement ensures employees are paid back for business-related purchases: It keeps personal and company finances separate while supporting day-to-day operations.
- Accountable plans offer major tax advantages: Properly structured reimbursements are not considered taxable income, reducing payroll tax burdens for both employees and employers.
- Clear policies prevent confusion and compliance risks: Defined rules for eligible expenses, documentation, and timelines reduce disputes and audit exposure.
- Manual reimbursement processes slow teams down: Lost receipts, delayed approvals, and inconsistent tracking create frustration and administrative overhead.
- Automated tools like Expensify streamline the entire workflow: Realtime receipt capture, policy enforcement, and fast reimbursements improve accuracy, compliance, and employee satisfaction.
What is an expense reimbursement?
An expense reimbursement is the process of compensating employees for out-of-pocket expenses they incur for business-related activities. Think of it as the company's way of saying, "Thanks for covering this, we've got you back." This could range from travel costs to client lunches or even that emergency pack of printer paper.
Timely, efficient reimbursements are the key to maintaining trust and fairness in the workplace. At its core, it's about recognizing that when employees spend their own money for company benefits, they deserve a no-fuss, quick way to get paid back.
Types of expenses that can be reimbursed
When it comes to employee expense reimbursement, not all costs are created equal. Businesses typically have specific types of expenses they're willing to cover. Here’s a glance at some common business expense categories:
Travel costs: Think airfare, hotel stays, and mileage.
Meals and entertainment: Business lunches, team dinners, or client happy hours.
Office supplies: From stationery to software subscriptions.
Professional development: Course fees or conference tickets.
Home office expenses: For those remote work setups — think computers, monitors, printers, or other equipment.
For remote and hybrid employees, this one's a little more nuanced. The IRS allows you to reimburse shared costs like internet or a personal phone plan, but only for the portion used for work. So if an employee uses their $100/month internet connection 50% of the time for business, you can reimburse $50 tax-free. Just make sure the split is reasonable and documented.
Who qualifies for expense reimbursement?
Not every employee will need, or should have access to, your reimbursement program. Defining eligibility upfront saves a lot of headaches later.
Think about it this way: an office-based employee who never leaves the building probably doesn't need to be expensing client dinners. But a field sales rep who's constantly on the road? They'll need full access.
When setting eligibility, consider:
Role and responsibilities: Does the employee regularly incur business costs as part of their job?
Department: Some teams (sales, client services, marketing) are more likely to need reimbursement than others.
Employment type: Decide whether contractors or part-time employees are covered, and document it.
Getting this right means your policy applies fairly and consistently across the whole organisation.
What can't be reimbursed?
Just as important as knowing what you can expense is knowing what's off the table. Every policy should spell this out clearly because without it, you'll end up having awkward conversations after the fact.
Common non-reimbursable expenses include:
Personal expenses: Groceries, personal travel, or entertainment that isn't tied to a business purpose.
Alcohol (unless your policy explicitly allows it with senior approval).
Fines and penalties: Parking tickets or late fees incurred during a business trip.
Expenses without receipts: If there's no documentation, there's no reimbursement — simple as that.
Expenses outside the submission window: Most companies set a deadline (typically 30–60 days) for submitting claims. Miss it, and the expense may not be covered.
The clearer your policy is on this, the fewer "but I thought..." conversations you'll have with your team.
Reimbursement and taxes
Small business taxes are complicated. Navigating the tax implications of expense payments can be tricky, and both employers and employees need to understand the tax rules that apply.
Generally, reimbursements can fall into three categories: nonaccountable, accountable, and per diem. Each of these has specific tax treatments and requirements. Getting this right is essential to ensure compliance with tax laws and to avoid unnecessary tax burdens.
Let’s dive deeper into each type below.
Is expense reimbursement legally required?
Here's something a lot of employers don't realise: in some US states, reimbursing employees for business expenses isn't just good practice; it's the law.
California, Illinois, Massachusetts, and several other states require employers to reimburse employees for necessary job-related expenses. Failing to do so could expose your business to wage claims and penalties. Even in states without a specific reimbursement law, you're still obligated to ensure that work-related expenses don't bring an employee's pay below minimum wage.
