What is expense reimbursement?

Expense reimbursement is a fundamental part of doing business, yet often a source of frustration for both employers and employees. At its core, it's the process by which companies repay employees for necessary out-of-pocket expenses incurred while conducting company business.

Employees often incur out-of-pocket expenses when interacting with clients, traveling to meetings, or purchasing essential supplies. Situations like these may require employees to front the costs with the expectation of being reimbursed by their company. It allows them to act quickly and efficiently without being hampered by bureaucratic processes.

However, expense reimbursements can create conflict between employers and employees, especially with payment delays or disagreements over what constitutes a necessary business related expense. Disputes like these can strain relationships, damage morale, and even lead to fraudulent expense claims, resulting in unnecessary costs.

Sound familiar? If so, we’re here to help. In this blog, you’ll learn how to get over the usual reimbursement frustrations and turn expense management into a strategic advantage for your business. We’ll discuss the types of reimbursable employee expenses, delve into crafting effective policies, explore tax implications, and list down some of the best practices in the industry.

Key elements to keep in mind when creating an expense reimbursement policy

Effective employee expense reimbursement is a crucial process for any business, and it all starts with a clearly defined expense policy that acts as a governing document. The policy should cover everything from what is considered an eligible expense and documentation requirements to approval processes and payment methods, ensuring everyone in your company is on the same page.

Precise eligibility criteria

A key part of the expense reimbursement policy is having precise eligibility criteria to determine which employee expenses are reimbursable and which are non reimbursable expenses. It might include categories of:

Travel expenses
Spending limits
Any pre-approval requirements

Think of it as an employee expense reimbursement rulebook that guides employees on what they can and cannot issue a reimbursement claim, preventing confusion and potential disputes.

Clear documentation and reporting

Another important aspect is clear documentation and reporting procedures. Your expense policy should outline the types of receipts, invoices, and supporting documents employees need to validate their business expenses. Having a standardized way of reporting expenses ensures you get all the transaction details needed for accurate record-keeping and compliance.

Automated workflows

Large companies often rely on sophisticated expense reimbursement systems that integrate their policies and automate workflows. Even small and medium-sized businesses (SMBs) have adopted automated solutions, typically opting for lightweight, cloud-based solutions that integrate with their existing accounting software.

The Different Types of Reimbursable Expenses

The nature of an organization’s expenses can be confusing, which can lead managers to question: what is and is not a reimbursable expense? The answer may vary, but they generally fall into several common categories:

Travel expenses

These are costs related to business travel, including:

Airfare
Train tickets
Mileage reimbursement
Lodging
Meals
Taxi and rideshare services
Parking fees
Rental car expenses
Fuel costs
Public transportation fares
Travel insurance
Visa and passport fees
Conference and seminar fees
Internet and communication charges during travel

Meals and entertainment

Client meetings or business meals, including:

Restaurant bills
Tips
Client dinners
Executive networking events
Conference reception expenses
Client hospitality suites at events
Premium tickets for client entertainment
Corporate retreat costs
Board meeting catering
Sponsorship for industry events

Office supplies

Regular restocking of office supplies such as:

Stationery
Printer ink
Paper clips
Staplers and staples
Pens and pencils
Notebooks and notepads
Highlighters
Envelopes
File folders
Sticky notes
Whiteboard markers
Tape and tape dispensers
Scissors
Printer paper
Toner cartridges
Paper shredders
Calculators
Desk organizers
Binders
Rubber bands
Desk calendars

Professional development costs

Training
Courses
Conferences that employees may attend to enhance their skills and knowledge.

Technology and equipment

Tools or software necessary for job performance, like:

Laptops
Mobile phones
Specialized software subscriptions
Software Licenses and Subscriptions
Hardware Upgrades
Online Learning Platforms
Virtual Reality Tools
Collaborative Tools
Security Software
Specialized Equipment

Remote work expenses cover costs associated with working from home such as:

Internet bills
Home office furniture
Supplies

The expense reimbursement process

The reimbursement process is mostly similar across organizations, but variations typically arise from company size, industry, and specific internal policies. Larger companies often have more complex processes with stricter controls and automated systems, while smaller businesses may have simpler, more manual processes. Regardless of size or complexity, the core steps involved in expense reimbursement usually include:

Initial expense incurrence

Initial expense incurrence is a critical step where employees engage in activities requiring financial outlays for business-related purposes. Proper tracking and categorization of these expenses are essential for seamless reimbursement, which include:

Business travel, including transportation expenses and accommodations
Procurement of office supplies needed for day-to-day operations
Participation in professional development events, including registration fees and materials

Documentation and receipt collection

It's crucial for employees to keep detailed records and receipts for all expenses incurred. This serves as proof of the expense and is essential for the reimbursement process. To start, you could implement more efficient receipt collection methods such as:

Automate receipt upload with expense management software for accuracy
Establish clear documentation guidelines to streamline reimbursements.
Use mobile tools for real-time receipt capture and submission.

