Reimbursable expenses are charges that you accrue when working for a client or an employer. They are the costs that come with completing a job or task. Instead of paying for those charges out of pocket, you will submit the costs to your employer or client for repayment—often with copies of the receipts.
Keeping track of reimbursable expenses is important if you want to save money and manage your business effectively. Let’s review some common reimbursable expenses and how to get paid for them.
What Does Reimbursable Mean?
A reimbursable expense means a company will pay the employee or contractor back for accruing it. It is different from you covering costs yourself. These are also called business expenses in some cases, though most companies prefer to differentiate between general business costs and reimbursable costs.
You may encounter many examples of reimbursable expenses within your business. For example, if an employee travels to a conference for work, they can report the hotel stay and airfare as a reimbursable expense if they pay for those travel costs with their personal accounts. If an employee visits a print shop or picks up catering ahead of a staff meeting, these charges may also be reimbursable expenses.
Companies need to set clear guidelines for what counts as reimbursable. For example, most companies have guidelines for reimbursing mileage rates when employees use personal vehicles for business purposes. They also set per diem amounts for what employees can spend when they travel. These guidelines prevent team members from spending $200 at a steakhouse and then asking their employer to pay them for it.
Most businesses will ask employees to gain approval on costs before charging them. This prevents conflict between employees who have already spent the money and employers who didn’t approve the costs. Pre-approval can also speed up the reimbursement process.
How Do You Invoice for Reimbursable Expenses?
Every organization has its own policies for reimbursement invoices. If you work as an independent contractor, you may be able to set up your own process or you will have to work with the employers who hire you.
Typically, each reimbursement invoice will have the same pieces of information for company review. These can include:
- The purpose of the charges (ex. February conference)
- The category of the expense (ex. Hotel stays, gas mileage, printing costs, etc.)
- The cost of each expense (ex. $250 for hotel stays, $50 for gas, etc.)
- The date of the expense
- Receipts for each of the charges confirming the amount, the items purchased, and the date.
Some invoices might only have 1 or 2 line items if the expense was related to a quick errand or purchase. However, for long-term travel (like a 2-week business trip), these invoices can be several pages long and include dozens of receipts.
If you operate a business where you frequently reimburse employees, or if you seek out reimbursements from clients, consider downloading an app that specifically records business expenses.
There are tools like BizXpenseTracker and Expensify where you can scan receipts and record expenses while you are on the road. You can even auto-generate invoices and send them to clients from the app. This can save money and reduce the frustration of filling out invoices after a trip.
Are Reimbursable Expenses Income?
Reimbursable expenses are not considered income. Your employee did nothing to earn that money—and they should not use their own personal money to cover business expenses.
For example, let’s say you ask an employee to order business cards with a plan to reimburse them. The employee doesn’t profit from the business cards and doesn’t get any money from the process of buying them. They essentially loan your business money by paying for it out of pocket. You are not paying them a salary to purchase the business cards but rather repaying them for the cost of doing business.
Reimbursements should not be recorded as income because it will have tax implications if that is how it’s organized. Your employee is not earning higher wages because of the reimbursement, so it shouldn’t be considered income.
Are Reimbursable Expenses Taxable?
Expense reimbursements are not considered taxable. This means employees and contractors should not pay taxes when you pay them back for their business expenses.
First, this is not actual income. You are simply paying employees back for your cost of doing business. Next, employees use their already-taxed income to pay for your business expenses. Adding taxes to that is double-taxation.
As an employer, it’s up to you to make sure you separate your reimbursable income from your wages. It may be convenient to combine invoices or include reimbursements in payroll, but this can make your taxes more complicated when you submit them. You can’t expect to remember which income is reimbursed, and your accountant won’t know either.
Instead, continue to pay employee wages as you normally would, even if your team members are owed reimbursements. Then, create a separate accounts payable account for team reimbursements.
Your accounting department can write checks to your employees (or deposit them directly from your account) in order to keep the funds separate. This way when you submit W-2 or 1099 forms in the spring, the business expenses won’t be part of the income.
Keeping separate accounts can also protect your business. If you are audited by the IRS, you can prove that your wages are accurately reported and your reimbursable expenses are organized and paid out.
Categorize Your Expenses With Sunrise
If you plan to have more expenses as you grow your team—and particularly reimbursable expenses related to travel and general operations—then use an app that helps you stay organized financially. It’s easy to get overwhelmed with receipts and charges, but a software system can keep everything in place.
With Sunrise, we have auto-categorization features that can help you sort through your expenses. With just a few minutes each day, you can stay on top of your books. Try our service out to see how you like it—it’s free for small businesses.