A Small Business Guide To Reimbursable Expenses

As a small business owner, it’s almost inevitable that you’ll have to process reimbursable expenses for your employees sooner or later. For any small business, there may be the occasion where an employee spends out-of-pocket to support the continued operation of your business. However, managing these expenses while trying to keep your team happy and your finances in check can be challenging. 

That’s why it’s worth understanding what is a reimbursable expense and what are non reimbursable expenses. With a proper understanding of reimbursables, you can pay back your employees in a timely fashion while preventing any financial surprises. Let’s break down what reimbursable expenses are and how they work.

What are reimbursable expenses?

Reimbursable expenses are costs incurred by employees or contractors that are paid back by the business. These expenses typically arise during the course of performing job-related duties. When an employee spends their own money on business-related activities, the business reimburses them to cover those costs.

Typically, the money spent by the employee on the business’ behalf is referred to as the reimbursable expense. Then, the employee claims the expense through an expense report and receipts following the expense reimbursement policy at the business so that they can be compensated fairly for their costs. 

As a business owner, you might worry about the financial burden on your employees and the importance of keeping track of these expenses to ensure fair and timely reimbursement. You’ll also want to consider how reimbursed expenses might impact your business finances. 

What is an example of a reimbursable expense?

You may already know that not all expenses fall under the reimbursable definition, but do you know which costs do qualify? Here’s a quick overview of what kinds of expenses tend to be reimbursed. Identifying these expense categories will make tax season easier for you, and ensure that your employees are clear on what is reimbursable. 

Travel expenses.

When employees travel for business, they often incur various travel costs that your company will reimburse. These include flights, hotels, rental cars, and other transportation costs. Whether an employee is flying across the country for a conference or driving to a nearby city for a client meeting, these expenses add up. 

A business covers these costs to ensure employees can focus on work without worrying about the financial burden. Make sure your employees keep all receipts and document their travel details to streamline the reimbursement process.

Meals and entertainment.

Business meals and entertainment expenses frequently fall under reimbursable expenses. If a client is taken out for lunch or dinner, those costs are typically covered. This category also includes expenses for team-building activities or entertaining clients. 

As a business owner, you want to be clear with employees what can and can’t be reimbursed when it comes to meals and entertainment, so that they make reasonable expense claims. You may even consider using a per diem reimbursement structure for meals.

Office supplies and equipment.

Supplies, equipment, and tools needed for work are another type of reimbursable expense. This can range from basic office supplies like pens and paper to more significant purchases like a new computer or specialized tools required for work. 

You should track the frequency of purchase and extent of use when it comes to office supplies, to keep your balance sheet clear. And if your employees are looking to make more significant purchases, make sure they have clarity on what that process looks like and whether any approvals need to be made to be reimbursed. 

Professional development.

Investing in professional development is often encouraged and supported by businesses. Employees may expect training, conferences, and certifications that enhance their skills and knowledge to be reimbursable.

Ensure employees know the correct procedure to follow if they want to pursue relevant trainings, and how much reimbursement is possible. Have them document the costs and provide proof of attendance or completion before providing the reimbursement.

Are reimbursements taxable income?

It depends on whether you use an accountable plan or a non-accountable plan. Accountable plans are not taxable, but need to follow these guidelines:

• The reimbursement is for expenses incurred for business purposes. 
• Documentation for the expense was done within a reasonable amount of time, including identifying information like the amount, place, time, and purpose of the expense. 
• If there is excess reimbursement, it’s returned to the employer in a reasonable amount of time. 

The IRS defines a “reasonable amount of time” as the following:

• Employees must document expenses within 60 days of the purchase
• Employers should issue a reimbursement within 30 days of the purchase or documentation of the purchase
• Excess reimbursements should be returned within 120 days

If all these rules are followed, you won’t need to withhold taxes on employee reimbursements. 

Why are reimbursable expenses important? 

