# How do I process employee expense reimbursements through payroll, and what documentation should accompany them?

Applies to: United States · Updated 2026-09-26

Pay each approved, substantiated claim that meets IRS accountable-plan conditions through a non-taxable reimbursement pay item, never an earnings line, and test its tax and account settings before the first run. Keep receipts and approvals in the claim file, tied to the run by claim number and pay date. Before release, check each employee's reimbursement line against their approved claims. Post reimbursements to expense accounts, not wages; put any unreturned excess into taxable wages without paying it again.

## What changes when payroll pays the claim instead of a separate payment?

Three things change. The money travels in the paycheck: Intuit's "Reimburse your employee" article for Intuit QuickBooks Workforce, the QuickBooks Online Payroll plans, says the paycheck total will include the reimbursement amount, that the product doesn't support a "reimbursement only" paycheck, and that reimbursements are processed along with regular paychecks. In that product, a claim for an employee with no regular paycheck due is paid outside payroll. The payroll register, which AccountingTools' payroll register definition describes as a comprehensive report of all payments made to employees in a pay period, becomes the proof of payment. And because it holds amounts, not receipts, the evidence must be filed elsewhere and linked to the run.

The reimbursement follows net pay to the bank account on the employee's payroll record, so a diverted direct deposit takes it with the wages; the FBI's Internet Crime Complaint Center recommends heightened scrutiny of employee-initiated direct deposit changes. Before a run pays to new or changed bank details, confirm them with the employee through a channel other than the one the change came by.

The claim does not change: it needs the same substantiation and approval as a separate payment, and paying it outside payroll is a separate question. One condition applies directly: the IRS regulation 26 CFR 1.62-2, in the April 1, 2025 edition of the Code of Federal Regulations (check for later amendments), says that when wages and a reimbursement are combined in a single payment, the reimbursement must be identified by a separate payment or by specifically identifying its amount. A dedicated pay item on its own pay-stub line does that.

## What must be true for the amount to stay out of wages?

The regulation treats all amounts paid under an arrangement as paid under an accountable plan if it meets three requirements, except where an employee fails to return an excess in time (last section):

- **Business connection.** It pays advances, allowances or reimbursements only for business expenses allowable as deductions under part VI (section 161 and following), subchapter B, chapter 1 of the Code, that the employee paid or incurred in performing services as an employee of the employer.
- **Substantiation.** It requires each business expense to be substantiated to the employer within a reasonable period.
- **Return of excess.** It requires the employee to return any amount above the substantiated expenses within a reasonable period; per diem and mileage allowances have their own rules, a separate question.

Two conditions in the regulation make amounts nonaccountable:

- **Other bona fide expenses.** If the arrangement also pays other bona fide expenses related to the employer's business that are not deductible under part VI (its example is travel that is not away from home), the employer is treated as maintaining two arrangements, and everything paid under the second is treated as paid under a nonaccountable plan.
- **Payment regardless of expenses.** If the employer pays an amount whether or not the employee incurs (or is reasonably expected to incur) business expenses, everything paid under the arrangement is treated as paid under a nonaccountable plan.

Under the regulation, amounts paid under an arrangement meeting the three requirements, up to the substantiated expenses, are not wages and are not subject to withholding and payment of employment taxes; amounts paid under an arrangement that fails any of the three requirements, or under either condition above, are wages subject to withholding and employment taxes when paid; an unreturned excess under an arrangement that meets them follows the later timing in the last section. The exception: where part of a meal or entertainment reimbursement is nonaccountable under the two-arrangement rule solely because of section 274(n), that nondeductible part is neither gross income nor subject to withholding and employment taxes.

The claim must carry what the regulation requires: for travel, entertainment, use of a passenger automobile or other listed property and other expenses governed by section 274(d), information satisfying that section (for travel away from home, the amount, time, place and business purpose); for other expenses, enough to identify each expense's specific nature and conclude it is attributable to the business, not broad categories or vague terms. Designing the claim form is a separate question.

The regulation says a reasonable period depends on the facts and circumstances. Under its fixed date safe harbor, an advance made within 30 days of when an expense is paid or incurred, an expense substantiated within 60 days, and an amount returned within 120 days, after the expense is paid or incurred, are within a reasonable period. Under its periodic statement safe harbor, the employer sends statements at least quarterly of any amount paid above substantiated expenses, asking for substantiation or return, and what is substantiated or returned within 120 days of the statement is within a reasonable period. Neither safe harbor is available for any year in which the employer has a plan or practice of paying amounts above substantiated expenses to avoid reporting and withholding on them.

## How do you set up the reimbursement pay item before the first run?

Set up and test the item before any claim goes through it; an earnings line would compute withholding and employer taxes on money that is not compensation, in every run.

