A Comprehensive Guide to Expense Reimbursement Management

What is Expense Reimbursement?

Reimbursement can be defined as the compensation paid by an organization to its employee for the expenses incurred out-of-pocket, or an overpayment made by an employee, customer, or another third party. Some common examples include reimbursement of business expenses, insurance, and overpaid taxes. Unlike typical compensation, reimbursements are not generally subjected to taxation. 

An employee expense reimbursement specifically includes the amount spent by an employee on behalf of the company during business travel and can be claimed back from the company. Such repayments depend on certain factors and limitations set by the company’s expense policies. 

Example of reimbursed employee expenses

Here is a simple scenario of a reimbursable expense where a web developer from your company attends a hackathon. As a web developer, you are participating in a weekend-long hackathon to learn new coding skills, collaborate with developers from different companies, and potentially showcase your talents in the competition. With your company’s approval, you are covering the expenses using your own money: 

• $150 for a hotel room near the hackathon venue
• $75 for using public transport
• $50 for meals throughout the weekend

Upon returning, you are submitting an official expense report with these three items totaling $275. Once approved, you receive the full amount reimbursed alongside your next paycheck. 

What Qualifies As Employee Expenses?

The expenses that are reimbursed by the employer should be subjected to the rules of deductible expenses. There are two ways in which your employer treats your business expenses. First are the expenses that your company will reimburse you for that are outlined in the company’s expense reimbursement policy. Some common examples include:

• Professional clothes and uniforms related to work
• Tools, supplies, equipment, and safety gear related specifically to your work
• Permits, licenses, and regulatory fees
• Educator expenses
• Medical exams required by employers
• Learning professional courses related to work
• Legal fees related to work
• Home office set up
• Passport fee for business trips

Here are some things to keep in mind when applying for reimbursement. First, you need to always refer to your company’s reimbursement policy for specifics on what’s covered and what’s not and if anything requires approval. There may be limitations set on the amounts reimbursed. You need to always keep receipts for all reimbursable expenses. Tax laws related to reimbursement tend to change over time so it is wise to consult a tax professional for the latest information. 

Reimbursement requirements

In the U.S., reimbursements can vary depending on circumstances. For employee expense reimbursement then most companies follow accountable plans. These are plans that require employees to prove that the expenses are necessary for doing the job and they need to submit receipts and other relevant documents within a reasonable timeframe (say 60 days) to substantiate the expense. These reimbursements are not considered taxable income for the employee and need to be compliant with the IRS guidelines.

Under what circumstances are employee expense reimbursements considered taxable income?

Taxability depends on whether the reimbursement falls under the accountable or non-accountable plans of the IRS. 

Saving on taxes with accountable reimbursements: 

The IRS likes accountable plans and when your company follows the IRS rules for reimbursing employee expense claims, then they are not accounted as taxable income for the employees. There are three main factors for an accountable plan to function. They are

• The expenses must be purely work-related.
• The employee must provide receipts and other necessary documents as proof of spending within a reasonable timeframe.
• Any money left over after the expense is covered must be returned to the company. 

On the other hand, the non-accountable plans are not-so-tax-friendly alternatives. They don’t follow these IRS rules so the reimbursements become taxable income for the employees. This can include either the entire spent amount or a part of it set by the government as a spending limit. So how can you spot non-accountable reimbursements? 

• When the company doesn’t ask for receipts or proof of spending.
• When the company lets employees have the leftover money from the reimbursement.
• When the employee gets a fixed amount of money upfront regardless of actual expenses. 

Remember, when reimbursements are treated as wages the company pays payroll taxes on top of that amount. 

Types of Expense Reimbursement

Major categories of expense reimbursement include insurance, taxes, and legal. 

Other than business expenses, reimbursements done in the insurance industry follow a different approach. In emergency healthcare situations policyholders face urgent medical needs and often don’t have the time to contact their insurer beforehand to confirm the coverage details. This can lead to policyholders spending money from their pocket for medication, services, and other related medical expenses.  

But there are some insurance policies, especially those related to fitness and wellness initiatives that might require upfront payments from the policyholders beforehand for reimbursing it at the right time. An insurer may reimburse claims from their policyholders each year if they are actively participating in fitness activities at qualified fitness centers. In such cases, any expenses covered by the policyholder during the program can be claimed under their policy. 

