What Is Expense Reimbursement? A Payroll & Tax Guide

Expense reimbursement is a process by which a company repays its employees for spending money out of their own pockets on business-related affairs. Reimbursements cover various expenses, such as business trips and lodging, client meals and entertainment, office supplies, internet expenses, and so on.

This article provides an in-depth analysis of expense reimbursement, exploring what it is and what it covers. We’ll look at reimbursable expenses for employees and independent contractors, analyze the differences between expenses and allowances, and look at tax considerations and potential mistakes you should avoid.

What Is Expense Reimbursement?

Expense reimbursement is when a company pays back its employees for out-of-pocket expenses related to work. Essentially, if an employee incurs an expense necessary for them to do their job and uses their own funds to cover it, they are likely due a reimbursement.

For instance, if a worker is required to travel out of their city or pay for a meal with the client, they will often pay for these expenses with personal funds. This would create a financial burden that would result in lower salaries and reduced employee satisfaction, if it weren’t for expense reimbursement.

It’s important to note that expense reimbursement isn’t a part of regular wages and is usually not taxable income, provided it’s handled correctly and only used to repay the expense.

5 Common Types of Reimbursable Expenses

While there are many different reimbursable business expenses, certain categories are more common than others. Let’s see what the most common types of reimbursable expenses are.

#1. Travel Expenses

Business travel is one of the most common reimbursable expenses. It encompasses various costs associated with traveling, covering everything from airfare and train tickets to car rentals and lodging.

It also covers employees who use their own cars for business trips. However, instead of calculating different aspects, like gas prices and wear-and-tear, employers use the standard rate set by the IRS to calculate mileage reimbursement.

The business standard mileage rate in 2026 is 72.5 cents per mile, which is 2.5 cents up from 2025. Employers and independent contractors also use this number to calculate deductible costs of operating a vehicle for business.

#2. Meals and Entertainment

Meals and entertainment expenses encompass business lunches and dinners, sporting events, shows, concerts, recreational trips, and more. These costs can be reimbursed if they are directly related to business activities.

However, reimbursing expenses related to meals and entertainment is a complex topic for tax deduction purposes, especially after the changes introduced with the Tax Cuts and Jobs Act (TCJA).

One notable change is that various entertainment expenses, like tickets to sporting events or concerts, are no longer deductible for employers. Moreover, employers may generally deduct only 50% of the meal costs on their tax returns. The costs also aren’t deductible if the meals are lavish.

#3. Office Supplies and Equipment

Expense reimbursement for office supplies and equipment is common in hybrid and remote employment situations. It enables employees to outfit their home offices and purchase the necessary equipment, knowing that employers will refund the costs.

Small and common purchases include physical items, like paper, printer ink, notebooks, paperclips, small electronics (mice, keyboards, microphones, headsets), etc. There are also larger and less frequent purchases, like ergonomic chairs and laptops, which can also be reimbursable.

It’s important to note that the ownership of anything that’s been reimbursed typically goes to the company, which means they technically own the equipment.

#4. Phone and Internet Expenses

Employers usually reimburse employees for using personal cell phones and the internet for work.

Depending on the way employees use their phones and internet services, employers may only reimburse a portion of these expenses. If a reimbursement covers the total use, it can come with taxes, since employees often use their phones and the internet for private purposes.

Instead, you can typically calculate a “reasonable percentage,” which should correspond to the amount of business use. This ensures a company doesn’t overpay for the expenses, and the employee doesn’t get taxed on their reimbursement.

#5. Training and Education Costs

Reimbursing training and education costs can even be tax-advantaged as they’re considered an investment in employee growth. Common expenses that are covered include conferences, seminars, workshops, courses, and certifications.

Under Section 127 - Educational assistance programs of the U.S. tax code, employers are allowed to reimburse up to $5,250 per year tax-free for employee educational purposes. The education doesn’t even have to be directly related to the position that an employee currently holds.

Reimbursable Expenses for Independent Contractors

Expense reimbursement for independent contractors works differently from employee expense reimbursement. Contractors are separate business entities that handle their own tax deductions (on their own tax returns). However, they can make arrangements with clients who can cover some of the costs associated with the project for which the contractor was hired.

Here are some of the most common reimbursable expenses for independent contractors:

• Business-related travel. These are often billed to the clients. A consultant hired by a business to go to their location for assistance may send an invoice that includes the costs of flights and hotels.

• Equipment and tools. These costs are rarely reimbursed directly. Expenses associated with equipment and tools are typically incorporated into the price of service. Otherwise, employers directly paying for tools and equipment could cause worker classification issues with the IRS.

