How to Record Employee Reimbursements the Right Way
- hiensam
- Aug 11
- 6 min read
Employee reimbursements are a common part of doing business — whether it’s paying back an employee for travel, office supplies, or client entertainment. While these payments may seem routine, recording them accurately is crucial for keeping your financial records clean and compliant.
When reimbursements aren’t tracked correctly, they can easily get misclassified as payroll, omitted from expense reports, or overlooked entirely. This not only disrupts your bookkeeping but can also create compliance risks with the IRS, especially if reimbursements are treated incorrectly for tax purposes.
By implementing a consistent and transparent reimbursement process, businesses gain clearer financial insights, prevent unnecessary disputes, and ensure employees are paid back promptly. More importantly, proper recording strengthens your audit readiness and keeps your financial statements accurate — a cornerstone of smart business management.
Understanding Employee Reimbursements
Employee reimbursements are payments made to staff to cover out-of-pocket expenses they incur while performing work-related duties. These costs are typically necessary for the business to operate smoothly and are later paid back to the employee once proper documentation is provided.
It’s important to note that reimbursements are not the same as payroll. Payroll covers an employee’s wages or salary for their work, while reimbursements strictly repay specific business expenses. This distinction is vital because payroll is subject to income tax and payroll tax, whereas legitimate reimbursements — under an accountable plan that meets IRS guidelines — are not taxable to the employee.
Reimbursements can apply in many situations:
Business travel, such as airfare, lodging, or mileage.
Purchasing office supplies or equipment needed for a project.
Hosting a client meeting over lunch.
Attending a training session on behalf of the company.
Understanding what qualifies as a legitimate business expense and how it should be reimbursed is the foundation for accurate bookkeeping and compliance.
Common Types of Employee Reimbursements
Employee reimbursements can vary depending on the nature of the business, but most fall into a few common categories. Knowing these categories helps ensure expenses are recorded under the correct accounts, improving reporting accuracy.
1. Travel Expenses
These include transportation costs (airfare, train tickets, ride-hailing services), lodging, meals while traveling for business, and mileage for personal vehicle use. IRS guidelines often set specific mileage rates that should be followed when calculating reimbursements.
2. Office Supplies and Equipment
Sometimes employees purchase essential supplies — such as stationery, printer ink, or small equipment — for urgent needs. These costs are reimbursable if they directly support business activities.
3. Client Entertainment and Meals
Taking a client to lunch or hosting a dinner meeting is a common business practice. These expenses should be documented carefully, noting the business purpose and attendees to comply with tax rules.
4. Training and Professional Development
Costs for courses, certifications, seminars, or workshops that enhance an employee’s skills relevant to their role are often reimbursable.
Recording these categories consistently helps businesses manage budgets, track spending patterns, and prepare accurate financial reports.
Steps for Recording Employee Reimbursements Properly
Accurate reimbursement recording is not just about paying employees back — it’s about ensuring each transaction is properly documented, categorized, and reflected in your books. Here’s a step-by-step process to follow:
Step 1: Collect Proper Documentation
Before processing any reimbursement, request complete documentation from the employee. This usually includes:
Original receipts or invoices.
A completed expense report detailing the nature of each expense.
Dates, locations, and the business purpose of each transaction.
Keeping thorough records ensures transparency and supports audit readiness.
Step 2: Verify Expenses Against Company Policy
Review submitted expenses to confirm they align with your company’s reimbursement policy. This involves checking:
Whether the expense is business-related.
If the cost is reasonable and within approved limits.
That no personal expenses are included.
Step 3: Enter the Expense into Your Accounting Software
Record the reimbursement in your bookkeeping system under the correct expense category (e.g., Travel, Office Supplies, Meals & Entertainment).
Avoid classifying reimbursements as payroll to prevent unnecessary tax implications.
Use consistent naming conventions for clarity in reports.
Step 4: Process the Reimbursement Payment
Decide whether to pay the reimbursement via payroll or accounts payable:
Through Payroll: Useful for convenience, but ensure it’s processed as a non-taxable reimbursement, not as taxable wages.
Through Accounts Payable: Keeps reimbursements separate from payroll records.
