What is expense reimbursement?
Expense reimbursement isn’t just about paying employees back—it’s about keeping your business running smoothly.
In this article, we break down what expense reimbursement really means, why it matters, and how you can avoid common reimbursement pitfalls. Learn how to create clear policies, prevent disputes, and empower smarter financial decisions.
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-related expenses
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.