Employee Expense Reimbursement Guide

What are employee expense reimbursements? 

Employee expense reimbursements are monetary repayments to employees who use their own funds for approved work-related expenditures. “Employee expense reimbursements are about paying employees back for work-related costs they cover upfront,” explained Sami Andreani, chief financial officer at Oppizi. 

It’s crucial to have an expense reimbursement policy so businesses aren’t hit with unexpected bills and employees aren’t left covering costs due to a mistake. “It sounds simple, but it can get tricky if the process isn’t clear,” Andreani cautioned. “From what qualifies as an expense to how reimbursements are taxed, there’s a lot that employers and employees need to know.”

Steven Kibbel, financial planner at LPL Financial and Certified Financial Planner and founder of Kibbel Financial Planning, emphasized that expense reimbursement plans are about fairness. “Employee expense reimbursement is a process that ensures employees are compensated for work-related costs they pay out of pocket,” Kibbel explained. “At its core, it’s about fairness because employees shouldn’t have to bear the financial burden of performing their job. It’s a structured process with rules, timelines and documentation.”

How do employee expense reimbursements work?

Because money changes hands, employers must carefully handle expense reimbursements to prevent the IRS from classifying the funds as taxable income. Kibbel explained that reimbursements can be handled in two primary ways: Accountable plans and nonaccountable plans. Accountable plans are the most common.

Accountable plans

According to the IRS Employer’s Tax Guide (Publication 15), if the business has an “accountable plan,” it doesn’t have to count expense reimbursements as part of its employees’ wages, meaning the money is not subject to taxation. This setup is typically most desirable for employees and employers. 

“Accountable plans are more structured,” Kibbel explained. “The employee has to prove the expense was work-related and return any excess reimbursement. With these plans, the employer doesn’t withhold taxes on the reimbursement.”

To qualify as an accountable plan, an expense reimbursement policy must meet the following conditions:

• Work-related expense requirement: The employee must pay or incur the allowable expense while performing services for their employer. The reimbursement must apply only to business expenses and cannot be an amount that would have been considered the employee’s wages.
• Documentation requirement: The employee must provide evidence to substantiate the business expenses, including the amount, date, location and purpose. Business expenses must be submitted within a reasonable time after they were incurred.
• Excess reimbursement repayment: If the employer reimburses more than the employee spent, the excess amount must be returned within a reasonable time frame.

What is a reasonable time frame?

These rules mention “reasonable” time frames. The IRS does not set a strict definition for “reasonable” time frames as circumstances vary. However, for guidance, the IRS considers the following time frames reasonable:

• Giving employees an advance within 30 days before they’ll pay the expenses.
• Having employees provide documentation of their expenses within 60 days after payment.
• Requiring employees to return excess payments within 120 days of payment.
• Issuing periodic statements reminding employees to return or explain any outstanding amounts within 120 days.

Nonaccountable plans

If expenses do not meet the accountable plan criteria, the employee reimbursement is treated as paid under a nonaccountable plan. This means the reimbursement is subject to all applicable income and employer payroll taxes. 

“Nonaccountable plans … don’t have strict rules, but reimbursements are treated as taxable income, which means employees pay taxes on them,” Andreani explained. “Most companies avoid this because it’s less efficient and can hurt employees financially.”

Payments qualify as part of a nonaccountable plan if they meet one or more of the following criteria:

• Lack of documentation: The employee does not provide receipts or other documentation to substantiate their expenses in a timely manner.
• Unreturned excess funds: The employer advances an amount to cover the employee’s business-related expenses, but the employee does not return the unspent amount in a timely manner.
• No business purpose: The employer advances an amount to the employee with no reasonable expectation that the employee will use the amount for business expenses.
• Reimbursement replaces wages: The employer advances funds with no reasonable expectation that the employee will use the amount for business expenses.

What qualifies as an employee expense?

Reimbursable employee expenses must meet the IRS rules for deductible business expenses. According to IRS Publication 535, deductible business expenses must be ordinary and necessary: 

• Ordinary: Ordinary expenses are common and accepted in your industry. 
• Necessary: An expense is considered necessary if it is helpful and appropriate for your specific business.

Examples of ordinary and necessary expenses include the following:

• Work clothes and uniforms
• Tools and supplies used at work
• Licenses and regulatory fees
• Professional society dues
• Educator expenses
• Medical exams required by employers
• Employee training and education
• Job-related legal fees
• Laboratory breakage fees
• Home office expenses
• Passport fee for business trips

Employer-reimbursed expenses typically fall into one of these categories:

• Work-related supplies
• Travel and transportation
• Meals and entertainment
• Gifts

Work-related supplies

If an employee purchases supplies for business purposes, such as office supplies, the employer can reimburse the expenses at cost.

Travel and transportation

According to the IRS, travel expenses qualify as ordinary and necessary when an employee must travel to perform their job. Employees may also be reimbursed for using their personal vehicles for business purposes. The IRS sets the standard mileage rate for business-related vehicle use, but commuting from home to work is not typically reimbursable. IRS Publication 15-B lists the standard mileage rates that cover driving expenses.

Transportation expenses are separate from travel expenses that the employee incurs while traveling away from their home area. Employers may reimburse transportation expenses when the employee travels to a temporary workstation under the following conditions:

• The employee travels to one or more regular business locations (not including the employee’s residence).
• The employee’s residence serves as their principal place of business.

Meals and entertainment

Employers can reimburse employees for meal and entertainment costs they incur within their tax home if those expenses have a clear business purpose. Employees can be reimbursed for 100 percent of meal and entertainment costs, but employers can deduct only 50 percent of the cost.

