Expense Reimbursements for Small Businesses

What are reimbursable expenses?

Reimbursable expenses are business-related expenses that your employees cover out-of-pocket but expect to be reimbursed for at a later date. For example, if you own a bakery and your team uses their own vehicles to deliver bread to restaurants, they will likely expect reimbursement for mileage. 

There are no requirements to reimburse employees on the federal level, but California, Illinois, and Massachusetts require it for all out-of-pocket expenses, and at least nine other states have some reimbursement requirements. But even if you operate in a state that doesn’t require them, many small businesses choose to reimburse employees as a courtesy and gesture of goodwill.

Common expense reimbursements for small businesses

Your own list of reimbursable expenses will vary by your industry — a real estate agency will have different expenses than a dog-grooming salon. That being said, here are some of the most common expense reimbursements small businesses have. 

Mileage

If your employees drive for work in their own car (think, client or site visits), you’ll likely need to reimburse them for time on the road. In order to do that, your team will need to track their business mileage and then submit it to you. 

Thankfully, app mileage trackers, including the MileIQ app, make this easy — drivers download an app, have their miles tracked, and then the app automatically calculates mileage reimbursements based on a predetermined rate. All you need to do is review drives and click approve or reject. 

Small businesses can also choose to use a spreadsheet and have employees fill out a mileage report by hand. While not impossible, this method can interrupt workflow and requires a lot of admin oversight, which most small businesses can’t spare. 

Travel expenses

Small business expense reimbursements also often include travel, including airfare, accommodations, cab/rideshare fees, and meals. If your team travels a lot for work and pays for expenses out-of-pocket, it’s a good idea to lay out best practices. 

For example, you may want to set spending limits on dining and hotel accommodation fees, so you can keep reimbursing employees for reasonable costs, instead of unnecessary luxuries. Or you may instead offer a taxable per diem amount (a lump sum that gets taxed like a paycheck) for employees to spend on work travel.

Home office expenses

If your team works from home and has to buy new equipment for their job (laptop, monitor, software), they will likely expect you to reimburse them. Some small businesses also offer to cover a part of an employee’s internet or phone bill if most of the work happens virtually. 

Much like with travel expenses, many small businesses set a spending limit or offer a taxable stipend so an employee can set up their home office.

Training and education

Conferences, trade shows, courses, and licensing exam fees are also common reimbursable expenses for small businesses. If your employees need to take exams to maintain their license, you’ll typically be expected to cover at least some of the fee, including real estate agent, insurance, and HR certifications. 

Reimbursing continuing education fees is all about communication — ask and keep track of required licensing exams and certifications so you’re not hit with a surprise expense report.

Do I need to reimburse all of my employees?

Technically, yes. But the term “employee” or “team” is often thrown around without consideration for legal implications. States that require reimbursements for employees refer to W-2 workers, people who are officially employed by your small business. Gig workers and freelancers are independent contractors and are not covered by these laws. That means if your team consists of contractors, you are not required to reimburse expenses. If you want to reimburse contractors anyway, make sure to add a list of expenses and spending limits to their contract.

Are some expenses not reimbursable? 

Some employee expenses that seem business-related are not reimbursable, including commutes — travel between home and primary place of work. The IRS counts commutes as a personal expense, so as a small business owner you need to make sure you’re not reimbursing them. 

‍TIP: MileIQ has a tool that automatically deducts a team-wide commute distance from drives.

Managing expense reimbursements for small businesses: Some best practices

Efficiency is key when it comes to managing employee reimbursements as a small business owner.

Create a clear reimbursement policy: Sitting down and writing a reimbursement expense policy may feel burdensome for a small business owner, but it can actually save you time and headaches down the road. Even a simple one-pager outlining spending limits, due dates for reports, and required documentation is enough to set expectations with employees.

Set spending limits: Speaking of expectations, spending limits are your friend because they help you set aside a maximum amount for reimbursements. Do some research on reimbursable costs (like accommodations), and use resources like the IRS standard mileage rate as your guide for mileage reimbursements. 

Consider stipends: Paying employees ahead of expected expenses is another common method for small businesses to keep their budget on track. If you offer a stipend for mileage, travel, or any other expense, it should be treated as taxable income.

Use technology to your advantage: Easy-to-use, affordable software is more accessible than ever for small businesses. That includes software for managing expenses and employee reimbursements. Some expenses, like mileage, require tracking and record-keeping — mileage tracking apps like MileIQ can help save the day by automating much of the tedious admin work. 

Expense reimbursements for small businesses can be manageable for teams of all sizes with a little organization and the right tools. 🛠️