All businesses at some point are subject to expenses, required directly or indirectly to run the company's operations at different levels. These expenses are paid directly from the company or are incurred by the employed officer who deems them necessary to ensure all operations run smoothly. In the case of the latter, the company would then be obligated to reimburse the amount back to the employee.
Monitoring these expenses is often complex yet very crucial, particularly to ensure that there isn’t any excessive expenditure or underreporting. As small businesses frequently incur reimbursable expenses, understanding their definition, categories, and the need for recording and tracking expenses is very important.
Expenses are categorized as reimbursable when they are made by employees from their personal accounts or are credited to ensure that all business operations run smoothly. These expenses are usually documented and presented to the company. The company then pays the employee the eligible amount as a business expense reimbursement.
Reimbursable expenses are a very distinct form of expense, including travel costs, postage costs, phone or internet bills, hotel charges, and so on. These expenses are directly associated with the completion of an ongoing project and are often not pre-calculated in any plans by the company. In such situations, the employee present makes the payment to complete the task and provides a legitimate receipt of the expense made. This is then assessed before being reimbursed by the company. These expenses can range anywhere from large to small payments depending on the employee’s needs.
How would you identify a reimbursable expense?
Let’s take a closer look. Here are a few questions to ask:
If you answered yes to any of the above questions, you’re right! That’s a reimbursable expense.
Let us understand the various categories of expenses.
They are broadly classified as large and small expenses based on the quantity of the amount paid and to be reimbursed. These expenses cover employee travel, meals, lodging, and entertainment costs. Companies usually set an upper limit to make sure there isn’t any exploitation.
As the name signifies, smaller expenses are for tasks such as printing documents, stationery supplies, postage and courier charges, local or overseas phone charges, internet charges, cleaning products, etc. These expenses, if unaccounted for at the initial stages of the operations and by the employee, incur costs. It is necessary to maintain a very diligent record of expense receipts for each expense made and these are to be submitted to the employer for reimbursement.
For example, at the beginning of any project, office supplies need to be available. If the printing material is short in stock, the employee may make a payment to restock the paper. The employee also ensures that the drafts that have to be sent to the client for review are couriered and he incurs the postage costs. Apart from reimbursing employee expenses, the employer may also pay for internet top-ups, software top-ups needed for the systems, and coffee for the team.
These payments may or may not be substantial individually but tally up to a significant amount. As long as each payment is documented and is made to ensure the smooth running of the client operations, it is identified as a reimbursable expense.
An employee is expected to travel for meetings, client acquisitions, and research trips. These can be national or international travels. All of the travel expenses (air, bus, train), hotel costs, local transportation costs, employee meals, and client meal costs are substantially larger payments made by the employee. These may be accounted for by the employer before the travel or are completely paid by the employee and then reimbursed to the employee by the company after the receipts are reviewed.
These payments may also include many smaller payments clubbed together and are claimed at once. To avoid any overspending or exploitation of the bills, the company provides an estimated upper limit for payments.
All expenses made are generally to ensure the smooth operation of projects. It is crucial to note that any business expenditure is made to aid in generating revenue for the company.
Reimbursements can be categorized into different expense categories to allow financial sustainability. This applies greatly to small businesses and small startups, as categorizing expenses allows a more comprehensive record that helps with taxes.
Overspending can easily occur when the entire focus is made on job completion. Each industry thus has a rough estimate of costs and expenditure estimates.
Some of the expense categories are as follows:
Any travel required by the company and approved by the employer, national or international, is a reimbursable payment. These expenses may include local transportation within the city for cabs and to and from the airport.
Reimbursable expenses examples in this category range from papers, pens, printing documents, and posters, to staples and folders. Utilities may include coffee purchased. Postage includes courier bills that aren’t accounted for.
During any business travels, employee meals and lodging are to be reimbursed. Any client meetings conducted that are paid for by the employee are also included.
This category includes phone bills, internet charges, and online meeting platform subscriptions such as Zoom, Skype, etc. Similarly, any employee expenses made on premium software required for the project are to be reimbursed to the employee.
This category usually varies and can be renamed accordingly. Many companies include medical coverage for employees where certain medical bills can be reimbursed here. Many expenses incurred by the employee during advertisements and branding are also considered reimbursable expenses.
Categorization helps with the next step, that is, recording reimbursable expenses. Irrespective of which category it may belong to, it is necessary to record and track each and every expense made. This ensures a transparent exchange of information about the project, collecting reimbursement expenses from the client, and entitles the company to tax deductions.
Once the employee has submitted the valid expense receipts, the receipts are then evaluated to qualify them as eligible reimbursable expenses. Then, the following steps are followed:
Maintaining receipts and bills of eligible costs - All the bills that are submitted are to be collected and assessed for eligibility by the employer. Eligibility may be identified by need and the approval made by the employer for the said expense.
Accounting and listing out all the expenses - Once the material is acquired, the content can be either recorded in a spreadsheet or input into reimbursable expense accounting software such as Quickbooks, Freshbooks, Xero, etc. This helps segregate different items.
Sort the expenses based on category- The expenses are now assigned to different categories. This allows the employer to track and analyze expenses.
Specify the date, goal, amount, etc - Then, the date of the expense, the quantity, the reason, the eligibility, and the date of reimbursement is specified.
Reserve the file for future purposes - Once the above documentation is completed, the file is saved for future use.
Once all the eligible reimbursable expenses are recorded, the accounting software is used to maintain a close eye to analyze the trends of expenditure occurring. Tracking reimbursable expenses allows you to maintain a systematic organization of all expenses. This helps to avoid overspending, makes sure that all extra expenses are reimbursed, allows for tax deductions, and allows small companies to track their finances better.
Tracking usually includes the following stages:
Maintaining a thorough record of all reimbursable expenses and expense accounting software provides a complete analyzed sheet with all tax deductions that can be availed. The IRS has deductible and nondeductible expenses. Small businesses should be aware of all the allowed deductions to be verified before the submission of forms.
Bills such as those incurred during employee travel, meals, accounting bills, etc. are valid for tax deduction whereas bills such as those for internet and electricity may be reimbursable but are taxable.
Reimbursable expenses for small businesses are an important category of expense. They allow the smooth functioning of the business and avoid any expenditure from the pocket of the employee. These costs may range from small expenses like printing, pens, and meals to larger expenses such as travel and lodging. The small business should maintain a complete log of reimbursable expenses under preassigned categories and track them periodically. This helps with reducing unnecessary expenses and availing tax benefits. To attain a sustainable financial management process, small businesses should install appropriate policies for reimbursable expenses.
Category: Business Spotlight
Generally, any expense that is not directly related to the current operation is not reimbursed. For example, clothes, personal entertainment, personal travel, etc.
It is advised to maintain records after the yearly tax process for up to 3 years or more. These records are best maintained for as long as possible using reimbursable expenses accounting software.
To ensure that employees are not paying for anything from their own pocket, it is advisable to maintain all receipts.
Reimbursement can be requested as and when the project is close to completion or the assigned task is completed. Using accounting software, employees can submit documents for reimbursement in real-time.
Reimbursable expenses are not considered income as they aren’t paid by the company for any work rendered. They are only payback for expenses incurred by the employee for the company.