Now that you know what they are, you may be wondering how reimbursements help you and your small business. When you want to manage a successful team, it’s important to consider how they might feel about reimbursable costs incurred while working for you. Here’s why it’s beneficial to reimburse employees for necessary business costs:

• Attract and retain talent. Covering costs makes employees feel appreciated and supported, which can boost morale and job satisfaction. Happy employees are more likely to stay with the company, reducing turnover rates and the costs associated with hiring new staff. Additionally, offering reimbursement for professional development opportunities as an employee benefit can attract top talent eager to grow their skills.
• Boost productivity. Knowing that they will be reimbursed for necessary costs allows employees to make decisions quickly and efficiently. For example, if an employee needs to travel for a client meeting, they can book flights without hesitation, knowing they won't be financially burdened. Moreover, covering expenses for office supplies ensures that employees have the tools they need to perform their jobs effectively, further enhancing productivity. 
• Ensure compliance. It’s important to keep accurate records and receipts for tax purposes and to protect the company during audits. By maintaining detailed records of reimbursed expenses, you can justify deductions and avoid potential penalties. Having a clear reimbursement policy in place helps standardize the process and ensures that all employees follow the same guidelines, which reduces errors and makes it easier to manage expenses and stay compliant.

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How to create a reimbursement policy in 4 steps.

To keep reimbursed expenses equitable, timely, and compliant, it’s important to create a reimbursement policy for your business, and clearly identify reimbursable vs. non reimbursable expenses. Here’s how you can start creating a reimbursement policy for your business, although you’ll want to customize based on your specific needs.

1. Define eligible expenses. 

Start by clearly outlining what expenses are covered. This step helps avoid confusion and ensures everyone knows what qualifies for reimbursement. Common reimbursable expenses include travel costs, meals, office supplies, and professional development. Specify each category in detail. 

For travel expenses, include flights, hotels, rental cars, and other transportation costs. For meals, cover business-related dining and entertainment. Office supplies should include items like pens, paper, cleaning supplies, and other equipment necessary for work. Professional development might encompass training sessions, conferences, and certifications. Providing a comprehensive list helps employees understand what they can claim and reduces the likelihood of disputes.

2. Set spending limits. 

Establish maximum amounts for each type of expense. Setting spending limits ensures that expenses remain within budget and prevents excessive claims. For instance, set a daily limit for meals and a cap on hotel rates, and use the GSA per diem rates as guidance if needed. Define acceptable price ranges for flights and rental cars. 

For office supplies, specify the maximum allowable cost for individual items. Professional development expenses should have a clear budget, covering registration fees, travel, and accommodation. These limits help manage costs and ensure fair reimbursement practices. Communicate these limits clearly to all employees, so they know the boundaries for their expense claims. 

3. Outline the submission process. 

Explain how employees should submit expense reports and receipts. A clear submission process streamlines reimbursement and reduces errors.

Require employees to fill out an expense report detailing each expense, including dates, amounts, and business purposes. Attach all relevant receipts to the report. Specify acceptable formats for receipts, such as digital copies or scanned images. Provide a template or form for expense reports to ensure consistency. 

Outline the timeline for submissions, such as within 30 days of incurring the expense. This process ensures that all necessary information is captured and makes it easier for you to review and approve claims.

4. Communicate the policy. 

Share the policy with all employees and provide training if needed. Communication is key to ensuring everyone understands the reimbursement policy. Distribute the policy document through email, your team communication app, and during team meetings. Make it easily accessible for future reference. 

Consider holding training sessions to walk employees through the policy, explaining eligible expenses, spending limits, and the submission process. Address any questions or concerns during these sessions. Regularly remind employees about the policy, especially when updates or changes occur. Clear communication helps prevent misunderstandings and ensures compliance with the reimbursement policy. 

Reimburse the right way with Homebase payroll.

When you’re keeping a close eye on your cash flow as a small business owner, it’s easy for any unexpected cost to be startling. But when you’re managing a team, you also know the importance of reimbursing your employees in a timely and accurate manner. So how do you make reimbursable expenses as painless as possible?

With tools like Homebase, which is designed for small business owners, expense reimbursements can be a breeze. Our all-in-one app allows you to manage your hourly team from one place, so not only can you track time and schedule employees with ease, you can communicate with them about expenses and ensure your reimbursements are properly tracked in payroll. Sign up now and let us make work easier for you and your team.