When it comes to taxes, reimbursements work slightly differently. Reimbursements are common with taxes paid to state and federal governments. Payroll deductions are done throughout the year to withhold federal income taxes from most paychecks of taxpayers. However, withholding this might not fully capture the tax credits that a taxpayer fully deserves as there are other taxes paid. 

Unlike salaried employees who have federal income taxes withheld from their paychecks, contractors pay their taxes quarterly throughout the year. Tax refunds represent a form of reimbursement from the government received by employees and contractors. These refunds occur when taxpayers have overpaid their taxes throughout the year resulting in a return of that excess money. 

Legal reimbursements can be a specific type – reimbursement alimony. This is a court-ordered payment given to an ex-spouse to compensate for financial contributions that can boost the other spouse’s future earning potential. For instance, in a divorce settlement, a spouse who supported their partner financially while they pursued a college degree might be entitled to reimbursement alimony if the ex-spouse is now earning a higher income. 

Beyond those common categories, here are some of the more common types of employee expense reimbursement a company can offer.

Per diem and travel expenses

Most of the employee expense reimbursement comes under this category. There are a lot of expenses that employees handle out of their pocket during business trips. They can file under the business travel expenses category in a single expense sheet and include relevant information such as transportation fare, hostel stays, and any other expenses incurred during the visit. 

Employee submits the expense report for a settlement which is then verified by the finance team for authenticity and accuracy of the claim. They can either approve or reject the same after verifying against the company’s policies. Usually, these expenses qualify as valid employee reimbursement claims however, there are limits set for such expenses in the policy.

Client development expenses

 To foster business relationships, employees often engage in networking activities or business meals with existing clients or potential prospects. In such cases, the employees pay for the meals and activities during their business visits and travel. Since such meal and client development expenses are done to contribute to the company’s success, such expenses are valid and can be claimed. 

Business operation expenses

With globalization, chances are your company may follow a hybrid work environment where employees work at different locations and time zones and they need to travel constantly. To ensure connectivity between your employees means these expenses must be reimbursed. Many businesses usually cover cellular phone charges, internet connectivity charges, laptops, tablets, etc. So, when employees are traveling for business purposes they can claim such expenses but there are limitations.

Incidental expenses

To ensure proper transparency and accountability, businesses establish clear guidelines on what constitutes valid work-related employee expenses. As there will be incidental expenses defining various expense categories the company is expected to provide a comprehensive list of eligible reimbursements for these expenses. 

For instance, most companies around the world offer health insurance plans allowing their employees to claim eligible healthcare expenses based on the chosen plan. Similar to this, there are other incidental expenses such as the use of personal vehicles for business purposes. They can reimburse the fuel expenses. Also, some companies may provide reimbursement to cover professional subscriptions, gym memberships, etc which have a positive impact on their employees’ job performance.

Automating the Reimbursement Process

Each business has unique business needs. The traditional expense claim process can be tedious and prone to error. Fortunately, automation offers a compelling solution to streamline your reimbursement process. But you need to tailor the solutions to suit your specific needs. You can follow these simple steps to automate your employee expense claims. 

Identifying the requirements

The first and key step to automation is a thorough assessment of what is needed. Define your objectives clearly. Is the aim of automation to expedite processing times minimize errors or seamless compliance? In addition, you need to consider factors such as the size of your company, expense policies, claim volume, employee technical proficiency, and budget constraints. 

Evaluating expense management solutions

Finding the perfect fit requires thorough market research to identify different expense reimbursement software that aligns with your requirements. You need to prioritize the features that directly address your needs. Following are some of the features you should consider when choosing expense reimbursement software. 

• Support OCR technology for automated data capture and processing from receipts.
• Rule-based approvals to speed up the processing of claims.
• Anomaly detection which some software offers with AI to flag potential fraudulent and non-compliant expenses.
• Self-learning algorithms to categorize expenses, and increase accuracy and efficiency.
• Seamless integration with the existing accounting software for a unified financial ecosystem.
• A mobile application providing on-the-go convenience for employees to submit claims.
• Customizable approval workflows can be tailored to the processes in your organizational structure.
• Compliance checks and alerts to mitigate risks and ensure adherence to compliance standards. 
• Detailed reporting and analytics to gain in-depth insights into spending patterns. 

