A Simple Guide to Understanding Expense Reimbursement

We all have been there at some point.

Suddenly, while working, there's an unplanned expense related to our job, and we need to cover it ASAP. 

The fastest solution?

Use our own money to do it and fill it later for an expenses reimbursement.

As businesses, however, this means you need to develop a good expense reimbursement policy. 

In some states, it's required by law but honestly?

It's a must-have if your business wants to build trust and transparency with your staff.

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What's Expense Reimbursement?

Repaying people

Or more precisely, repaying employees for costs that happened due to work activities and they covered with their own money.

Maybe it's due to travel, client meetings, or some necessary subscriptions, whatever the case, it's fundamental to work with some clear policies on hand.

The more specific you are regarding your company's reimbursement rules, the happier your staff is going to be.

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Besides, it's also useful to keep your finances organized and compliant.

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Examples of Expense Reimbursement.

They might be different from one industry to another, but most of the time, you'll find that there are some common points as to what's considered an expense.

• Travel expenses: This happens whenever your team travels for work purposes.  They might need to book flights, stay at hotels, or even rent a car. Are they traveling in their car? You'll also need to reimburse fuel costs.
• Meals: Is someone in your procurement team having lunch with a client or a supplier?  Maybe they're attending a networking event? 
• Office supplies: Sometimes it might be necessary to purchase new equipment like a laptop or an additional printer. Shall these be included in your company's reimbursement guidelines, they are also considered work-related expenses.
• Training and equipment:  Investing in learning new skills is always good news. If someone takes a relevant course or follows an industry certification, reimbursement helps to deal with these costs.
• Subscriptions: Monthly or annual fees for essential software, publications like magazines, or professional memberships can add up. In the case these subscriptions help your people to do their jobs better, they're often eligible for reimbursement.

Why Does Having an Expenses Reimbursement Policy Matters?

The simple truth? It makes everyone's lives easier.

When your team knows exactly what expenses are covered and what steps should be taken, things are just…easier to follow. 

No confusion, fewer delays, and zero awkwardness.

For you as a business leader,  it's how you contribute to preventing unnecessary costs and keeping everything according to tax regulations. 

Another benefit? 

You won't have stressed employees who are worried about when they're going to get their money back.

See? 

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Really simpler and happier lives.

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How To Decide Which Expenses Are Eligible?

Determining what precisely qualifies for reimbursement can be approached by asking a single question:

Is this cost necessary for work?

Yes?

Then you have the basis for making it eligible.

Setting rules, however, is key to avoiding any greyness. Begin by outlining main categories, like the ones we mentioned above. Then you can be a bit more specific, for example:

• If you are covering meals, what's the budget? Under which circumstances?
• Is business class an option for long flights?
• What happens if they want to send an appreciation gift to a client?
• What about home office equipment?

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Defining all of these minor details keeps things fair and prevents confusion.

It's also a good idea to set spending limits and create simple-to-follow approval workflows.

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Challenges of Expense Reimbursement 

Theoretically speaking, it should be something straightforward.

People in your team use their money to cover a work-related expense and you pay them back.

End of the story

Until it's not…

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Delayed submissions

Yeah, sometimes employees can forget to submit their expenses on time, usually due to a lengthy and messy process. 

The outcome?

Last-minute rushed and financial reporting problems. If something is not properly reported how can your business track it as formal spending?

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Missing documentation 

Is a blurry receipt or no receipt at all any useful?

This might look like the responsibility of your staff, but actually it should be in your spending policy to determine what sort of documents are required.

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Unclear policies 

What have we been saying so far?

The clearer the better

If your employees don't know what's covered, they might submit expenses that don't qualify or hesitate to submit ones that do. 

Take your time to develop a policy that's easy to understand and even simpler to follow.

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Slow process 

Money is money at the end of the day.

And just like you wouldn't like to spend weeks or months to have your money back, your employees won't be exactly thrilled to hear that the reimbursement is going to take too long.

Having a streamlined system with digital submissions and automatic approvals for smaller expenses can speed things up.

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How to Create an Expenses Reimbursement Strategy?

Define what's covered

Seriously, it is the simplest thing you can do to prevent chaos in your financial records.

Start listing the types of expenses employees can have covered.  Be open about what's included and under what circumstances.

Set spending limits 

Yes, as a business you should cover all work-related costs but there's a limit for everything, right? This is going to be determined by your company's size and general budget.

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Outline the submission process 

People do what they can understand.

Explain exactly how your team should submit their expenses. What details need to be included? What's the format?  The clearer things are the fewer chances of delays.

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Approval workflow 

Who's going to be responsible for reviewing and approving the requests? 

How do they get notified?

Do small purchases get approved automatically?

If multiple departments are involved, what’s the chain of command? Outlining this process promotes accountability and prevents bottlenecks. For more significant expenses, consider adding an extra layer of approval to avoid unnecessary spending.

Timelines

No one likes waiting weeks to get their money back.

Clearly state how long it takes to process reimbursements so employees know what to expect. A standard timeframe (e.g., within 7 or 14 days after submission) keeps things predictable. Also, make sure employees know how they’ll receive their reimbursement

Automate, of course

Manually handling expense reports can be slow and frustrating and one of the reasons why nobody likes to deal with it. 

An expense management system is designed to automate approvals, flag policy violations, and even extract details from receipts. Employees can submit expenses through an app, managers can approve them with one click, leading to faster financial processes. 

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Are Reimbursed Expenses Taxable?

Yes and no

Whether reimbursed expenses are taxable depends on how they’re handled. In most cases, if an expense is directly related to work and follows a clear reimbursement policy, it’s not considered taxable income for employees.

However, if reimbursements are too loosely managed or don’t follow proper guidelines, they could end up being taxed.

Here’s what you need to know:

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Accountable vs. non-accountable

If your business follows an accountable plan, where employees submit receipts, expenses are work-related, and excess reimbursements are returned, then those payments aren’t taxed. 

On the other hand, if it’s the case that you use a non-accountable plan, where reimbursements aren’t properly documented or exceed actual expenses, they may be considered as income and thus taxable.

Receipts matter

To keep reimbursements tax-free,  your employees must provide clear records, like receipts, dates, and descriptions of each expense.

Without proper documentation, payments might be seen as extra income rather than reimbursement

Per diem

Some businesses offer a daily allowance (per diem) instead of reimbursing exact amounts. If the per diem follows government-approved rates, it’s not taxable. But if employees receive a lump sum without tracking actual expenses, it might count as income.

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