Employee expense reimbursement is the process by which employees are compensated for money spent in service to a business. Employees are most frequently reimbursed for mileage and travel expenses but also may be reimbursed for other work-related expenses. Depending on the situation and the institution, reimbursement may be made either through payroll or through accounts payable.
AP Vs. Payroll
Accounts payable is a liability account that includes money a company or institutions owes for goods and services, including money owed to employees who have spent personal money on company business. Accounts payable is also responsible for paying money a company or institution owes to non-employees. The payroll department issues paychecks to employees for their work; an employee's normal wages, bonuses and benefits are paid through payroll, which also is responsible for deducting taxes from employee income. Although some institutions reimburse expenses directly through accounts payable and some through the payroll department, the process is the same.
Rules for reimbursement vary by institution, but all organizations have expenses that are reimbursable and others that are not. Travel and lodging expenses associated with attending a work-related conference or event, or expenses incurred in relocating for a job, are often reimbursable. Meals may be reimbursable in some situations. Organizations frequently compensate employees for miles driven in personal vehicles on company business. Expenses that may not be reimbursed commonly include tickets or other expenses associated with personal entertainment or money spent on alcoholic beverages. An organization may not reimburse an employee for items or money lost or stolen while on company business or for any expense that has not been explicitly authorized.
While the exact process for receiving reimbursement varies by organization, most companies follow the same general procedure. Employees should gain official authorization for expenses before spending money and should keep all receipts. To initiate reimbursement, an employee must submit a signed expense report or expense form to accounts payable; expense reports must be accompanied by a receipt or other proof of purchase. Accounts payable then issues a check directly to the employee or sends this information on to payroll so that an employee can be reimbursed in his next paycheck.
Reimbursement and Taxes
Reimbursement for expenses is generally not considered income, so it usually is not taxed. Even if reimbursement is handled through payroll and included in an employee's regular paycheck, it is listed separately and is not taxed. Exceptions to this general rule vary by state and by specific organization. For example, some organizations repay some costs associated with relocation that are taxed because they are considered part of the employee's compensation. These include trips for the purpose of finding a house, temporary living expenses or closing costs associated with the purchase of a house.