How to Handle Employee Expense Reimbursement the Right Way

Your employees book flights, pay for software, or drive to meetings—keeping the business running as smoothly as possible. But when it’s time for reimbursement, receipts go missing, approvals drag on, and they have to wait weeks for money they’ve already spent.

It makes one think - if purchases happen smoothly, shouldn’t reimbursement follow the same pace?

These delays don’t just slow things down. They make employees second-guess work-related purchases, and finance teams waste hours chasing receipts and pushing approvals through a messy system.

So, two questions:

1. Why does this happen? Due to the lack of a simple process that wasn’t set up.
2. How to fix it? With a well-defined business expense policy that clearly outlines what is and isn’t covered.

A sound policy:

• Removes confusion so everyone knows what qualifies for reimbursement
• Builds trust by ensuring employees get reimbursed on time
• Speeds up approvals, making reimbursements predictable
• Keeps the business compliant, reducing financial and audit risks

Next, we’ll walk through the entire employee expense reimbursement process, starting with what qualifies as a reimbursable expense—and what doesn’t.

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Reimbursable vs Non-Reimbursable Expenses

Drawing a clear line between reimbursable and non-reimbursable expenses benefits both the business and its employees.

For businesses, it helps avoid unnecessary disputes, prevents policy misuse, and keeps finances under control. For employees, it eliminates uncertainty, ensuring they know exactly what’s covered—reducing frustration and preventing unexpected denials.

Let’s take a closer look!

Expenses Eligible for Reimbursement

Reimbursable expenses are ordinary, necessary, and directly related to an employee’s job duties. These typically include travel, meals, office supplies, and other business-related costs, as long as they comply with company policies and IRS guidelines.

Below is a structured breakdown of commonly reimbursed categories:

Understanding these categories is important, ensuring employees don’t have to second-guess whether an expense is valid before purchasing.

However, even if an expense qualifies, businesses require proper documentation to approve and process it. A missing receipt or lack of approval can lead to reimbursement delays or outright rejections.

Below are the essential documentation requirements:

• Receipts must be submitted for all expenses, clearly showing the expense amount, date, location, and business purpose.
• Mileage logs are required for vehicle-related reimbursements, including the date, purpose, and distance traveled.
• Pre-approval documentation must be provided for educational or training expenses before reimbursement.

By maintaining proper records, businesses can ensure smooth approvals while complying with tax and financial regulations.

Now, let’s talk about non-reimbursable expenses!

Establishing this distinction ensures everyone is on the same page before purchases occur and helps break down the key categories of reimbursable expenses versus those that fall outside the company’s responsibility.

Expenses That Are Not Reimbursed

Just as it’s important to define what qualifies for reimbursement, it’s equally critical to set clear boundaries on what doesn’t. 

Below are expenses that generally do not qualify for reimbursement:

Now that we’ve established what qualifies for reimbursement and what doesn’t, let’s talk about how to implement an efficient reimbursement process.

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Implementing Efficient Reimbursement Processes

Expense reimbursements should be simple—an employee submits a claim, it gets approved, and payment is issued. Yet, for many companies, the process is anything but smooth.

But, why does this problem exist?

Before digital tools, reimbursements were handled manually. Employees submitted paper receipts, managers signed off on expenses, and finance teams processed payments in batches. This worked when businesses were smaller, but as companies grew, so did the volume and complexity, making manual methods inefficient.

This is why companies are turning to automation:

However, even with automation, businesses need a structured workflow to ensure every reimbursement is processed accurately and free from unnecessary delays!

Step-by-Step Expense Reimbursement Process

Having a structured process eliminates uncertainty and helps both employees and finance teams stay aligned. 

Below is a structured breakdown of how reimbursements should flow from submission to payment:

Step 1: Submit the Expense with Supporting Documents

Employees submit claims through an expense management system, attaching receipts and selecting the appropriate category. A well-defined policy minimizes errors and reduces the likelihood of rejections at this stage.

Suggested Timeline: Submit within 48 hours of incurring the expense.

