P&L Expenses Error: Reimbursements
- Jan 15
- 2 min read
The reimbursement expenses must be accurately categorized under the actual expenses incurred, as misclassification can lead to them being perceived as income. This misclassification may result in potential payroll tax complications.
CORRECT: Report reimbursement by type
1) Reimbursements for business expenses
These are company expenses incurred by an employee acting as an agent of the business. While the business reimburses/pays the employee, the expense must reflect the real operating cost on the P&L.
Post the reimbursement on the Profit & Loss to the same expense category the cost belongs to.
Josie reports her Mileage → Pay Josie → Post to Vehicle Expense
Steve has a hotel bill or airfare → Pay Steve → Post a Travel Expense
Ted closes a deal over dinner → Pay Ted → Post a Meals or Client Entertainment Expense.
Taylor picks up printer paper aat lunch → Pay Taylor → Post an Office Supplies Expense
2) Reimbursements that function like compensation
If the reimbursement is not tied to substantiated business expenses, the IRS treats it as taxable income to the employee and it should be reflected as compensation.
Examples:
Undocumented reimbursements.
Cash payments
Zelle transfers directly to employee without
If reimbursement is a compensation or wage expense, the reimbursement must be treated as payroll-related expense:
Wages or
Payroll Expense or
Other Compensation, subcontractor 1099
3) Owner or partner reimbursements
As long as it is a legitimate business expense post to the appropriate operating expense category, not Owner Draw or Distributions.
4) What not to do
Do not post reimbursements to a generic “Employee Reimbursement” expense account if it masks the real cost structure.
Do not run taxable reimbursements through Accounts Payable as if they were non-taxable expenses.
Do not classify true business expenses as payroll unless required by non-accountable plan rules.
5) Reimbursement Expenses best practice
Proper accounting flow:
Employee submits expense report with receipts.
Reimbursement is coded to the correct expense account.
Only non-accountable or undocumented payments flow through payroll.
This keeps:
Operating margins accurate
Tax treatment compliant
Financials credible for lenders, buyers, and auditors
*Recommendations
Educate both your internal or external bookkeeper, accountant, CPA on proper procedure. In my experience many CPAs pass through your internal bookkeeping without verifying accuracy. Essentially, they reconcile your work without correcting it.
For the current year, revisit reimbursemsnts, collect missing recipets, correct the category.
RENAME "Reimbursement Expense" in you accounting software to Misc Expenses: "DO NOT USE"! Unfortunately, once reconsiled last year, the expense category cannot be deleted.
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