Reimbursing Owners and Employees for Business Costs

Record the expense when it happens

The business expense belongs in the books even though the business did not pay at that moment. Enter an expense or bill with the proper category, and credit a liability such as reimbursements payable or due to owner. The profit and loss is correct now, and the amount owed is visible.

Attach the receipt and note who paid and why.

Pay it back with a clear trail

When the business repays, record a payment from the bank that clears the liability. Do not categorize the repayment as an expense again, or the cost is counted twice. A reimbursement is a settlement of what is owed.

Pay by a traceable method, such as a bank transfer, with a memo naming the expense period.

Owners versus employees

For owners, reimbursement of real business costs is usually straightforward, though it depends on the entity type and your tax preparer should confirm. Owners who simply keep paying personally and never claim it lose deductions in practice, so record them.

For employees, reimbursements follow a policy. Under an accountable plan, the employee substantiates expenses with receipts within a reasonable time and returns any excess, and the reimbursement is generally not treated as wages. Without those features it can be treated as taxable pay. The details are in IRS guidance, so confirm with a payroll professional.

Write the policy down

A one-page policy should say what is covered, the documents required, the deadline for submitting, who approves and how fast payment is made. Include mileage and home internet or phone stipends if applicable, with a note on how they are calculated.

Review it when staff change. A policy that everyone has signed settles most disputes in advance.

Watch for patterns

If an owner constantly fronts expenses, the business may need its own card or account. If an employee carries large balances, consider a company card with limits. Track outstanding reimbursements monthly and clear them promptly.

An old balance on the due-to-owner account may signal a loan rather than an expense. Document it as such, or settle it, so equity and liabilities tell the right story.

A short example

An employee buys supplies on a personal card and submits the receipt the next day. You enter the expense to supplies and credit reimbursements payable. At the end of the week you pay the employee by bank transfer, which clears the payable. Supplies appear once, the cash leaves once, and the liability returns to zero. If the employee had been paid through payroll as extra wages instead, it would be taxed differently, which is why the method and policy matter.

Common questions

This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.