Choosing and implementing the right tool

When choosing expense reimbursement software always prioritize user-friendliness, training requirements, security, cost, and more importantly the quality of customer support. When you implement the software ensure that your employees are trained proficiently to utilize the system to the maximum benefit. Clearly define eligible expenses, who the approvers are, the approval line, and the workflows. Also, configure roles and system settings to enforce expense policies that adhere to the compliance requirements. Establish a holistic financial management approach by seamlessly integrating with your accounting, payroll, and HR software. 

Monitoring and continuous improvement

Once you have successfully implemented the system, you need to regularly monitor its performance. Analyze data capture accuracy, approval times, and reimbursement timelines. Identify areas that require manual intervention and evaluate the effectiveness of how the system detects anomalies. Regularly update roles and rules as needed to optimize the system. 

Continuously ask for feedback from employees to enhance user experience and identify areas of improvement. Are your employees comfortable with the reimbursement system? Can they submit claims easily and receive reimbursement effectively? Utilize their input and refine the process accordingly. 

Finally, it’s time to track the system’s impact on the bottom line –  is there cost savings? Does the system effectively help with cost controls and mitigate fraudulent activities? When you have a well-defined automation strategy your expense claim process gets streamlined and fosters efficiency and cost control.

How to Efficiently Manage Expense Reimbursements

Employees appreciate getting reimbursed quickly and easily. To accomplish this it is essential to have a clear and streamlined reimbursement process that everyone understands easily. This will benefit both employees (faster reimbursements) and business owners (accurate record keeping).  

Establishing a smooth reimbursement system

Having a well-defined reimbursement policy keeps everyone happy! Here are a few things you should consider when creating one:

1. What gets reimbursed? First, identify what work-related employee expenses need to be reimbursed. Some common expenses include transportation, meals, lodging, office supplies, training, and professional licenses. 
2. Clearly communicate with your employees about the new reimbursement policy. Explain in detail about what are all the expenses that will be covered, how to submit claims (including relevant receipts and documents for processing claims), and deadlines for submitting claims. This level of detail ensures that everyone is on the same page and having a transparent process makes the reimbursement process easier. 
3. Set a clear timeframe for when the employees can expect to receive their funds after submitting the claims. This fosters trust and improves employee satisfaction.
4. Work with your accounts department to establish a system for recording all receipts, transactions, and reimbursements accurately. This helps maintain accurate financial records for audits and avoid unnecessary discrepancies. 

Going digital

Manual paperwork can bog down the expense process making it tedious and frustrating for everyone. So consider switching to an automated online expense management system. 

• Effortless expense tracking. Employees can easily submit claims and upload receipts and other relevant documents electronically thus saving ample time and reducing paperwork.

• Enhanced transparency. Having an online system provides a clear audit trail for all submissions, approvals, and reimbursements which fosters trust and helps compliance regulations.

• Streamlined approvals. Managers can easily review and approve (or reject) claims through the automated workflows thus saving time and speeding up the reimbursement process. 

Establishing a budgeting system

Planning ahead helps to stay on top of things. When budgeting for expenses factor all your employee expenses into the overall financial budget. This allows you to track how much is actually spent and you can compare the outcomes. Using a tracking system to monitor employee expenses helps you stay consistent with budget allocations and investigations. Also, address cost overruns when employees exceed their spending limits. Understand their reasons and implement a more rigorous approval process to stay mindful of departmental spending and avoid unnecessary costs that could impact cash flow. 

Communication

Clear communication is crucial for a smooth reimbursement process. Develop a well-written reimbursement policy that includes everything. This will serve as a reference guide for both employees and managers whenever questions arise. You can consider posting the policy on the company’s intranet for easy access. Also, the online reimbursement system should allow employees to track their claim status, including approval status and expected payment dates. This will eliminate guesswork and reduce frustrations and unnecessary delays. 

