Employee Reimbursement Policy: Template and Best Practices

# Employee Reimbursement Policy: Template and Best Practices

Your employees shouldn't have to float your business expenses on their personal credit cards and hope they get paid back. That's not a perk issue — it's a compliance issue, a morale issue, and potentially a legal issue.

A clear reimbursement policy does three things: it keeps you compliant with IRS rules so reimbursements aren't taxed as income, it sets expectations so employees know what's covered and what's not, and it creates an approval trail so nobody's expensing their personal Netflix subscription as a "team entertainment" charge.

Most small businesses either have no written policy (dangerous) or have a policy they copied from the internet without understanding the tax implications (also dangerous). The difference between a tax-free reimbursement and taxable income comes down to whether your plan meets the IRS definition of an "accountable plan." That sounds complicated. It's not. There are three rules, and they're straightforward.

This guide covers the IRS requirements, what expenses to reimburse, state laws you need to know about, and how to build an approval workflow that works. There's a downloadable policy template with an expense report form at the bottom.

The Accountable Plan: IRS Requirements for Tax-Free Reimbursements

If you want employee reimbursements to be tax-free (for both you and the employee), your plan must meet three IRS requirements. Miss any one of them, and the entire reimbursement becomes taxable income to the employee — and you owe payroll taxes on it.

Requirement 1: Business Connection

The expense must have a business connection. The employee must have paid or incurred the expense while performing services as your employee. "I drove to a client meeting" qualifies. "I drove to the grocery store on Saturday" doesn't.

This seems obvious, but it matters for gray areas. An employee's home internet bill? Partially business-connected if they work from home. Their cell phone? Same thing. The policy needs to define what qualifies as a business expense in your organization.

Requirement 2: Adequate Accounting

The employee must substantiate the expense within a reasonable time. The IRS considers 60 days from when the expense was paid or incurred to be "reasonable."

Substantiation means:

• The amount of the expense
• The time and place
• The business purpose
• The business relationship (for meals/entertainment — who was there and why)

For expenses under $75 (other than lodging), a receipt isn't technically required by the IRS. But practically? Require receipts for everything. It's cleaner, easier to audit, and removes any ambiguity.

Requirement 3: Return of Excess

If an employee receives an advance or allowance that exceeds actual expenses, they must return the excess within a reasonable time. The IRS considers 120 days to be reasonable.

Example: You give an employee $500 for a business trip. They spend $380. They must return the $120 within 120 days of the trip.

What Happens Without an Accountable Plan

If your reimbursement arrangement doesn't meet all three requirements, it's a "non-accountable plan." The consequences:

• The entire reimbursement is taxable income to the employee (reported on their W-2)
• You owe employer payroll taxes (FICA — 7.65%) on the amount
• The employee can no longer deduct unreimbursed business expenses on their personal return (that deduction was eliminated for employees by the Tax Cuts and Jobs Act in 2018)

So an employee who spends $2,000 on legitimate business expenses and gets reimbursed under a non-accountable plan pays income tax on that $2,000. That's money out of their pocket for doing their job. Don't do this to your people.

What to Reimburse

Your policy should clearly define reimbursable expenses. Here are the categories most businesses need to address:

Mileage

When employees use their personal vehicles for business purposes, reimburse at the IRS standard mileage rate. For 2026, that rate is $0.70 per mile (confirm the current rate at IRS.gov — it adjusts annually and sometimes mid-year).

What counts as business mileage:

• Driving from one work location to another
• Driving to client meetings, job sites, conferences
• Running business errands (bank, post office, supply store)

What doesn't count:

• Commuting from home to the regular office (that's personal)
• Personal stops during a business trip (detour to the gym)

Exception for home-based employees: If an employee's home is their principal place of business, driving from home to a client site or meeting is business mileage.

Employees should log every trip: date, destination, business purpose, and miles. A mileage tracking app makes this easy. See our business mileage tracking guide for details.

Travel

Business travel — flights, hotels, rental cars, ground transportation, parking, tolls — is reimbursable when the travel has a clear business purpose.

Policy decisions to make:

• Do you reimburse economy class only, or allow business class for flights over a certain duration?
• What's the nightly hotel rate cap? (Many companies use the GSA per diem rate for the destination city.)
• Do you reimburse rental cars? What class?
• Do you cover parking at the airport or require off-site lots?

Tip: Set a pre-approval requirement for travel over a certain amount (e.g., any trip expected to exceed $500). This prevents surprises and gives managers a chance to suggest alternatives (Zoom instead of fly).

