Accounting technology / Glossary / Expense reimbursement

What is expense reimbursement?

Definition

Expense reimbursement is paying employees back for business costs they paid with their own money, such as travel, meals with clients or supplies. The employee submits the costs with receipts and a business purpose, a manager approves it against the expense policy, and finance repays the amount, usually by bank transfer or through payroll.

Also calledemployee reimbursementout-of-pocket expensesexpense claims

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US tax rule: Accountable plan
UK tax rule: Exemption since April 2016
Category: Expense and spend management

How expense reimbursement works

The employee records each cost, usually by photographing the receipt in an expense app, which reads the merchant, date, amount and tax. Each item is checked against policy and routed to the approver, then gathered into a reimbursement run, often weekly or with the next payroll. Reimbursements that follow the tax rules are not taxable pay. In the US, amounts paid under an accountable plan, where the cost has a business connection, is substantiated within a reasonable time and any excess advance is returned, are excluded from wages and not reported on the W-2. In the UK, since 6 April 2016, reimbursed costs that would be fully deductible for the employee are exempt from tax and National Insurance and do not go on a P11D. Company cards reduce out-of-pocket spending; Expensify, Emburse, Pleo and Payhawk handle both.

Common questions

How quickly should employees be reimbursed?+

Most companies repay within one or two weeks of approval, or with the next payroll. Faster repayment matters to staff who pay significant costs personally, which is one reason companies issue cards.

Are expense reimbursements taxable?+

Not when they repay genuine business costs under the rules: an accountable plan in the US, or the paid and reimbursed expenses exemption in the UK. Allowances paid without evidence, or personal costs, are usually taxed as pay.

Should reimbursements be paid through payroll?+

They can be, as a separate non-taxable line, which keeps payments in one run. Many companies pay them by bank transfer instead so employees are not waiting for the monthly payday.