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Expense reimbursement: What it is and how it works
How the process works, which expenses qualify, IRS tax rules, and how to build a policy.
Expense reimbursement is the process of paying employees back for business expenses they cover with their own money, such as airfare, meals, and supplies.
This guide contains:
- How the expense reimbursement process works
- What expenses are reimbursable?
- Is expense reimbursement taxable?
- How to create an expense reimbursement policy
If your team travels internationally, Holafly for Business keeps employees online with secure mobile data.
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How the expense reimbursement process works
Each claim goes from purchase to payment in five stages:
- Purchase: An employee pays for an approved business cost with personal funds (e.g., a client dinner or a train ticket).
- Submission: The employee files an expense report with the date, amount, vendor, business purpose, and an itemized receipt for each cost (see our guide to travel and expense reporting).
- Approval: A manager or the finance team checks the report against your policy and approves it.
- Verification: Finance matches the receipts to the reported expense items and checks for duplicate claims.
- Payment: You pay the employee back via payroll, as a separate untaxed line item (provided you follow IRS accountable plan rules), or via a separate check or direct deposit (i.e., an ACH transfer).
Keep in mind that adding reimbursements to payroll is convenient for you, but it can mean a longer wait for the employee. Either way, it’s best to pay workers back before their credit card bill arrives.
Reimbursement is the final stage of travel and expense (T&E) management, which covers employee travel costs from booking to payment.
Why expense reimbursement is important
Paying employees back on time and by the rules matters for four reasons:
- Legal compliance: Federal law requires reimbursement only when an employee’s work costs cut into the minimum wage or overtime pay they’re owed. Some states, such as California (Labor Code 2802) and Illinois (820 ILCS 115/9.5), require you to reimburse all necessary business expenses.
- Tax treatment: An IRS-compliant accountable plan keeps reimbursements out of employees’ taxable wages and exempts them from payroll taxes, while still allowing your business to deduct the expenses.
- Employee trust: Employees aren’t left covering company costs out of their own pay.
- Accurate records: Each expense is categorized and documented, which gives you a better idea of where the money goes.
What expenses are reimbursable?
Your company decides which costs it reimburses, but a reimbursement stays tax-free only when it covers an ordinary and necessary business expense. That means the cost is common in your line of work and helpful for doing the job.
Here’s how the common categories break down:
| Category | Examples |
|---|---|
| Business travel | Airfare, lodging, rental cars, rideshares, parking, tolls, and mileage |
| Meals | Meals while traveling and client meals with a business purpose (note that client entertainment isn’t generally deductible) |
| Office supplies and equipment | Stationery, printer ink, and tools the job requires |
| Technology | Laptops, phones, and software subscriptions |
| Professional development and training | Courses, certification exams, and conference fees |
| Remote work expenses | The business share of home internet and phone bills, and home office equipment |
For costs that mix business and personal use, reimburse only the business share. For example, if an employee pays $60 a month for home internet and uses it for work half the time, you’d reimburse $30 a month.
For mileage on an employee’s own car, you can reimburse at your own rate or the 2026 IRS standard mileage rate, which is 72.5 cents per mile from January 1 to June 30 and 76 cents per mile from July 1 to December 31. Just remember to ask employees to keep a mileage log or use a distance-tracking app to back up each claim.
Expenses you generally don’t reimburse include:
- Personal costs
- Commuting between home and the employee’s regular workplace
- Lavish or extravagant spending
- Anything your policy excludes (e.g., alcohol, mini-bar charges, or business-class upgrades)
Is expense reimbursement taxable?
Expense reimbursement isn’t taxable when you pay it under an accountable plan, because those amounts aren’t wages and aren’t subject to income, Social Security, Medicare, or federal unemployment taxes. Under a non-accountable plan, the same payments count as taxable wages.
Here’s how the two plans compare:
| Factor | Accountable plan | Non-accountable plan |
|---|---|---|
| Business connection | Required | Not required or not met |
| Proof of each expense within a reasonable period | Required | Not required or not met |
| Excess amounts returned | Required | Not required or not met |
| Taxed as wages | No | Yes, as supplemental wages |
| Reported on Form W-2 as taxable wages (Boxes 1, 3, and 5) | No | Yes |
Receipts and documentation
You need records for each expense you reimburse, showing its:
- Amount
- Date
- Place
- Business purpose
Publication 463 requires a receipt for all lodging and for any other expense of $75 or more (except for a transportation expense without a readily available receipt, or meals and lodging covered by a per diem under an accountable plan). Therefore, it’s best to ask employees for itemized receipts, as a signed card slip doesn’t show what was bought.
If an employee loses a receipt, Illinois law, for instance, allows them to submit a signed statement instead. You can adopt that practice in your own policy wherever you operate.