For example: Alex, a marketing manager from a New York-based startup, flies to San Francisco for a client pitch. He books a flight, stays in a hotel, and takes a cab to the meeting. 

To get reimbursed, he logs into the company’s expense platform, attaches his flight, hotel, and cab receipts, and categorizes them under ‘Business Travel’.

Step 2: Manager Reviews and Approves

Once submitted, the manager reviews the request to confirm that the expenses comply with company policies, IRS accountable plan rules, and budget allocations before approval. This step prevents unauthorized or excessive spending.

Suggested Timeline: Review and approve within 3 business days of submission.

Example Continued: Alex’s manager receives a notification about his claim. She checks whether the flight class and hotel charges comply with company travel limits. Since everything falls within policy, she approves the request.

Step 3: Finance Team Processes the Request

After approval, the finance team verifies receipts, cross-checks expenses with budgets, and ensures compliance. Automation helps flag duplicate or non-compliant claims.

Suggested Timeline: Processing within 2–5 business days after manager approval.

Example Continued: The finance team reviews Alex’s submission, ensuring all receipts are accounted for. 

During this process, they notice a $50 charge labeled as ‘miscellaneous’ and request clarification. Alex provides an additional receipt showing it was a baggage fee, which aligns with company policy.

Step 4: Payment is Issued to the Employee

Once verified, the reimbursement is processed via payroll or direct deposit. Rolling reimbursements allow faster payouts instead of waiting for month-end.

Suggested Timeline: Payment within 7 business days of final approval.

Example Continued: Alex’s reimbursement is scheduled for payment with all approvals in place. 

Since his company uses an automated system, he receives the funds directly in his bank account within 7 days instead of waiting until the next payroll cycle.

How Automation Enhances the Expense Reimbursement Process

Each step in the above-explained reimbursement workflow can be optimized using automation to reduce delays and ensure policy compliance. 

IRS safe harbor rules suggest a 60-day window for expense submission under an accountable plan. Companies can integrate automation to send reminders and enforce timely submissions, avoiding tax complications.

Some key benefits include:

• Auto-flagging non-compliant expenses to avoid unnecessary manual review
• Pre-approved spending categories to reduce back-and-forth approvals
• AI-driven receipt scanning to instantly categorize expenses
• Smooth payroll integration for quicker payouts

Now, even with an efficient reimbursement process in place, disputes over expenses can still happen. Employees might question why a claim was denied, or finance teams may find inconsistencies that need resolution.

In the next section, we’ll explore how to manage expense disputes reasonably and ensure policies remain up to date to prevent recurring issues.

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Managing Expense Disputes 

Many disputes arise because employees misunderstand or misinterpret reimbursement policies. On top of it, without a clear resolution process, these disputes can drag on, causing delays and inconsistencies in decision-making.

In this case, how should disputes be handled effectively?

With the help of a well-defined dispute resolution system, you can keep employees informed and prevent unnecessary conflicts by ensuring a structured, fair, and transparent review process. 

Here’s what the process looks like:

1. Employee Challenges the Rejection
   Employees who believe their claim was wrongly denied can formally dispute it, providing additional details or missing documentation.
2. Manager Conducts a Secondary Review
   Managers reassess the dispute to determine if the rejection resulted from a policy misinterpretation or documentation issue. If the claim aligns with company guidelines, it is re-approved and processed to finance.
3. Escalate to HR or Finance (If Necessary)
   If the manager cannot approve the claim due to unclear policies or exceptional circumstances, the dispute is escalated to HR or finance for a final decision. This ensures consistent policy enforcement across departments.
4. Final Decision & Employee Notification
   Once a final decision is made, the employee is notified along with an explanation of the outcome. If the claim remains denied, guidance is provided on how to submit future expenses correctly to avoid similar issues.

Now, disputes can be resolved through this process, frequent disputes signal deeper issues, such as outdated policies, unclear guidelines, or misalignment with actual business expenses.