Submission of expense report

Employees submit their expense claims and often use expense report forms or software, providing details of each expense, the date incurred, and the purpose.

Review and approval workflow

Submitted expense reports go through a review and approval process and typically involve a travel manager or finance team. This step ensures that expenses comply with company policies and are legitimate business expenses.

Verification procedures

Organizations may have procedures in place to verify the legitimacy of expenses, such as comparing receipts to credit card statements or checking for duplicate claims.

Payment methods

Once approved, reimbursements are processed through various payment methods such as direct deposit or checks.

Typical timeline for reimbursement

The time it takes for employees to receive their reimbursement can vary depending on the company's policies and processes. It's important for companies to communicate these timelines to employees to set clear expectations.

Best practices for employers managing expense reimbursements

While the whole reimbursement process seems straightforward, it can still be fraught with risks. Employers play a crucial role in ensuring that the entire process is free from fraud or spending leakages.

Here are some reimbursement best practices for employers:

Define reimbursable expenses and eligibility
Specify documentation requirements (e.g., original receipts)
Implement clear approval workflows
Outline distinct expense categories
Regularly update and communicate policies
Use expense management software for efficiency
Align with tax regulations through an accountable plan

Efficient tracking systems

Use expense management software to automate tracking and reporting
Implement mobile apps for real-time expense submission and receipt capturing
Integrate financial services platforms for seamless data synchronization and oversight

Fairness and consistency

Applying reimbursement policies uniformly across all employees is crucial for maintaining fairness and avoiding disputes. Doing so can optimize your process to:

Ensure all employees understand the expense reimbursement policy to promote transparency and consistency in reimbursements
Use a standardized expense report template to facilitate the efficient processing of employee reimbursement claims and minimize errors
Regularly review and update policies to align with current business expenses and regulations, reinforcing a fair reimbursement environment

Tax and compliance considerations

Understanding the tax implications and legal obligations of employee expense reimbursements is crucial for compliance. Employers must ensure accountable plans are in place to avoid classifying reimbursements as taxable income. Maintaining a thorough documentation process aids in clarifying eligible expenses and avoiding compliance issues.

Develop an accountable plan to designate non-taxable expense reimbursements.
Ensure detailed record-keeping of all employee expense reports and receipts.
Regularly review and update reimbursement policies to comply with current tax laws.

Technology utilization

Embracing digital solutions is crucial for streamlining the expense reimbursement process to enhance efficiency for both employees and finance teams. By integrating modern expense management software, organizations can automate expense reporting, reduce errors, and ensure faster reimbursement cycles. Utilizing mobile apps allows employees to submit an expense claim on-the-go, thereby speeding up the reimbursement process and improving compliance.

Automate expense reporting with cloud-based software.
Implement mobile apps for easy receipt capture and submission.
Use technology to ensure policy compliance through real-time alerts.
Integrate expense management systems with financial services for seamless accounting.

Best practices for employees

Employees, too, play a crucial role in ensuring a smooth and efficient expense reimbursement process. Here are some best practices for employees to follow:

Accurate record keeping

Maintain detailed records of all expenses, including the date, amount, purpose, and any supporting documentation, to ensure accurate expense reporting and avoid delays.

Policy awareness

To avoid issues, familiarize yourself with your company's business expense reimbursement policy, including eligible expenses, documentation requirements, and submission procedures.

Timely submission

Submit expense reports promptly after incurring expenses to avoid delays and ensure timely reimbursement.

Proper documentation

Include all necessary receipts and explanations with your claims to support the expenses and avoid any questions or delays in processing.

Transparency

Be honest and transparent in reporting expenses to foster trust with your employer and ensure compliance with company policies.

The value of effective reimbursement management

Effective reimbursement management is crucial for both employees and employers. It ensures that employees are fairly compensated for business expenses while employers maintain control over costs and ensure compliance with regulations.

By implementing the best practices outlined in this article, organizations can streamline their reimbursement processes, reduce errors and fraud, and foster a more positive and productive work environment.

Take the time to understand and optimize your expense reimbursement process to reap the benefits of a well-managed system.

Emburse Enterprise and Professional

Emburse is an established provider of expense management software with years of experience helping companies streamline their travel and expense processes.

We ensure that the solution adjusts to your needs regardless of size or complexity by offering Emburse Expense Professional for small and medium-sized businesses and Expense Enterprise for larger global organizations.

Our solutions are built to automate key tasks such as expense reporting, approval workflows, and policy compliance, bringing order and simplicity to the entire expense reimbursement process.

Emburse AI-powered automation also allows you to reduce manual effort, minimize errors, and provide real-time visibility into spending, which not only saves time and money but also empowers you and your employees to focus on more strategic initiatives.