What are expense reimbursements? Everything you need to know

Key takeaways:

• Expense reimbursements compensate employees for business-related out-of-pocket expenses.

• Proper management of these expenses is crucial for maintaining financial accuracy and employee satisfaction.

• Airwallex enhances expense management with automated processing and integrated financial tools.

From squinting at blurry Uber transaction screenshots to rifling through stacks of crumpled receipts, managing employee expenses is as routine for your finance team as their morning coffee. Each transaction, whether it’s a taxi ride, a client dinner, or office supplies, involves meticulous verification to ensure it aligns with company policies before reimbursement is issued. Effective management of these reimbursements is important for both the company’s financial health and keeping employees happy.

However, the traditional methods often used are fraught with inefficiencies that can bog down your finance team and lead to frustrations across the board. As transactions multiply and diversify across different payment methods and currencies, the likelihood of errors increases.

Embracing advanced automation technologies can revolutionise this essential function. By automating expense tracking, submission, and approval, businesses can improve accuracy, reduce processing times, and free up valuable time for their finance teams. Below, we’ll explain expense reimbursements and try to answer some of the most common questions around them.

What is an expense reimbursement?

Expense reimbursement is the process by which businesses repay employees for work-related out-of-pocket expenses. This includes any expenses that are necessary for carrying out their job duties, such as travelling to meet clients, purchasing office supplies, or entertaining potential business partners. Here’s how the process usually goes:

1. Incurring the expense: An employee pays for a business-related expense, such as a train ticket or a meal during a business meeting, out of their own pocket.

2. Collecting evidence: The employee collects all necessary documentation, typically receipts or invoices, that provides proof of the expense.

3. Filing the expense report: The employee fills out an expense report, attaching the receipts and detailing each expense’s purpose and amount.

4. Submitting for approval: The employee sends the completed expense report to their manager or the finance team for review.

5. Reviewing the claim: The designated approver checks the submitted report to ensure details match the receipt and that all expenses are compliant with company policies.

6. Processing the reimbursement: Once approved, the finance team processes the payment, either adding it to the next payroll cycle or issuing a separate transfer.

7. Record keeping: The finance team records the reimbursement in the company’s accounting system for auditing purposes and budget tracking.

Common expenses for reimbursement

Figuring out what can and can’t be expensed can be a bit of a minefield for employees. Every company has a different policy, but some expenses are commonly accepted across most businesses. This ensurse employees are not out-of-pocket for essential costs incurred on the job.

Here’s a straightforward list of expenses typically eligible for reimbursement:

• Travel expenses: This includes airfares, train tickets, and mileage when using a personal vehicle for business purposes. Employees often travel to meet clients or attend conferences, making these costs a staple in reimbursement policies.

• Accommodation: Hotel stays are reimbursable when employees need to travel away from their home base for business reasons.

• Meals: Meals during business trips, or team events can be claimed, though companies usually set daily or per-meal limits, or expect reasonable spending.

• Office Supplies: If employees purchase necessary supplies like stationery, or minor equipment to facilitate their work, these are typically reimbursed. 

• Conference and training fees: Costs associated with professional development, such as attending workshops or industry conferences, are often seen as an investment in employee growth or business development and are reimbursable.

• Client entertainment: Expenses incurred from entertaining clients, such as meals and event tickets, can usually be claimed, as they're pivotal in building and maintaining business relationships.

Transparency in which expenses are claimable helps to streamline the expense reimbursement process. Most companies document these policies for claiming out-of-pocket expenses, which could include a corporate card policy, to ensure compliance and avoid ambiguity.

Do I need receipts to reimburse an employee?

The short answer is yes, in most cases you will need the physical or digital receipt. Receipts serve as proof of the expenses an employee claims, as well as what portion of the expense amount was for goods or service tax. Receipts serve as proof of cost, purpose, and date of an expense, ensuring it aligns with company policies on what can be reimbursed.

For auditing purposes, receipts help verify that the company’s financial records are accurate and transparent. This can be critical during tax season or financial reviews.