If you operate across multiple states or internationally, it's worth checking the rules in each location. The requirements can vary significantly, and what's optional in one place might be mandatory in another. When in doubt, a quick conversation with an employment attorney can save you a lot of trouble down the line.
Nonaccountable
A nonaccountable plan is a relaxed way to handle expense reporting. Under this plan, employees receive a set amount for expenses, and they aren't required to provide detailed reports or return any excess amount. Sounds straightforward, right?
However, it's crucial to know that reimbursements under a nonaccountable plan are treated as taxable income. This means they're subject to income tax and payroll taxes, both for employers and employees.
While this plan offers simplicity, it lacks the tax advantages of more structured plans. Employers need to report these reimbursements as part of the employee's wages, which can increase the overall tax burden for both you and your employees.
Accountable
When it comes to business expense reimbursement, accountable plans are preferred by many businesses because they’re not subject to taxes. Here’s what makes a reimbursement plan "accountable" in the eyes of tax authorities:
Proof of business connection: Expenses reimbursed under this plan must be business-related.
Adequate accounting: Employees must provide the employer with receipts or other documentation, detailing the amount, time, place, and business purpose of the expense.
Returning excess amounts: Any advance or allowance over the actual incurred expense must be returned to the employer.
Choosing an accountable plan is great for staying on the right side of tax laws and keeping your business's financials clear and under control. Plus, these kinds of reimbursements won't be counted as taxable income for your employees, and your business can write them off on taxes. It's a practical choice for both you and your team.
IRS receipt rules + de minimis threshold
Under an accountable plan, documentation is everything. The IRS requires that every expense be recorded with four key details: the amount, date, place, and business purpose.
One handy rule worth knowing: for non-lodging expenses under $75, the IRS doesn't technically require a receipt, though you'll still need to log the details above. This is known as the de minimis rule, and it can simplify things for smaller incidental purchases.
That said, most businesses (wisely) require receipts for everything anyway. It keeps your records clean, your audits straightforward, and your accountant happy. With Expensify's SmartScan, employees can snap a photo on the spot, so there's really no excuse for a missing receipt.
Per diem
Per diem, a Latin phrase meaning "for each day," is a straightforward approach to handling business travel expenses. Instead of tracking every penny spent, companies allot a fixed daily amount to cover the costs. This method simplifies expense reporting and gives employees a clear budget for their trip.
As far as taxes are concerned, any amount spent that exceeds the per diem rates is subject to taxes.
Many companies opt for per diems during business travel because:
It's hassle-free: No need to keep every receipt, as the per diem covers all expected daily expenses.
It makes budgeting predictable: The company knows exactly how much will be spent per employee each day, aiding in financial planning.
It’s fair: All traveling employees get the same daily rate, ensuring equity in expense coverage.
With expense management automation, per diem management becomes even smoother. This software can be set up to automatically allocate daily allowances, streamlining the process and ensuring consistency in applying the policy.
How to reimburse expenses in 4 steps
Processing and paying reimbursement expenses doesn't have to be a complex task. By breaking it down into manageable steps and using our expense report templates you can ensure a smooth and efficient workflow.
1. Create expense report guidelines
Setting a clear expense reimbursement policy is a must for establishing guidelines for what can be claimed and how, so employees know what expenses are reimbursable.
These guidelines should also outline the process for submitting expense reimbursement requests, and let employees know how they can expect to be paid back. This keeps everyone on the same page and prevents misunderstandings.
It's also worth building spending limits into your guidelines for each expense category. Set a maximum daily rate for meals, a mileage rate for personal vehicle use, and caps on things like hotels or client entertainment.
This isn't about being stingy, but about giving employees a clear budget so they're not second-guessing every purchase, and making sure your finance team isn't dealing with surprises at the end of the month.
2. Employee submits an expense report
When an employee incurs a business expense, they'll need to submit an expense report to get paid back. This report should detail the expense and include any necessary documentation, such as receipts or invoices.
