Reimbursement: a guide for employers

As a US business owner, you've likely had to manage employee reimbursements and expense claims. Reimbursements are used to repay employees who have incurred out-of-pocket expenses for work-related purchases. When done right, a business's reimbursement process helps maintain accurate financial records and fosters a culture of fairness.

Understanding business owners' common mistakes in their reimbursement processes can help you craft policies for better management. Here, we’ll also share how Airwallex’s Expense Management solution can simplify reimbursements for all types of employee expenses.

What is a reimbursement? 

From a business context, the definition of reimbursement is when a company repays employees for work-related expenses they’ve personally covered. This includes things like business travel, client lunches, or pantry items. The amount reimbursed should match the exact expense incurred.

What different types of reimbursements are there? 

Businesses need to process various types of reimbursements. Understanding these reimbursable expenses helps you create a fair expense policy. 

Business travel reimbursements

Business travel reimbursements cover actual expenses employees incur during work-related trips, such as airfare, lodging, meals, and ground transportation. Employees typically submit receipts or expense reports, and the company reimburses them based on the amounts spent.

It’s important to distinguish travel reimbursements from per-diem allowances. A per-diem is a fixed daily amount provided to employees to cover travel costs, eliminating the need for itemized receipts. Many companies prefer per-diem because it reduces the administrative burden of tracking and approving each expense.

In the US, per-diem allowances are generally not taxable as long as they fall within the limits set by the IRS and employees provide adequate documentation of time, place, and business purpose. However, any excess amounts or undocumented payments may be treated as taxable income.

Airwallex simplifies the process of tracking and reimbursing business travel expenses. Airwallex Corporate Cards can be issued to employees, allowing them to spend directly from company funds in multiple currencies with no international transaction fees. They provide better control over business spending with card controls, spend limits, and a real-time view of expenses. Employees who spend out-of-pocket can also easily submit expenses in their local currency and get reimbursed directly to their local bank accounts. With Expense Management, the submission and reimbursement process is seamless for everyone.

Medical reimbursements

Medical reimbursements refer to payments employers make to cover eligible out-of-pocket healthcare expenses employees incur, such as doctor visits, treatments, or prescriptions. Depending on the company’s benefits structure, these reimbursements are often managed through health reimbursement arrangements (HRAs) or flexible spending accounts (FSAs).

In the US, employers aren’t legally required to reimburse medical expenses outside what’s offered in their benefits plan. However, many businesses provide tax-advantaged programs to help employees manage healthcare costs. To remain non-taxable, reimbursements must meet IRS requirements and be used for qualified medical expenses under Section 213(d) of the Internal Revenue Code.

Education and training reimbursements

Employee training and education reimbursements cover the costs of employees attending external training or educational programs approved by the company. These programs are typically job-related and aim to improve ‌employees' performance.

Entertainment and business meals reimbursements

This type of reimbursement refers to the repayment of expenses incurred during business-related entertainment, such as client meetings, business lunches, or team-building events. Employees typically cover these costs out of pocket and are later reimbursed by the company.

Disbursement vs. reimbursement: What’s the difference?

In the US, disbursements and reimbursements differ based on who initially paid for the expense and how the transaction is recorded in a company’s books. Understanding the distinction is vital for managing cash flow, employee expenses, and tax reporting.

Understanding tax implications: Principal vs. agent

In the US, the distinction between disbursements and reimbursements – and whether you’re acting as a principal or an agent – can affect how expenses are recorded, whether sales tax is applicable, and how income and deductions are reported.

This distinction is significant in industries like advertising, manufacturing, and logistics, where companies often pay expenses on behalf of others or pass costs through.

• Principal: The business is the buyer and assumes ownership of the goods or services. The expense is part of its normal operations and may be deductible as a business expense.

• Agent: A company that incurs an expense on behalf of another party (the principal) but doesn't take ownership of the goods or services.

US tax implications

When sales tax or deductions may apply

• If you’re the principal, you may be responsible for sales tax (if applicable in your state) and eligible to deduct the expense as a business cost.

• If you invoice your client with a markup, that is typically taxable income, and depending on state laws, the entire amount may be subject to sales tax.

When tax generally does not apply

If you’re acting as an agent and passing through the cost without markup, it's typically:

• Not subject to sales tax

• Not included in your income

• Not deductible as a business expense (since you’re not the end-user)

Under an accountable plan, reimbursement for employee expenses (e.g., travel and office supplies) isn't taxable if documented correctly in IRS rules. However, non-accountable plans may result in taxable income for the employee.

Examples of tax-exempt reimbursements

• Business travel reimbursements (e.g., taxis, lodging)

• Office supplies purchased by employees

• Medical reimbursements under a qualified health plan (e.g., HRA, FSA)

Examples of non-deductible, or non-reimbursable items

• Fines or penalties (e.g., parking tickets)

• Personal expenses unrelated to business

• Certain compensation payments (e.g., fees for breach of contract)

How to create an effective expense reimbursement policy 

A reimbursement policy is a set of guidelines that outline which categories are eligible for reimbursement and how employees can claim back work-related expenses. 

Creating a clear policy ensures employees are fairly compensated while helping the company manage costs. Here are some best-practice tips for building your expense policy:

Clearly define eligible expense categories

Start by outlining broad categories of expenses your employees can claim, such as travel or client entertainment. For many companies, travel expenses often make up the bulk of claims. It’s important to provide clear guidelines, like allowable transport modes and accommodation standards. Defining these categories upfront prevents confusion and ensures employees know what’s covered.

