Accounting

What is Reimbursement?

The repayment of money spent on behalf of a business, typically for out-of-pocket business expenses incurred by an employee or contractor.

Definition

Reimbursement is the process by which a business repays an individual — usually an employee or contractor — for legitimate out-of-pocket expenses they paid while conducting business. The key principle is that the payer (employer or client) is compensating the payee for costs they bore on the payer's behalf, rather than providing income. Properly structured reimbursements are not considered taxable income to the recipient when they meet IRS accountable plan requirements.

Types of Reimbursements

Business Expense Reimbursement — repayment for travel, meals, supplies, or other costs incurred for business purposes; Mileage Reimbursement — payment for business miles driven in a personal vehicle, using the IRS standard mileage rate or actual expenses; Medical Reimbursement — employer payments for employee medical expenses, often through an HRA (Health Reimbursement Arrangement); Moving Expense Reimbursement — employer repayment of relocation costs, now generally taxable for most employees under the TCJA; Client Reimbursement — contractor or vendor receiving payment from a client for costs passed through on a project; and Cell Phone/Technology Stipend — a flat monthly payment to cover business use of a personal cell phone or internet.

How the Reimbursement Process Works

The typical reimbursement workflow is: Employee/contractor incurs a business expense and pays for it out-of-pocket; Employee obtains and retains a receipt or other documentation; Employee submits an expense report with all receipts and business purpose descriptions; Manager or finance team reviews and approves the expense report; Accounting processes the reimbursement via payroll (for employees) or as an accounts payable check (for contractors); Reimbursement is paid, typically within one to two pay periods; and The expense is recorded in the company's accounting system as a business expense.

Reimbursement vs. Per Diem

A per diem (Latin for "per day") is a flat-rate daily allowance provided to employees to cover meals and incidental expenses during business travel, rather than requiring them to submit receipts for each meal. The IRS publishes per diem rates by location. Per diems simplify the reimbursement process for both employer and employee, reduce the number of receipts that must be tracked, and may simplify tax treatment. However, per diems require employees to track the number of travel days and may not cover all actual expenses in high-cost locations.

Reimbursement Best Practices

For employers: establish a clear, written expense policy specifying what is reimbursable, spending limits, and submission deadlines; require receipts for all expenses over a set threshold (typically $25–$75); use an accountable plan to keep reimbursements non-taxable for employees; and reimburse promptly to maintain employee trust. For freelancers and contractors: always clarify reimbursement terms in your contract before incurring expenses; bill reimbursable expenses separately from your service fees on your invoice; and retain all receipts and documentation in case of a tax audit.

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Key Takeaways

Reimbursement is the act of repaying someone for money they have spent on behalf of a business or organization.

Frequently Asked Questions

What is a reimbursement?

Reimbursement is the act of repaying someone for money they have spent on behalf of a business or organization. In an employment context, employers reimburse employees for out-of-pocket business expenses such as travel, client meals, and office supplies. In a client-contractor context, clients may reimburse contractors for costs incurred while completing a project, such as materials or third-party services.

Are reimbursements taxable income?

In general, employee expense reimbursements are not taxable income if they are for legitimate business expenses and are paid under an accountable plan (a formal reimbursement arrangement with requirements for substantiation). However, reimbursements that exceed actual expenses, are not properly accounted for, or are paid for personal expenses rather than business expenses may be treated as taxable wages. For freelancers, passing through a client's reimbursement is typically treated as income (the expense was your cost to begin with).

What is an accountable plan?

An accountable plan is an employer's formal expense reimbursement arrangement that meets IRS requirements, which include: the employee must incur and substantiate the expenses with receipts or other documentation; the employee must return any excess reimbursements not spent; and the employee must substantiate the expenses within a reasonable time. Under an accountable plan, reimbursements are not subject to employment taxes and are not included in the employee's taxable wages. Without an accountable plan, reimbursements may be treated as taxable compensation.