Clear guidelines make it easier for employees to understand what to include in their submissions, ensuring a smooth process. Also, don’t forget about expense report automation software — which can streamline the reimbursement process for everyone, while limiting the risk of manual errors.
3. Review submission and check for accuracy
After submission, the expense report needs to be reviewed for accuracy and compliance with company policies. Take your time here! This step is crucial to double-check that all claims are legitimate and within the set guidelines.
A solid approval workflow makes this step much smoother. Spell out in your policy who reviews what: direct managers might approve day-to-day expenses, while larger claims or out-of-policy requests go to a department head or your finance team. Set a clear window for approvals, say, five business days, so employees aren't left wondering where their report went.
With Expensify, you can automate this entire workflow so the right person gets notified the moment a report lands in the queue.
And don’t forget that expense management automation speeds up this step, too.
Watch out for common red flags
Expense fraud is more common than most businesses realize, and it doesn't always look like someone submitting fake receipts. It can be as subtle as rounding up amounts, submitting the same expense twice, or expensing personal costs as business ones.
A few simple safeguards go a long way:
Require itemised receipts rather than just credit card statements.
Enable duplicate detection so the same expense can't be submitted more than once.
Set spending limits that trigger a review for anything above a certain threshold.
Audit periodically even a random spot-check now and then keeps everyone honest.
4. Reimburse employee and track payment
Once the report is approved, the next step is to reimburse the employee. There are more ways to reimburse than you might think. Here's a quick rundown:
Payroll: Bundling reimbursements with salary is consistent and easy to track, though it can create tax complications if not handled carefully.
Separate bank transfer / direct deposit: Clean, fast, and easy to record — a popular choice for timely reimbursements outside of payroll cycles.
Expense advance: For larger or anticipated costs (like a multi-day conference), you can issue funds before the trip. The employee submits receipts after and returns anything unused.
Company card: Employees spend on a company-issued card, so they're never out of pocket at all. Expensify's company card integrates directly with expense reports, making reconciliation almost effortless.
Cash: Quick for small amounts, but leaves no digital trail, so use sparingly.
Regardless of the method chosen, reimbursing as soon as possible is crucial to maintain employee trust and morale. Tracking these payments is also important for maintaining accurate financial records!
Revolutionize reimbursements with Expensify
To stay compliant with taxes and keep your business up and running, one thing is certain: you need to establish a clear and efficient employee expense reimbursement process. Fortunately, Expensify makes that a whole lot easier.
With Expensify, managing reimbursements is a breeze, giving you more time to focus on growing your business. Ready to transform the way you handle expenses? Sign up for Expensify today and experience the ease and efficiency of automated reimbursements.
FAQs about business expense reimbursement
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Reimbursements under an accountable plan are not taxable income for employees, while nonaccountable plan reimbursements are treated as taxable wages subject to income and payroll taxes.
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An employee purchases coffee for a team meeting or office supplies with their personal funds, then submits an expense report with receipts to receive payment back from the company.
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Substantiated employee business expense reimbursements appear on Box 12 of Form W-2, and any unused amounts from advances are taxed as regular wages.
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Reimbursable expenses are out-of-pocket costs employees pay for business activities — like travel, meals, office supplies, or professional development — that the company pays back according to its expense policy.
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Expensify improves accuracy by automating expense capture, categorisation, and policy enforcement.
SmartScan extracts data from receipts, while realtime integrations with cards and banks ensure transactions are recorded correctly.
Built-in expense rules enforce policy at the point of spend, and automated approvals, duplicate detection, and audit trails help ensure every report is complete, consistent, and compliant.
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Reimbursable expenses are costs directly tied to business activities — travel, client meals, office supplies, and so on that fall within your company's policy.
Non-reimbursable expenses are personal costs, or business costs that fall outside your policy guidelines (like expenses submitted late, or purchases that exceeded the approved limit). Your policy should make the distinction crystal clear.
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The IRS allows you to reimburse the business-use portion of shared expenses tax-free. So if an employee uses their internet 40% of the time for work, you can reimburse 40% of their monthly bill. Just document the agreed split and keep it consistent.