Regular auditing

Even if you have a well-defined process in place it is important to add additional layers of security. Regularly conduct checks for accuracy by selecting a sample from expense reports and verifying if they have proper documentation (receipts) and if the data matches the reported amounts. This helps you to identify any potential errors and inconsistencies. Moreover conducting regular audits throughout the year can ensure that your financial records are accurate for the tax season and year-end closing. This saves time and ensures you have a seamless audit. 

Reimbursement Software to Efficient Reimbursement Management

Expense reimbursement software is a type of financial tool that helps businesses automate their employee expense reimbursement processes for business-related expenses. It can be used to submit claims, track approvals, keep tabs on spending, and track other expenses. These tools especially help businesses save time and money by streamlining the reimbursement process. 

Having a reimbursement software has a lot of benefits:

• Expense reimbursement software lets you automate most of the tasks associated with the reimbursement process such as approval routing and data entry which saves a significant amount of productive time.
• It reduces errors and ensures that employees receive reimbursed payments correctly and the expenses are compliant with the company policy standards.
• Employee satisfaction is significantly improved as the expense reimbursement software makes the whole claim process much easier. 
• You get better visibility into the departmental spending and easily identify potential areas of saving money. 

There are a number of options available in the market from which you need to find the right one that meets the needs of your business.

Cflow

One of the leading business process management software, Cflow offers robust solutions for automating expense management for all types of business. It offers unique solutions such as custom workflows, automated routed approvals, seamless integration with existing financial systems for data transfer, and much more. 

Navan

Navan (formerly known as TripActions) offers seamless reimbursement across 45 countries and accommodates 25 currencies. It integrates virtual cards and offers VAT compliance and recovery. 

Expensify

This is another popular expense tracking and management tool that helps streamline reimbursement. It offers a user-friendly interface and a wide range of features including receipt scanning, automatic expense categorization, and integration with popular accounting software. 

Sap Concur

This is relatively a comprehensive expense management solution specially designed for larger businesses. Sap Concur offers a wide range of features including expense tracking, reporting, travel booking,g, and much more. 

Zoho expense

This is another leading platform that lets you plan travel itineraries for business trips and automate expense tracking. This is a good option for those already familiar with Zoho products as it integrates seamlessly with them. 

ExpenseOnDemand

It offers cloud-based expense management that streamlines the entire expense reporting process from capturing receipts to reimbursement. Its features include automated expense categorization, real-time reporting, and integrated corporate cards.

Coupa BSM Platform

Provides a comprehensive expense management solution that includes procurement and invoice automation as well. Coupa BSM platform is an excellent choice for businesses looking for a comprehensive BSM (business spend management) solution. 

Webexpenses Expense Management 

This is a cloud-based solution that helps businesses automate their expense claim management. It offers a variety of features including receipt scanning, automated policy compliance, claim management, corporate credit card automation, real-time expense reports, a mobile app, and approval workflows. 

ExpensePoint

A comprehensive tool for managing expenses that offers features such as receipt reading, credit card integration, built-in approval workflows, expense policy management, mileage tracking using a mobile app, and support for multiple languages and currencies. 

Rydoo

A powerful expense management tool that offers unique features for expense capture such as AI-powered receipt scanning, automatic matching, real-time approvals, and automated rules. 

How Cflow Automates Expense Claims Management

Cflow is a cloud-based no-code workflow automation tool that you can use to streamline your expense reimbursement process effectively. 

Cflow’a automation lets you handle bulk receipts uploaded by employees with its powerful automation features. It offers a centralized database for storing all claim-related information in one place securely that is easy to track, manage, approve payments, and audit claims. Cflow offers intelligent workflows that are completely customizable to perfectly match your company policies. In addition, you can easily integrate Cflow with your existing financial software for seamless data exchange. 

Conclusion

Having an efficient expense reimbursement solution means happy employees and a thriving business. It fosters a positive experience for employees, improves financial visibility, streamlines the claim process, and ensures compliance with audits. By setting clear guidelines, leveraging automation, and adopting innovative practices you can empower your workforce and make sound business decisions. 

Cflow‘s automation helps streamline the entire process from claim submission to funds being paid to the employees, reducing reimbursement turnaround times significantly. Now managing expense reimbursements in just a few clicks with Cflow’s automation. Schedule a free demo today and see how Cflow transforms your expense management for your business.

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