What Is Expense Reimbursement?

Expense reimbursement is a standard business practice where organizations repay employees for costs incurred out-of-pocket while performing work-related duties. This process ensures that employees are not financially burdened by necessary business expenditures. It also allows companies to maintain accurate financial records and manage their operational costs effectively.

Understanding Expense Reimbursement

Expense reimbursement involves compensating employees for specific costs they incur that directly benefit the employer’s business operations. These are not personal expenses but rather outlays made by an employee on behalf of the company. Companies implement reimbursement policies to facilitate essential business activities, such as travel or purchasing supplies, without requiring employees to use their personal funds indefinitely. Ultimately, these expenses must be considered “ordinary and necessary” for the business, meaning they are common and helpful in carrying out the trade or business.

Common Reimbursable Expenses

Businesses reimburse a range of expenses that are directly related to work activities. Travel expenses often form a significant category, encompassing costs like airfare, hotel accommodations, and ground transportation, including mileage for personal vehicle use. Meals consumed during business trips or client meetings are also commonly reimbursed, though often subject to specific company guidelines and deductibility limits.

Beyond travel and meals, employees may be reimbursed for office supplies and equipment purchased for business use, such as items for a home office or specific project needs. Professional development costs, including fees for courses, conference registrations, and professional memberships, are also frequently covered. Communication expenses, such as business phone calls or internet access required for work, can also be eligible for reimbursement. The specific categories and any spending limits for these expenses are defined by the individual company’s policy.

The Reimbursement Process

The reimbursement process involves several steps. Employees must collect original receipts or other proof of purchase for all expenses they wish to submit. These documents should clearly show the vendor’s name, the date of purchase, the total amount, and an itemized list of what was bought. It is also important to record details such as the specific business purpose for each expense and, for meals, the attendees.

All this information is then compiled onto an expense report form, which can be physical or digital, ensuring all required fields are accurately completed. Companies often have specific timelines for submission, such as within a certain number of days after the expense is incurred or a trip concludes.

Once the expense report is fully prepared with all supporting documentation, it is submitted through the designated channel, which might be an online portal, directly to a manager, or to a specific department like finance. The report then undergoes an approval workflow, starting with a manager’s review to verify compliance with company policy and business relevance. Following managerial approval, the finance department processes the request, often conducting further checks for accuracy and adherence to tax regulations. Reimbursement occurs within a specified timeframe, commonly via direct deposit or check, ensuring employees are repaid for their out-of-pocket costs. Should there be any discrepancies or missing information, the employee may be contacted for clarification to resolve issues before payment.

Tax Implications of Expense Reimbursement

The tax treatment of expense reimbursements depends on whether an employer’s plan qualifies as an “accountable plan” or a “non-accountable plan” under IRS guidelines. An accountable plan offers tax advantages for both the employer and employee because reimbursements are not considered taxable income to the employee. For a plan to be considered accountable, it must meet three specific IRS requirements.

First, the expenses must have a business connection, meaning they were incurred while performing services as an employee. Second, the employee must adequately substantiate the expenses to the employer with records and receipts within a reasonable period, typically within 60 days. Third, the employee must return any excess reimbursements or advances to the employer within a reasonable timeframe. When these conditions are met, the reimbursed amounts are excluded from the employee’s gross income and are not reported as wages on their Form W-2.

Conversely, if an employer’s reimbursement arrangement does not meet all three criteria of an accountable plan, it is classified as a non-accountable plan. Under a non-accountable plan, reimbursements are treated as taxable wages to the employee. This means the reimbursed amounts are subject to income tax withholding and FICA (Federal Insurance Contributions Act) taxes, just like regular salary. These amounts are included in the employee’s wages on their Form W-2. Due to changes in tax law, most employees cannot deduct unreimbursed employee expenses or expenses reimbursed under a non-accountable plan on their personal tax returns.