For more on deducting travel expenses, see our business travel expenses guide.

Meals

Business meals are reimbursable when there's a clear business purpose — dining with a client, meals during business travel, team meals during work events.

Policy decisions to make:

• What's the per-meal cap? ($15 breakfast, $20 lunch, $35 dinner is a common structure)
• Or do you use per diem rates instead of actual receipts? (See below)
• Are team lunches reimbursable? Under what circumstances?
• Is alcohol reimbursable? Many companies say no.

IRS rule for meal deductions: Business meals are 50% deductible for the company (the full reimbursement is still tax-free to the employee under an accountable plan). For the specific rules, see our business meal deduction guide.

Home Office

If employees work from home regularly, consider reimbursing:

• A portion of internet service (typically 50% if used for both personal and business)
• A portion of cell phone service (same logic)
• Office supplies (printer paper, ink, pens)
• Equipment (monitor, keyboard, desk chair — usually a one-time purchase with a cap)

Some states require this (see below). Even if yours doesn't, reimbursing home office expenses is a retention tool, especially for remote teams.

Phone and Internet

If employees use personal phones for work (calls, texts, email, apps), reimburse a reasonable portion. Common approaches:

• Flat monthly stipend — $50-$100/month for phone, $25-$50/month for internet
• Percentage of actual bill — 50% of the monthly bill (requires the employee to submit their bill)

A flat stipend is simpler to administer. Just make sure the amount is reasonable relative to actual costs.

Professional Development

Consider reimbursing:

• Conference registration fees
• Professional association dues
• Certification exam fees
• Books and courses directly related to the employee's role

Set an annual cap ($500-$2,000 per employee is typical) and require pre-approval.

Other Common Reimbursable Expenses

• Client entertainment — within defined limits
• Business software/subscriptions — when the employee purchases tools for work
• Uniforms and safety equipment — if required for the job
• Licensing and credential fees — required for the role
• Business gifts — to clients or partners, with a per-gift cap (IRS limits the deduction to $25/person/year)

The Per Diem Option

Instead of reimbursing actual meal and incidental expenses during travel, you can use the federal per diem rates established by the General Services Administration (GSA).

How Per Diem Works

The GSA publishes per diem rates for every city in the U.S. The rate covers lodging and meals/incidental expenses (M&IE). You can use per diem for:

• Meals and incidentals only — you reimburse actual hotel costs and per diem for meals
• Full per diem — you reimburse per diem for both lodging and meals (less common)

Advantages

• No meal receipts needed (the per diem is the substantiation)
• Simpler administration
• Predictable costs
• Employees who spend less than the per diem keep the difference (tax-free)

Disadvantages

• May overpay in low-cost areas, underpay in expensive ones
• Employees may feel shortchanged in high-cost cities if you use standard (non-locality) rates
• Still need to verify the trip happened and had a business purpose

Current Rates

For 2026, the standard M&IE per diem rate is $68/day for most locations, with higher rates for designated high-cost cities (up to $79/day). High-cost cities like New York, San Francisco, and Washington D.C. have locality rates for lodging that can exceed $300/night.

Look up rates at gsa.gov/perdiem.

Approval Workflows

A policy without an approval process is just a suggestion. Here's a practical workflow:

For Routine Expenses (Under $100)

1. Employee incurs the expense
2. Employee submits expense report with receipt within 30 days
3. Direct supervisor reviews and approves within 5 business days
4. Finance processes reimbursement within 10 business days of approval
5. Reimbursement via direct deposit to employee's bank account

For Travel and Larger Expenses ($100-$1,000)

1. Employee requests pre-approval from supervisor (verbal or email is fine)
2. Employee incurs the expense
3. Employee submits expense report with receipts within 30 days
4. Supervisor reviews and approves
5. Finance processes reimbursement

For Major Expenses (Over $1,000)

1. Employee submits written pre-approval request to supervisor and [department head / controller / CFO]
2. Written approval before the expense is incurred
3. Employee incurs the expense
4. Employee submits detailed expense report with all receipts
5. Supervisor and finance both approve
6. Finance processes reimbursement

Who Approves What?