Collecting receipts allows finance teams to track spending more accurately, helping to manage budgets effectively and make informed financial decisions.

In some cases, for minor expenses below a certain threshold, some companies may allow claims without receipts. However, it’s generally good practice to maintain a comprehensive record of all transactions to prevent any discrepancies or issues with financial compliance.

How do I pay expense reimbursements?

Reimbursing expenses can be done the old way, with paper and patience, or a better way, with technology and efficiency.

• The old way: Historically, expense reimbursements have been synonymous with piles of manual paperwork and cumbersome approval processes. This method leads to delays and dissatisfaction, and often errors, bogging down your finance team with administrative overheads.

• The better way: Modern solutions, like Airwallex, offer an easy-to-use alternative that makes for happier finance teams and employees. By automating the entire process, from submission to payment, Airwallex ensures that reimbursements are swift and secure. Employees submit expenses via an app, the system processes them with minimal intervention, and payments are made directly to their local bank accounts, no matter where they’re located. This method not only speeds up the process but also reduces the potential for errors, making the whole experience smoother for everyone involved.

How long do I have to reimburse expenses?

To avoid any office discontent, it’s best to reimburse your team for their out-of-pocket expenses as soon as possible. One to two weeks is a healthy timeline to aim for but your ability to achieve this will depend on your system for processing.

Do expense reimbursements count as income?

Expense reimbursements are not considered income if they are made purely to cover costs incurred for business-related activities. These payments are made to compensate employees for out-of-pocket expenses and do not contribute to their taxable income.

Are reimbursed expenses taxable?

In general, directly reimbursed expenses for things like flights or hotel bookings aren’t taxable but it can depend on the country. Essentially, if you’ve spent money on business-related costs and have the receipts to show for it, you won’t be taxed on the money you get back. When it comes to per diem allowances, the daily amount you might get for meals or minor expenses while travelling, the rules can vary. These are only non-taxable up to the limits set by each country’s tax authority.

Are there alternatives to expense reimbursements?

If expense reimbursements sound like a hassle, there’s a better way – one that doesn’t rely on paper and spreadsheets. Corporate cards allow employees to make business-related purchases using company funds, reducing the need for subsequent reimbursements. Adding to this convenience are virtual cards, which can be included in digital wallets for employees or shared among teams without the need for a physical card on hand.

Cards also enable companies to control spending before it happens with inbuilt spend limits and Merchant Category Code (MCC) restrictions. Transactions are visible to the finance team in real-time, ensuring fewer end-of-month surprises.

Using Airwallex for expense reimbursement

Airwallex dramatically simplifies expense reimbursement for global businesses and their employees. Team members can submit expenses in any currency directly from their mobile phones. They can snap photos of receipts and transaction details will be automatically extracted by OCR technology. After submission, automated approval workflows save your finance teams time.

Airwallex Corporate Cards, available in physical or virtual forms, can be issued to employees, so expenses can be charged directly to the company while giving detailed, real-time insights into every cent spent.

Expense management doesn’t have to be slow and unwieldy. Airwallex automates the process from end-to-end, reducing manual effort, eliminating errors, and keeping financial records accurate. Integrations with Xero and QuickBooks automate transaction syncing, reducing discrepancies. This allows finance teams to win valuable time back and ensures your team members are never out of pocket.

Frequently asked questions (FAQs)

Is a reimbursement a refund?

Yes, in a business context, a reimbursement is essentially a refund provided to employees for out-of-pocket expenses incurred for business-related activities. It compensates for the money they’ve spent rather than providing income.

How do you record an expense refund in accounting?

Expense refunds are recorded in accounting by reversing the original expense. For example, if the expense was initially recorded as a debit, the refund would be credited to the same account, effectively nullifying the original outlay.

How do you invoice reimbursable expenses?

To invoice reimbursable expenses, list each expense clearly on the invoice along with dates and a brief description. Ensure that the total matches the receipts provided, and categorise the expenses according to the company’s accounting system for clarity and compliance.