What is expense reimbursement?

Expense reimbursement is a payment from an employer to an employee for business-related expenses that they have incurred personally. When an employee spends their own money on things such as office supplies, they are entitled to receive expense reimbursement from their employer. The expense reimbursement should be the exact amount that the employee has spent so that they do not have to lose money to the business.

This does not mean that employees can buy anything when it comes to purchasing an item for the business. For example, if an employee buys lunch for a client, they should not pick the most expensive restaurant and buy the most expensive meal. Expenses should be reasonable and should fall under the same types of expenses that the CRA (Canada Revenue Agency) allows for regular business expenses.

Eligible expense reimbursements normally include:

• Office supplies
• Travel and accommodation for a business trip
• Phone charges for communication with a client or on behalf of the company
• Costs for entertaining a client

Expense reimbursement is meant to compensate for personal expenses an employee had in order to do their job. For example, it is common for administrative assistants to go on errands for the office, perhaps picking up supplies for a large meeting. These expenses only occurred due to their job, which means the administrative assistant should receive expense reimbursement.

It is also important that expense reimbursement is done with efficiency, accuracy and accountability. When the process of expense reimbursement is done with these three factors in mind, both the employer and employee benefit. Without efficiency, accuracy and accountability, the process can be confused and mistakes about who owes what can happen. When dealing with money it is better to be clear and precise if you want to avoid issues.

Related: 10 Company Policies to Consider for Your Business

Some general rules for expense reimbursement

Here are a few rules to follow when processing expense reimbursement.

• Never reimburse without a receipt. The receipt is needed by the employer in order to keep documentation for the CRA.
• Payment can be done at the same time as payroll or directly to the employee as a separate payment.
• Payment can be done by any method- direct deposit, cash, cheque etc.
• Paying expense reimbursements counts as an item of business expenditure and should be documented on your taxes.

These simple rules can help guide you if you are new to giving expense reimbursements. For more detailed guidance, keep reading.

Alternate types of expense reimbursement

Some companies use different types of expense reimbursement that are more flexible but possibly more difficult to document.

• Advance– this is when the employer gives money to the employee in advance of a purchase for the business.
• Per Diem– this means that the employee gets a certain amount of money to spend each day. This is sometimes used when an employee is going on a business trip.
• Corporate Credit Card– some businesses will have a corporate credit card that will be used by any employee who is purchasing an item for the business.
• Purchasing Card– this is also a credit card but is used by a single employee who has a lot of expenses for the business. This type of method is often used for executives who need to entertain clients.

These types of alternatives to expense reimbursement are not as common, but still are options for those who want them.

Best practices for expense reimbursement

As we have discussed, there are a lot of ways in which an employer can handle expense reimbursement. In order to make sure that the process goes smoothly, there are a few tips that your company can follow.

1. Form a policy for the expense reimbursement process

Make sure that the procedure around expense reimbursement is clearly explained in your employee handbook. Having a policy around expense reimbursement will mean that employees are less confused about what can be reimbursed and what cannot. Also, adding information about how claims can be submitted and how long it will take for payment will make sure that employees know the entire process and have fewer questions.

An important aspect of the policy would be if purchases made on behalf of the organization need pre-approval. If this is the case, then it should be clear as to who has to approve the expense and what information will be needed in order to get the approval. It would be good to have a form that employees have to fill out in order to make a purchase for the company so that everything is documented before the money is spent.

2. Determine what types of purchases will qualify for expense reimbursement

It is important to be clear when deciding on what type of purchases can qualify for expense reimbursement so that employees do not dispute a denial. If you are not clear about what types of purchases or activities count for expense reimbursement, then you might be setting yourself up for arguments about the policy.

For example, if an employee takes a client out to lunch, does the meal(including that of the client) qualify for reimbursement of expenses? This is the type of question that can come up time and again if you do not have a list of items or activities that count as a work expense.

3. Create a system for collecting claims for expense reimbursement

Having a system in place for the collection of expense reimbursement claims is important as it will make sure that things do not go unnoticed. If an employee is incurring business expenses without claiming them, it can affect your budget and create more work for your HR and accounting departments.

By having a system for expense claims, you avoid any miscommunication and employees are less likely to wait to hand them in. Make sure that part of the system includes the need for receipts so that it can be easy to see exactly where the money went and how much the company owes the employee.

Having a form that employees need to fill out is a great way to do this. The form should have all the information that would be needed for the expense reimbursement which would include the total amount of money spent, what the expense was for and what was bought.

You might also need to have a separate form for employees for mileage reimbursement if your employees use their cars for work. Employees would have to keep track of their mileage and gas receipts for this to happen and follow the Canada mileage reimbursement guidelines.

4. Set deadlines for expense submissions

Make sure that employees know exactly how long they have to submit expenses so that you are not stuck trying to pay back an employee for a purchase done months previously. For example, some companies make it a policy that employees submit their expense claims a week before the next payday so that all payments can get processed quickly. This type of policy can make the system more straightforward and makes it easier for the HR and accounting departments to do their jobs.

5. Pay expense reimbursements within a specified timeframe

Make sure employees know exactly when they should expect their expense reimbursements so there is no confusion about when they’ll get paid. Employees like transparency when it comes to getting paid, so it is important to make sure that there is clear communication about this part of the expense reimbursement process.

By following these best practices for expense reimbursement you should be able to come up with a system that works for you and your employees.

Related: Small Business Payroll Checklist: What Employers Need to Know