Though we will cover policy reviews in detail later, here’s why they are essential for effective dispute management:

• Clarifying Ambiguous Policies means revising the wording or examples in the policy if a specific expense category is frequently disputed.
• Aligning Policies with Business Needs involves updating the policy when employees regularly submit expenses that weren’t previously covered, reflecting evolving business practices.
• Standardizing Decision-Making ensures disputes are handled consistently across teams, eliminating case-by-case confusion.

While dispute resolution ensures fairness, compliance is just as crucial. Businesses must align their processes with tax laws and financial regulations to avoid penalties and legal risks.

Next up, we’ll explore the tax implications of expense reimbursement—what businesses need to know, how different reimbursement plans affect tax liability, and the required documentation for compliance.

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Tax Considerations in Expense Reimbursement

The reimbursement process carries tax implications that businesses must manage carefully, as the chosen structure impacts compliance and financial liabilities.

Businesses risk higher tax burdens and unnecessary employee liabilities without a clear distinction between accountable and non-accountable plans.

Accountable vs. Non-Accountable Plans

The IRS categorizes reimbursements as accountable or non-accountable plans, determining whether they are tax-free or treated as taxable income to employees.

Let’s compare:

Which Plan Should You Choose?

Depending on your needs:

• Choose an Accountable Plan if you want tax-free reimbursements, compliance benefits, and reduced payroll tax liability.
• Choose a Non-Accountable Plan if you prefer simplified administration but accept that reimbursements will be taxable income for employees and increase employer payroll taxes.

Regardless of the chosen reimbursement plan, proper documentation and timely submission are essential for IRS compliance, preventing reclassification of expenses as taxable income and avoiding penalties.

To stay compliant:

• Store receipts and proof of payment for all reimbursements.
• Ensure expense reports include justifications and categories.
• Use digital expense tools for automated tracking and audits.

This will help your structure remain structured, audit-ready, and organised and prevent compliance risks.

Now that tax implications are clear, the final step is keeping reimbursement policies up to date.

In the conclusion, we’ll explore your next step, including how businesses can refine reimbursement processes, proactively update policies, and prevent disputes while staying compliant.

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Conclusion

A reimbursement policy that isn’t regularly reviewed can quickly become a source of confusion. What was clear a year ago may now lead to disputes. Expenses evolve, tax laws change, and without periodic updates, both employees and finance teams are left navigating outdated rules.

So, how often should policies be reviewed?

Let’s see:

Beyond reviews, you should be able to distinguish between when a policy should be updated versus just clarified. 

Decide on the basis of:

• If employees frequently misinterpret a rule, clarify it with better wording.
• If a specific category of expenses is always disputed, expand or restrict the policy.
• If tax laws change, update the policy to stay compliant.

As for the final thoughts, it’s clear how a strong policy creates a stronger business. Not only do you prevent disputes, but you also build trust, as employees know what qualifies, finance teams process claims faster, and compliance risks are handled in time.

If you want to stay ahead of startup finance best practices, connect with Inkle to learn more about expense management.

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FAQs

1. What documentation is required for expense reimbursement?

Employees must generally provide original receipts or invoices showing each expense's amount, date, and business purpose. In practice, this means submitting an expense report with proof of payment and a brief description of how each cost relates to company business.

2. How long should the reimbursement process take?

Most companies process reimbursements quickly – often within one to two weeks or by the next payroll cycle after submitting a complete expense report. The exact timeline can vary, but a prompt process (with clear internal deadlines) ensures employees are repaid on time.

3. What makes an expense eligible for reimbursement?

An expense is eligible if it is a legitimate business expense – typically one that is ordinary, necessary, and directly related to the employee’s job duties.

 In other words, the cost must be incurred in the course of work (and authorized by company policy), providing a benefit to the business rather than a personal benefit to the employee.

4. How do tax laws affect expense reimbursements?

Tax laws allow valid business reimbursements to be tax-free for employees under an accountable plan, so long as proper documentation and timely accounting are provided. 

If those conditions aren’t met (non-accountable plan), the reimbursement is treated as taxable income to the employee, meaning it would be added to wages and subject to payroll taxes​.

Simply put, following IRS rules ensures that reimbursements don’t create unwanted tax liabilities for either party.