• Software subscriptions. Software subscriptions are primarily reimbursed when the contractor has to purchase them specifically for the client’s project. Alternatively, the company hiring them can buy the software and give the contractor a license.

There are two methods of paying for and covering these costs:

• Billable expenses. Contractors add the expenses that need to be reimbursed to the invoice. The client pays the amount in full and reports everything on the Form 1099-NEC. The contractor can then deduct these expenses when filing their tax return.
  
  
• Accountable reimbursement. The contractor can provide documentation that covers the costs incurred (receipts, work orders, invoices), and clients can treat them as non-income reimbursements. Still, most businesses prefer the first method as it is much simpler in administrative terms.

How Expense Reimbursement Works: Step-by-Step

Expense reimbursement requires following a dedicated procedure to ensure compliance and avoid incurring unnecessary taxes.

Here is a step-by-step process for an accountable plan:

1. Creating an expense. The process begins when an employee pays for something that is reimbursable under the company’s policy by spending their own funds or using a personal credit card.
   
   
2. Collecting receipts. For the company to reimburse the expense (and later claim it as a deduction), an employee must save the original receipts. The receipts need to show all the relevant information, like the amount, date, location, and description of the expense.
   
   
3. Submitting a report. The IRS requires employees to fill out and submit an expense report to their employers, typically within 30 days, and usually no later than 60 days after the initial payment. The report will contain the category of the expense (e.g., meals or travel) and needs to have receipts attached.
   
   
4. Reviewing and approving. A person in charge (e.g., a manager or a payroll administrator) reviews the expense and the report. They need to ensure that everything is in alignment with company policies and tax laws (e.g., adhering to the per diem pay limits) before approving the reimbursement.
   
   
5. Reimbursing the expense. If everything is in order, the employer or their finance team issues the payment. This can be done as a standalone deposit or check, or as a non-taxable expense reimbursement pay stub line.
   
   
6. Recording everything. Every document associated with the reimbursement (including the report and receipts) needs to be preserved for a minimum of three (and up to seven, depending on the document) years in case of an audit by the IRS.

Expense Reimbursement vs. Allowances

Expense reimbursements and allowances are often confused, but there are significant differences and tax distinctions.

An expense allowance represents an upfront payment for the expenses that an employee may incur in the future. For instance, instead of reimbursing a company’s employee after they’ve made a trip using their own car, a company may provide a $600 “car allowance” per month, regardless of how much they drive.

Allowance can be made under an accountable and non-accountable plan.

Accountable allowances require employees to meticulously track, record, and report their expenses. Moreover, they need to return any excess funds that they didn’t spend. This ensures that allowances remain tax-free.

Non-accountable allowances don’t require employees to track expenses or collect receipts. Moreover, an employee doesn’t have to return what they don’t spend. In that case, the IRS considers the entire amount of the allowance as supplemental wages, and it becomes taxable income.

Understanding these differences and their consequences is critical because employers must withhold FICA and income tax from non-accountable allowances. Additionally, employees must report them as wages when filing their year-end tax return.

Is Expense Reimbursement Taxable?

The taxability of expense reimbursements depends on whether they are made under an accountable IRS plan or a non-accountable plan. The rules are primarily established in Publication 463.

Reimbursements are not taxable if they meet the following three conditions:

• Connection to the business. The expense must be entirely work-related.

• Substantiation of the costs. The employee must provide all the necessary documentation to prove the purpose of the purchase, as well as the amount, time, and place. This needs to be done within a reasonable time (typically under 60 days).

• Return the excess. If you’ve accidentally been reimbursed more than the original expense (or if you’ve been provided an allowance that exceeds incurred costs), you have to return the excess, or it will be categorized as supplemental wages.

If reimbursements meet all these criteria, they will not show on a pay stub as taxable income. Instead, they will typically be listed as negative deductions in a separate section titled “Reimbursements.”

On the other hand, the reimbursement usually becomes taxable if an employee:

• Doesn’t collect receipts, or even if they get them and lose them before submitting.
• Doesn’t give back the excess if they received more than the original expenses.

This turns expense reimbursement into taxable income, and it will have to be added to the “Gross Earnings” section in an employee’s pay stub as they become a part of regular wages.

Tax Considerations for Independent Contractors

Tax considerations for independent contractors regarding expense reimbursements are different from those of employees.

As a general rule, a business that hires a contractor needs to report everything that they pay to them (including the expenses that they reimburse) on Form 1099-NEC, as long as the total exceeds $600 in a year.