Create a pre-approval process

Implementing a pre-approval process helps your business manage costs more effectively. It gives employees clarity and confidence when spending for the company, especially for high-ticket items like flights, hotel bookings, or equipment.

For example, your policy might state that expenses under $500 can be submitted without formal pre-approval but still require receipts for reimbursement. For expenses over $500, employees must submit a detailed request outlining the business purpose and estimated cost. A manager should review and approve this request before the purchase is made.

Create step-by-step instructions for claim submissions

Provide employees with clear instructions on how to submit their claims, including forms, documentation, and deadlines. For example, you might require claims to be submitted within seven days of the expense. Setting expectations around timing ensures a smooth workflow and keeps financial records up-to-date.

You can simplify claims submission by issuing virtual cards to employees. Virtual cards come with a dashboard that automatically tracks and categorizes all expenses in one place. Instead of filling out complex forms, employees can use the Airwallex mobile app to upload pictures of receipts and easily submit expenses. With Airwallex’s Expense Management, you can also define multiple approval layers based on spend thresholds and set specific approvers at each layer to ensure compliance while minimizing delays. This eliminates forgotten purchases and delayed submissions, making the process faster and stress-free.

Set guardrails against expense fraud

Fraudulent expense claims may seem unlikely, but they can lead to significant financial losses if left unchecked. According to the Association of Certified Fraud Examiners (ACFE), organizations lose an estimated 5% of their annual revenue to occupational fraud yearly. ACFE analyzed over 2,100 cases globally, including US businesses, and found that the median loss per fraud case was $117,000.

Safeguards like detailed receipts can prevent abuse of the reimbursement policy. Expense fraud can also be prevented through digital solutions like Airwallex Spend. It lets you set spend limits and controls on your corporate cards and review expenses in real-time. By providing precise spending controls and instant visibility, expense management software can help you stay on top of costs while promoting transparency and employee accountability.

Common employee reimbursement mistakes to fix

Reimbursing employee expenses might seem straightforward, but many companies unintentionally make mistakes that complicate the process. If not appropriately addressed, these errors can lead to inefficiencies and even financial losses.

Using manual expense management processes

Even the most well-crafted expense management policy can falter if executed through manual processes. Many US businesses still rely on spreadsheets, paper forms, and other manual methods to manage employee expenses. These outdated systems increase the risk of data entry errors, misplaced receipts, and delayed reimbursements, which can hinder operational efficiency and employee satisfaction.

Poor communication of reimbursement policies

Don’t assume that all employees are familiar with ‌spending policies. Without clear communication and proper education, employees might unintentionally submit incorrect claims or violate policy guidelines.

Share the policy through easy-to-access channels like employee handbooks, intranet portals, or onboarding sessions. Keep communication open and quickly address any questions or concerns to ensure everyone feels confident about the process. 

Failing to communicate ineligible expenses

Even if your employees know which expenses are covered, transparency about off-limits items is essential. In a business travel scenario, non-eligible expenses can include personal grooming costs like haircuts or traffic violation fines. 

Clearly outlining ineligible expenses alongside valid ones avoids misunderstandings or delays in processing expense submissions.  

Lack of clear spend controls

Implementing spend controls ensures employee accountability and helps businesses stay on track with their budgets. Without defined spend limits, employees may unintentionally exceed budgets or make purchases that don’t align with company policies.

Slow international reimbursements 

Slow international payments can be a hidden issue for businesses managing reimbursements for overseas employees. The delays are especially pronounced when businesses use multiple bank accounts in different countries. This fragmented setup often requires time-consuming steps like transferring funds between accounts and manual workflows, contributing to delays.  A centralized expense management and payment solution can help businesses avoid these bottlenecks and ensure timely reimbursements.

Simplify business expenses management and employee reimbursements with Airwallex

As your business grows, managing employee expenses and reimbursements becomes increasingly challenging. A unified expense management and payments platform like Airwallex can simplify the process. 

Airwallex gives you a single platform for managing and paying global company expenses in multiple currencies. You can create separate accounts for each of your entities to accurately attribute expenses, while managing expenses across all entities in one platform.  On top of that, our platform comes with the following time-saving features:

• Multi-currency Corporate Cards. Our Visa corporate debit cards allow employees to handle multi-currency expenses like social media ad spend or business travel without hidden foreign transaction fees. Airwallex Corporate Cards have built-in expense management that eliminates the hassle of manual expense claims. In a single dashboard, you can set spending limits per card, view and approve expenses in real time, and instantly freeze or cancel cards.

• Automatic receipt scanning for reimbursements. With Airwallex, employees can submit expenses on the go by scanning and uploading receipts via the Airwallex app. OCR technology automatically populates fields, eliminating manual data entry hassle.

• Batch payouts in multiple currencies. Instead of paying employees one at a time, you can pay up to 1,000 employees in 150+ countries simultaneously with Airwallex Batch Transfers. Simply copy-paste your employees’ payment details into an intuitive Excel file. Airwallex will also automate currency conversions so that your employee receives the full amount in their local currency.

• AI-powered expense categorization. Airwallex automatically categorizes expenses and identifies vendors based on card transactions, using insights from your spending history to improve accuracy over time.

• Speed up monthly reconciliation. Airwallex can be integrated into accounting software like QuickBooks or Xero. Reimbursements approved and paid out through Airwallex get automatically synced to your accounting software to speed up the monthly reconciliation process. Airwallex also supports bill payments similarly, with paid invoices automatically syncing with your accounting software.

Change the way you manage corporate expenses today. Create a free Airwallex Business Account and implement an effective reimbursement policy for your growing team.