Step 5: Record in Financial Statements
Once paid, update your financial records to reflect the expense. This ensures your profit and loss statement accurately shows all reimbursable business costs.
Following these steps consistently reduces errors, improves cash flow tracking, and keeps your records IRS-compliant.
Best Practices for Employee Reimbursement Tracking
Having a clear and consistent process for tracking reimbursements not only helps with accuracy but also improves employee satisfaction and reduces administrative headaches. Here are key practices to follow:
1. Maintain a Clear Expense Reimbursement Policy
Your policy should outline:
Which expenses qualify for reimbursement.
Required documentation (receipts, expense forms).
Submission deadlines.
Approval process before payment.
Distributing this policy to all employees prevents misunderstandings and sets clear expectations.
2. Use Consistent Expense Categories
Assign all reimbursements to standardized categories in your accounting system. This makes it easier to monitor spending trends, manage budgets, and generate accurate financial reports.
3. Require Timely Submissions
Encourage employees to submit reimbursement requests promptly, ideally within 30 days of incurring the expense. This reduces the chance of lost receipts and makes month-end closing smoother.
4. Keep Digital Records for Audit Readiness
Store scanned copies of receipts and expense forms in a secure cloud-based system. This ensures that documentation is accessible for audits or tax reviews without having to dig through paper files.
Following these best practices streamlines the process, keeps financial records accurate, and fosters trust between the company and its employees.
Common Mistakes to Avoid in Reimbursement Recording
Even with a good system in place, certain errors can lead to inaccurate books, tax issues, or employee dissatisfaction. Here are some of the most common mistakes — and how to prevent them:
Not Requesting Receipts: Failing to collect receipts makes it harder to verify expenses and can cause problems during an audit. Always require proof of purchase, even for small amounts.
Mixing Personal and Business Expenses: When employees combine personal and business expenses in a single transaction, it creates confusion and increases the risk of misclassification. Reimburse only the business-related portion, supported by clear documentation.
Misclassifying Reimbursements as Payroll: If reimbursements are recorded as wages, they may become subject to payroll taxes unnecessarily. Always categorize them correctly to avoid inflating taxable income.
Delaying Reimbursements: Slow reimbursements can frustrate employees and damage trust. Establish a regular payment schedule (e.g., weekly or biweekly) to keep the process predictable.
Avoiding these mistakes ensures reimbursements remain accurate, compliant, and efficient — saving time and preventing costly errors.
Using Accounting Software to Simplify Employee Reimbursements
Manually tracking and recording reimbursements can be time-consuming and prone to errors. Modern accounting software can streamline the process, improve accuracy, and save valuable time for both employees and finance teams.
Automation of Expense Recording:
Many accounting platforms allow employees to upload receipts directly through a mobile app. Once approved, the expense is automatically entered into the correct category in the accounting system, reducing manual data entry.
Integration with Payroll Systems:
Some solutions integrate directly with payroll, enabling reimbursements to be paid alongside regular wages — while still being marked as non-taxable. This eliminates the need for separate payment runs.
Real-Time Tracking and Reporting:
Accounting software offers dashboards and reporting tools to monitor pending, approved, and paid reimbursements at a glance. This improves cash flow visibility and budget control.
Cloud-Based Accessibility:
With cloud-based systems, employees and finance teams can submit, review, and approve reimbursements from anywhere. This is particularly beneficial for remote or multi-location businesses.
Leveraging the right software not only speeds up reimbursement processing but also ensures that each transaction is accurately recorded and easily accessible for future reference.
Accurately recording employee reimbursements isn’t just about repaying your team — it’s about maintaining clean, compliant, and reliable financial records. From collecting proper documentation to categorizing expenses correctly, every step in the process plays a role in ensuring transparency, accuracy, and tax compliance.
By implementing a clear reimbursement policy, using accounting software to automate the process, and avoiding common mistakes, businesses can reduce administrative stress, keep employees happy, and maintain financial integrity.
If you want to streamline your employee reimbursement process — and your overall bookkeeping — WSC Accounting can help. Our team specializes in accurate, efficient, and compliant bookkeeping solutions tailored to your business needs. Contact us today to discover how we can simplify your financial processes and give you more time to focus on growing your business.
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