Still, for tax-free reimbursements, the IRS typically expects the employee to substantiate the signed statement with secondary evidence, such as a credit card statement or a vendor invoice.
How to create an expense reimbursement policy
A written expense reimbursement policy tells employees what you’ll pay back, how to claim it, and when they’ll receive the money. If your team travels for work, our company travel expense policy guide includes a free template.
These seven steps cover the essentials:
- List the eligible and excluded expenses, with an example for each category.
- Set spending limits per expense and per category, along with pre-approval for high-cost purchases (e.g., a nightly hotel cap, or sign-off before any conference fee).
- Define the documentation you need for each expense type (e.g., itemized receipts for any expense over $25).
- Choose a submission deadline that falls within the IRS 60-day window from when costs are paid or incurred (e.g., within 30 days of the trip’s end), while allowing exceptions where state labor rules require paying late claims.
- Build an approval chain by amount (e.g., a manager approves purchases under $500, and a department head approves purchases above that threshold).
- State the payment method and when employees can expect payment (e.g., within 10–15 business days of approval).
- Share the policy, train approvers, and review it regularly using travel expense analytics to see where limits need updating.
Common expense reimbursement challenges and how to solve them
Even with a policy in place, a few problems can come up, but luckily, each one has a fix:
- Slow payments: Manual processing and approval bottlenecks delay repayment, so set a payment timeline and streamline approvals with automated payouts or scheduled reimbursement batches.
- Missing receipts: Lost receipts break the audit trail, so encourage employees to photograph receipts on their phones at the time of purchase and provide a formal missing-receipt affidavit process backed by bank records.
- Unclear or unevenly enforced policies: Vague rules lead to denied claims and disputes, so write examples into the policy and apply it the same way to everyone.
- Expense fraud: Inflated amounts, personal purchases, and duplicate claims add up, so review claims regularly and maintain an audit trail.
- Manual data entry: Spreadsheets can cause errors and wasted time, so use software that reads data from each receipt (travel and expense management software can automate receipt capture, policy checks, and reimbursement payments).
Alternatives to expense reimbursement
You can reduce how often employees pay first by giving them company money up front or a set allowance.
Let’s examine the main options:
| Alternative | How it works | What to watch |
|---|---|---|
| Per diem | A fixed daily allowance for lodging, meals, and incidentals, so employees don’t need receipts for the covered categories (up to federal per diem rates) | Employees still prove the time, place, and business purpose of each trip |
| Cash advance | Money paid to the employee before the trip or purchase | Employees account for the spending and return what’s unused within a reasonable period |
| Corporate card | A company card that pays the merchant, so the employee never uses personal funds | Set spend limits and card controls, require prompt expense coding, and still collect receipts |
| Purchasing card (P-card) | A company card for buying goods and supplies | Set spending limits per card and per merchant, and require invoices or receipts to substantiate business expenses |
Give traveling employees secure data with Holafly for Business
When your team travels internationally, secure mobile data is key.
Holafly for Business is a business eSIM provider available in 160+ destinations, activating on your team’s devices so they don’t have to worry about local SIM cards or roaming charges. You also get access to our centralized management platform, the Holafly Business Center, where you can manage individual eSIMs, invoices, and data usage.
Holafly Plans for Business come in four tiers, all featuring hotspot, 4G/5G, and 24/7 multilingual support:
- Daily: Unlimited data with pay-per-day flexibility, built for short business trips under 16 days a month.
- Monthly: Unlimited data for teams traveling more than 16 days a month, a fit for frequent travelers and long-term remote staff.
- Annual: Unlimited data for ultra-frequent travelers, suited to long-term global operations and predictable annual budgets.
- Enterprise: Bespoke plans for companies managing travel for 20+ employees a year, with volume discounts, a dedicated account manager, priority support, and custom integrations, built to optimize costs, streamline operations, and ensure seamless global connectivity across teams.
Not sure which plan is right for your team? Book a demo.
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FAQ
Employers can no longer deduct meals they provide on their premises for their own convenience, or the cost of running an employer-operated eating facility, from 2026 under Section 274(o) of the tax code. Meals that employees buy on business trips and claim back are exempt from this rule and remain subject to the standard 50% deduction limit.
The best software for employee expense reimbursement depends on your company size and workflow needs. Some popular options include SAP Concur, Expensify, and Ramp, which capture receipts and check claims against your policy.
A reimbursement isn’t a refund. A refund is the return of money from a vendor for a canceled or returned purchase, reducing an existing expense. A reimbursement is a payment to an employee for personal funds spent on your behalf, which is the transaction that records the business expense.
I’m a writer with over eight years of experience in digital content. My work has appeared in publications such as The New York Times, Forbes, Business Insider, and the BBC. At Holafly, I write clear, practical guides to help travelers stay connected with eSIM technology. In my spare time, I enjoy car detailing, biking around Warsaw, and capturing portraits.
