The ultimate guide to expense reimbursement

Incurring expenses is part of everyday life as a business owner. It costs money to keep your business running, and many of these costs can be expensed and reimbursed later. This is the key to running a stable business with potential for growth.

That being said, expense reimbursement might raise a lot of questions for the average business owner, especially those who have recently started their companies. For instance, what counts as a reimbursable expense? How much information do I need to provide to reimburse properly? And what are the best practices for efficient expense reimbursement?

We’ll cover these questions and more in our blog post on expense reimbursement, with some valuable expense management tips.

There are two types of expense reimbursement. The first refers to expenses made by one of your employees, which you as the company owner then reimburse them for. The second refers to expenses you make, which are then approved for reimbursement by the tax authorities.

In the first case, you as the owner of your company are in control of what can be reimbursed. You set the parameters of what employees can purchase for reimbursement, and how much they can spend on each categorical expense. In the second case, there are more strictly set guidelines by the relevant tax authorities on what will and will not be reimbursed.

We’ll get into more detail on this in our next section.

To answer this question, we’ll need to split expense reimbursements into two different categories:

• Employee expense reimbursements
• Business owner expenses

When an employee takes a business trip, they inevitably incur expenses which they then send back to you to reimburse. Common employee expenses during business trips include:

• Travel
• Accommodation
• Phone bills
• Meals

Whether or not the expense can be reimbursed, however, will depend on your expense policy. We’ll discuss expense policy creation in detail further down, but the key thing to remember is that you set the parameters for expenses incurred by employees.

These parameters can include class of travel (business, economy, etc.), meal allowances, pre-approved accommodation options, and spending limits on employee lunches.

The expenses you incur running your business have to be reimbursed by the tax authorities. How much you can deduct for certain expenses will depend on where you pay your taxes, however there are a few major categories in which you can likely claim for reimbursements during tax time:

• Travel expenses
• Office rent and utilities
• Business meals
• Business trips
• Car use for work related trips
• Insurances

…among others. How much you can expense for reimbursement will depend on the size of your business and its earnings, and where you practice.

Employees and business owners must submit sufficient documentation to have their expenses approved and reimbursed. What is required will depend on the nature of the expense.

Any documentation that informs the finance team you have paid for this particular item with a card. A receipt, fully photographed with all relevant information, should be sufficient.

Anything you’ve purchased on the internet will require certain documentation for proof of purchase, since paper receipts aren’t an option. Information concerning the purchase (price, item number etc.) as well as indiciation of the successful confirmation of payment. Screenshots or invoice .pdfs will likely be most ideal here.

How you or your employee is travelling will determine what kind of documentation is sufficient for this travel expense report.

• Air travel: boarding card, ticket, receipt for proof of purchase
• Higher class public transport tickets: submitted with ticket
• Own car use: approved in advance, fuel receipts submitted

Sometimes, problems arise which can lead to delays in reimbursements. For small business owners this can range from irksome to disastrous. Let’s go over some of the common reimbursement delays so you can avoid them in your own work.

An expense policy that’s overlong, unclear, or confusing will only cause delays in the reimbursement and expense management process. The employee may not understand what is required of them, and so delay submitting the materials until returning from the business trip, or fail to submit the correct ones.

Without the proper documentation for submission, the reimbursement process cannot begin. It can be quite easy to receipts, so taking photos of every paper receipt you receive and downloading receipt scanning software is a good preventative measure. Rather than holding onto all your paper receipts in a folder, digitize them as soon as you can.

Whether or not your expense reimbursements are taxable is dependent on your business plan being accountable or non-accountable. This is true in the US, where companies are classed according to certain criteria.

Under an accountable business plan, expense reimbursements are not taxable. Business plans are made accountable if they meet the following criteria:

1. The employee has incurred deductible expenses while performing services for the company, and the reimbursement is a payment for those expenses. This reimbursement amount must be separate to their usual wages.
2. The employee has supplied proper documentation, on time, about the expense.
3. The employee has returned any excess amount of the expense within an appropriate time period.

Non-accountable plans must pay taxes on reimbursements. Non-accountable business plans have the following characteristics:

• Your employee does not need to lodge the expenses by any deadline
• The employee is not bound to return excess amounts on an expense in a timely manner
• The reimbursement would be otherwise paid in wage form

Efficient reimbursement of employee expenses is going to help your business run more smoothly and avoid trouble in the case of audits and tax returns. You will in addition have a clearer picture of your finances allowing you to grow and plan accordingly.

To help you achieve this, we’re going to discuss some of the best practices for efficient expense reimbursement.

Pre-emptively ensure efficient reimbursement by creating a good expense policy from the beginning, that all employees understand and adhere to without confusion.

When putting together your expense policy, make sure you keep these elements in mind:

Clear categories and budgets. Employees should know how much they can spend and which category each expense fits into.

Equal treatment of employees. Expense policies should be company wide, regardless of position or individual relationship. This reduces jealousy and bitterness among employees, which reduces the possibility of intentional fraud due to unfairness.

Short and simple document. The longer your document is, the more likely your employees are to skim read it, make mistakes, and cause potential problems. Keep it short, boil it down to the  essentials.

Regular updates. Updating your policy regularly means keeping it accurate as your company changes in size, and its requirements change with it. This also means updating according to legal regulations in your region.

Creating a reliable and simple system for the reimbursement procedure is beneficial for both you and your employees. The information must travel from the employee to your finance team and usually back to you for final approval. To ensure smooth traveling between all these points, you can employ a few different tactics:

• Minimal contact points. Your approval process should move between as few people as necessary, to reduce unnecessary communication and confusion.

• Real-time spending notifications. When your employee makes a purchase, make sure that the software you use sends immediate notifications to the company owner, so that spending can be tracked as it happens.

• Regularity in reimbursements. Pick a day of the month or week in which you handle all reimbursements. This will regulate the process and structure all communication concerning the process.

Automating workflows has a number of benefits for both employee and employer. When it comes to the reimbursement process, automation can solve typical headaches and smoothen the procedures for all involved. Automating expenses, you increase the likelihood of:

• Employee satisfaction due to sooner reimbursements
• Better processing costs by reducing labor
• Better accountability in the case of errors
• A deeper insight into your finances

Expense management software often possesses features that make the reimbursement process simple and smooth. Take advantage of these features for better expense management in teams:

• Spending limits on each card
• Automated expense reports
• Simple, one-click approval on purchases
• Individual access and rights to each team member
• Unlimited spending history accessibility