This is the main difference in expense reimbursement reporting between W-2 and 1099 workers, as it leaves the contractor with the responsibility of claiming deductions when filing their tax return.

For instance, if a contractor incurs a $300 travel expense while working on a $1,000 project, they will bill the client $1,300 in total. The client will then pay the sum and report all $1,300 on Form 1099-NEC. After that, the contractor reports $1,000 as income, while using $300 travel expense as a deduction on their Schedule C.

An alternative to this method is accountable reimbursement, where the client doesn’t report it on Form 1099-NEC, but they need receipts as proof from contractors. This method is similar to the one with employees, resulting in increased administrative work for the client.

A common mistake that businesses make when reimbursing contractors is paying for expenses that have no business connection (e.g., non-work-related lunches). This is just another form of compensation that a contractor can’t claim as a deduction.

Another mistake is not gathering receipts when doing an accountable reimbursement. Without receipts as proof, the IRS can assume the expense reimbursement was income for the contractor, and it can fine you for under-reporting on Form 1099.

Common Expense Reimbursement Mistakes to Avoid

Here are some of the biggest and most common traps and mistakes you can make when it comes to expense reimbursement:

• Using credit card statements as receipts. While credit card statements show that a purchase has been made, they don’t provide information about what was purchased. The IRS requires itemized receipts as proof to understand the nature of the expense.

• Not setting a clear expense reimbursement policy. A business needs to have concrete policies about expense reimbursement. Allowing employees to claim miscellaneous reimbursements can turn into issues during the tax season.

• Having a slow reimbursement process. Delaying payments to employees can lead to their frustration, resulting in reduced workplace satisfaction and lowered output. Moreover, some states have strict labor laws and timeframes for reimbursement, so being late can lead to penalties.

• Having unclear documentation. Pay stubs that don’t make a clear distinction between gross earnings and expense reimbursement can create problems during audits.

• Paying general reimbursements to contractors. Paying broad reimbursements to independent contractors (especially without clear labels and solid proof) can lead to issues with misclassification. This can trigger an audit with potential penalties.

How Paystub.org Helps With Expense Reimbursement Records

Paystub.org can help you with expense reimbursement by allowing you to make clear and accurate records with ease. We developed professional software that is intuitive and easy to use, helping you generate compliant documentation even if you’ve never used the tool before.

The creation process is simple and goes as follows:

• Pick a generator that you need.
• Select a template that suits you.
• Fill out the form with your information.
• Verify your inputs for accuracy.
• Check out to download a finished document.

Here are the document generators that we offer:

• Pay stub generator. The generator lets you effortlessly list expense reimbursements separately from gross wages. This prevents any potential reporting mistakes and simplifies the tax season.

• Form 1099 generator. Report payments made to independent contractors, including expense reimbursements, regardless of whether they were made under accountable or non-accountable plans.

• Invoice generator. Bill your clients and itemize expenses to ensure that you’ve been adequately compensated and to document transactions for the tax season and in case of audits.

• Form W-2 generator. Generate compliant year-end tax documentation for your employees.

Our generators are designed for both business owners and independent contractors. They will significantly cut the time required to create and maintain these records while reducing the chances of making mistakes due to manual input to a minimum. This allows you to manage payroll, expense reimbursement, overall finances, and more.

Final Thoughts

Expense reimbursement is a simple concept that requires careful execution. This ensures worker satisfaction and regulatory compliance. That’s why it’s important to understand all the nuances surrounding reimbursement, set up an accountable plan, and make sure that employees follow strict policies.

A meticulous approach will save your business headaches in the form of administrative work and even potential troubles with the IRS. To make the process easier, make sure to check out our generators at Paystub.org. You’ll create accurate documentation with ease, improving your payroll and record-keeping processes.

Expense Reimbursement FAQ

#1. Does reimbursement mean refund?

No, reimbursement doesn’t mean refund. A refund is the process of returning the money a customer paid for a product or service. Meanwhile, a reimbursement is a repayment to an individual (e.g., employee) who spent their own money on behalf of someone else (e.g., employer).

#2. Are reimbursed expenses reported on a W-2?

Reimbursed expenses typically aren’t reported on a W-2 if they are paid under an accountable plan. However, if the expenses are paid under a non-accountable plan, they are considered taxable wages and reported in box 1 (and possibly box 12) of Form W-2.

#3. Are there alternatives to expense reimbursements?

A direct alternative to expense reimbursements is corporate credit cards. That way, an employee pays for what’s needed by using the company’s funds. However, they typically still need to submit receipts as proof that the expenses were related to business.