You may reimburse employees with a fixed allowance, such as per diem for travel days or miles driven. Under this arrangement, the employee has sufficiently accounted for their expenses as long as the reimbursement rates are in line with government-established rates. Details of the government per diem rates for meals and accommodations can be found on the United States General Services Administration website. 

Gifts

Corporate gift-giving is common in some industries. If your employees purchase client gifts as part of doing business, you can reimburse them for the cost of those gifts. The IRS allows businesses to deduct a maximum of $25 per recipient per year for gifts. If an item given to a client could be considered either a gift or entertainment, the IRS generally classifies it as entertainment.

Other employee reimbursements and benefits

Many employers also have to deal with additional reimbursement categories, including nontaxable reimbursements, fringe benefits and home office reimbursements. 

Nontaxable reimbursements

Many employers reimburse the following expenses on a tax-free basis:

• Education, such as professional development and various tech and business certifications
• Specific insurance premiums, such as health benefits, group life insurance, accident benefits
• Gifts with minimal value, such as trophies
• Retirement planning services under a qualified plan, such as one of the best business retirement plans
• Discounts on employer-provided services

Each of these nontaxable reimbursements falls into its own category with specific guidelines on taxability.

Fringe benefits

Many employers include fringe benefits as part of a broader employee benefits package. According to the IRS Employer’s Tax Guide to Fringe Benefits (Publication 15-B), a fringe benefit is “a form of pay for the performance of services.” Therefore, most fringe benefits are taxable. 

Even if a third party facilitates the benefit, such as a gym providing workout equipment and classes for your wellness program, the employer pays to provide it. The employee receives the fringe benefit package in exchange for providing their services to the employer, even if another person receives the benefit without performing services in exchange for money, such as if the employee’s spouse uses the gym membership.

Examples of fringe benefits include the following:

• Employee stock options
• Health savings accounts
• Transportation benefits
• Meals
• Tuition reduction
• Gym memberships
• Adoption assistance
• Achievement awards

While many fringe benefits are taxable, such as subject to federal income tax, Social Security tax, Medicare tax and FUTA tax, the taxable portion may be reduced by amounts legally excluded from compensation or covered by the recipient.

Home office reimbursements

Employers can issue work-from-home reimbursements to cover some of the expenses employees incur while working remotely. 

“Remote work has made reimbursement policies even more important,” Andreani noted. “If you work from home and buy a new desk or pay higher utility bills, some companies might reimburse these costs, but it’s not guaranteed. Always check your company’s policy before making purchases.”

A remote work reimbursement may cover the following:

• Internet service and utilities
• Telephone service
• Desks and chairs
• Computers
• Equipment

Andreani emphasized that state laws and individual employer policies will affect remote work reimbursements. “There’s no universal rule and reimbursement for remote work expenses often varies by state or company,” Andreani explained. “For instance, California requires employers to reimburse necessary costs, but most states don’t.”

How to record and reimburse employee expenses

Properly recording employee expenses and reimbursements is crucial. Luckily, the best accounting software can help you record, report and reimburse expenses efficiently while ensuring compliance with tax regulations.

Employers and employees must adhere to best practices to ensure the expense reimbursement process is smooth, consistent and compliant. 

“For employees, the most important thing is to save receipts and follow the company’s rules when submitting expenses,” Andreani advised. “For employers, it’s about being consistent, fair and fast. A well-handled reimbursement process not only ensures compliance but also builds trust and keeps everyone focused on their work — not chasing payments.”

Consider the following four steps to establish and implement your employee expense reimbursement process. 

1. Create an expense reimbursement report form.

Create an expense reimbursement report form using your accounting software or a spreadsheet. Distribute it to all employees who need to be reimbursed for business expenses. The form should include line items for the following:

• The employee’s name
• The period covered by the expense report, such as monthly or weekly
• A listing of all possible reimbursable expenses, such as airline tickets, hotel rooms, gifts, trade shows and other business-related costs, with some blank lines so employees can add other approved expenditures
• The amount of each expense
• The business purpose for each expense like general purposes, such as “marketing” or specific to a customer account
• The total amount due for the period

2. Set rules for expense reimbursement.

Your expense reimbursement policies must be clear and include the following: 

• What is reimbursable: Not every expense, including personal employee expenses, will be reimbursable. Additionally, your business budget is likely limited, so it’s essential to set parameters for various expense categories. List all reimbursable expenses and the rules surrounding them. For example, you may reimburse remote employees for their internet service but not their work computer. You want to avoid confusion that will lead to misunderstandings, frustration and disappointment. 
• Employee obligations: Employees should know the time frame in which they must submit their reimbursement requests as well as how and to whom to submit them, such as online and paper submissions. They should also know when they’ll be compensated. 

“For employers, having a clear and simple reimbursement policy is critical,” Andreani advised. “It should list what’s covered, how to submit expenses and when employees can expect reimbursement.”

3. Designate who will be responsible for approving or denying expense reimbursements.

After submission, an employee’s submitted expense report must be approved or denied by a designated party. This person may be the employee’s direct supervisor, a department head, an executive or a member of your accounting and finance team.

Kibbel emphasized the importance of open communication between the expense approver and the employee. “Employees need to know what’s covered, how to submit claims and what documentation is required,” Kibbel said. “Many businesses use expense management software to simplify submissions and approvals. Regardless of the method, accurate records are essential for compliance and audits.”

The designated approver should inform employees of any denied expenses and the reasons for denial. Approved expense reports should then be passed along to accounts payable for payment.

4. Pay approved reimbursable expenses.

It’s essential to compensate your employees for approved expenditures promptly. Employers generally reimburse employees in one of two ways: 

• Integrate employee reimbursements directly into the payroll system.
• Pay employees separately for expenses through check or direct deposit.

Paycheck record-keeping laws require businesses to maintain records of reimbursements, so ensure compliance.

Amanda Clark contributed to this article.