Receipt Requirements

Require receipts for all expenses. Yes, the IRS only requires receipts over $75 (except lodging). But implementing a universal receipt policy:

• Eliminates confusion about thresholds
• Creates a clean paper trail
• Reduces fraudulent claims
• Simplifies audits

Acceptable receipt formats:

• Original paper receipts
• Digital photos of receipts (most expense management tools accept these)
• Email confirmations (for online purchases, flights, hotels)
• Credit card statements alone are NOT sufficient — they show the amount and vendor but not what was purchased

Lost receipts: Have a process. A signed lost receipt affidavit (included in the template below) with the amount, date, vendor, business purpose, and an explanation of why the receipt is missing. Limit these — more than 2-3 per quarter should trigger a conversation.

State Requirements

This is where many employers get caught off guard. Several states require employers to reimburse business expenses — it's not optional.

California (Labor Code §2802)

California requires employers to reimburse all "necessary expenditures or losses" incurred by employees as a direct consequence of performing their job duties. This includes:

• Mileage for business driving
• Cell phone costs if the employee uses their personal phone for work
• Internet costs for remote workers
• Tools and supplies required for the job

Failure to reimburse is a labor code violation. Employees can file claims with the Labor Commissioner, and penalties include the expense amount plus interest plus attorney's fees.

Illinois (Expense Reimbursement Act, 820 ILCS 115/9.5)

Illinois requires reimbursement of all "necessary expenditures" incurred by employees within the scope of employment. Similar to California, this covers phone, internet, mileage, and tools. Employers must reimburse within 30 days of the employee submitting the expense.

Other States

Several other states have expense reimbursement requirements:

• Iowa — employers must reimburse expenses that reduce wages below minimum wage
• Montana — employers must reimburse when they require the employee to incur the expense
• New Hampshire — similar to Montana
• North Dakota — similar to Montana
• South Dakota — employers must reimburse tools and equipment costs
• Massachusetts, Minnesota, New York — various requirements through case law or regulation

Check your state's current law. This area is evolving, especially as remote work crosses state lines. If you have employees in multiple states, your policy may need state-specific addenda.

Direct Deposit Reimbursement

Reimburse via direct deposit to the employee's bank account. Benefits:

• Faster than paper checks
• Cheaper to process
• Creates automatic records
• Employees don't have to deposit a check

Most payroll systems can process reimbursements as a separate, non-taxable payment. Just make sure it's coded correctly — reimbursements under an accountable plan should NOT be included in taxable wages on the W-2.

If you're using Holdings for business banking, reimbursement payments are just another ACH transfer — fast, free, and tracked automatically in your transaction history.

Common Mistakes

Reimbursing without receipts. Even for small amounts, you're creating an audit risk.

No written policy. Verbal agreements don't hold up with the IRS or in an employment dispute.

Treating reimbursements as taxable income. If your plan meets the accountable plan rules, don't report reimbursements on the W-2. If it doesn't meet the rules, fix the plan.

Ignoring state requirements. A California employee who never gets reimbursed for business mileage can file a claim — and win, plus penalties.

No pre-approval for large expenses. An employee books a $3,000 conference trip without asking? That's awkward to deny after the fact. Require pre-approval.

Slow reimbursements. Taking 60+ days to reimburse employees creates resentment and can violate state timing requirements. Aim for 10 business days after approval.

Not distinguishing between employees and contractors. Independent contractors handle their own expenses — you don't reimburse them (their payment rate should account for their costs). If you're reimbursing contractors, it might signal they're actually employees. See our 1099 vs. W-2 guide for the distinction.

Building Your Policy

Every reimbursement policy should include:

1. Purpose and scope — who it covers, what it addresses
2. Accountable plan statement — reference IRS requirements
3. Reimbursable expenses — categorized list with any limits or caps
4. Non-reimbursable expenses — explicitly list what's not covered
5. Approval workflow — who approves what, pre-approval requirements
6. Submission requirements — timelines, receipt requirements, expense report format
7. Reimbursement timeline — how quickly employees can expect payment
8. Return of excess — what happens with advances that exceed actual expenses
9. Violations — consequences for submitting fraudulent or policy-violating claims

The downloadable template below covers all of these sections and includes an expense report form.

Get the Employee Reimbursement Policy Template

Download the Employee Reimbursement Policy Template, which includes:

• Complete reimbursement policy document (customize with your company name and limits)
• Expense report form (printable or digital)
• Approval workflow matrix
• Lost receipt affidavit
• Pre-approval request form

Adapt the limits and thresholds to your business. A 5-person startup will have different approval thresholds than a 50-person company. The key is having something written down, communicated to every employee, and consistently enforced.

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