In Intuit QuickBooks Workforce, Intuit's "Reimburse your employee" article covers adding nontaxable reimbursements to paychecks: under the employee's Additional pay types, look for an existing reimbursement item or add a pay type with Reimbursement as its Type, and enter a default amount or leave it blank. Leave it blank, so nothing is paid unless a claim is keyed. The article marks accounting preferences optional; treat them as required, because Intuit's payroll accounting preferences article says QuickBooks automatically creates default accounts for liabilities and expenses. Confirm where the reimbursement type posts; that article sends Core, Premium or Elite users without accounting turned on to its export settings.

In QuickBooks Desktop Payroll, Intuit's "Reimburse your employee in QuickBooks Desktop Payroll" article has you create an Addition item, choose an expense account to track it (an asset account if the reimbursement is an advance), set the Tax Tracking type to None, make sure no taxes are selected, choose to calculate on Net Pay, and enter a Default Rate if applicable or leave it blank. Leave it blank.

Each item posts to one account. In QuickBooks Desktop Payroll, set up one item per expense account you reimburse, plus an advance item mapped to an employee advances asset account, and key each claim line to the matching item. In Intuit QuickBooks Workforce, confirm in payroll accounting preferences before the first run whether each reimbursement type can post to its own account, including an asset account for advances; if not, map the reimbursement type to one expense clearing account, reclassify each line from the run schedule to its expense account or to employee advances after each run, and confirm the clearing account returns to zero.

Before the first live run, check a preview paycheck (Intuit's Desktop article places the item in the Other Payroll Items area of the Preview Paycheck screen):

- Taxable wages, withholding, employer taxes and percentage-of-pay deductions do not change when the reimbursement is added; compare taxable wages, because some systems include it in a gross or total figure.
- Net pay rises by exactly the reimbursement.
- The reimbursement prints on its own line.

Before the first run, confirm each item's account in its settings (Intuit's articles: View/Edit Payroll Item List in QuickBooks Desktop Payroll, payroll accounting preferences in Intuit QuickBooks Workforce); after the first run, confirm the posting with the post-run check below.

With an outside provider, the item lives in a system you do not control. Ask in writing for a non-taxable reimbursement item, its tax settings, the ledger account it posts to, and a register showing reimbursements by employee in their own column. That register proves amount, employee and pay date only. Keep the run schedule, the signed pre-release check and a copy of the provider's register in your own pay-run records under the provider's run identifier and pay date. Send approved schedules only through the provider's authenticated portal, never by email.

## Where does the documentation sit when a pay run is the payment record?

For the amount to stay out of wages, the regulation says the arrangement must require each expense to be substantiated to the employer; a register holds no receipts, so the register never stands in for the claim. Keep this packet for every reimbursement paid through payroll:

| Item | Kept with | Reference that ties it |
|---|---|---|
| Claim with itemized expenses and receipts | Claim file | Claim number |
| Approval: approver, date, amount approved | Claim file | Claim number |
| Payment note: pay date, run identifier, amount paid | Claim file | Pay date and run identifier |
| Run schedule: each claim number, employee and amount, and the total | Pay-run records | Claim numbers; each employee's amount equals that employee's register line |
| Signed pre-release check of the preview register | Pay-run records | Run identifier |
| Final register showing the reimbursement item by employee | Pay-run records | Pay date and run identifier |
| Payroll journal and any reclassification, settlement or return entry | Ledger | Run identifier and claim numbers in the memo |

From the run, the schedule leads to every claim it paid; from the claim, the payment note leads to the run. Record retention is a separate question.

## Who approves a claim, and what is checked before the run pays it?

Approval must be complete before an amount is keyed, because once in a run it is paid on the pay date. The approver checks each claim against the conditions above and approves a specific amount; where deductibility is unclear, settle it with your adviser first. A claim for a bona fide business expense not deductible under part VI is never keyed to the reimbursement item: the regulation treats it as paid under a nonaccountable plan, so, apart from the section 274(n) exception above, it is wages subject to withholding and employment taxes when paid. Settle with your adviser how to pay it before it enters a run. AccountingTools' payroll register definition says that as a control a manager usually reviews and formally approves the final register before payments are issued. That approves the run, not the claims in it, so a processed payroll never shows a claim was approved.

Hold the gate with these rules:

- The approver is never the claimant, and a claim by an owner, approver or bookkeeper goes to another approver, such as a co-owner or the outside accountant.
- Every reimbursement is approved whatever its size, in every run.
- Payroll keys amounts only from the approved schedule, never from the claimant or an emailed request.
- Before release, someone other than the person who keyed the run compares each employee's reimbursement line on the preview register with that employee's approved claims, claim by claim, then the total; an amount on the wrong employee, including the preparer's own paycheck, or a line with no approved claim, comes out before release.
- Everyone who approves claims, changes payroll records or releases a run uses their own login with a second sign-in factor; the FBI's Internet Crime Complaint Center recommends two-factor authentication for access to sensitive systems.

If one person approves, keys and releases, the line-by-line check still catches keying slips, but nothing checks that person. Then have the outside accountant or an owner who does not key compare reimbursement lines with the claim files after each run, ask employees to check their pay-stub reimbursement line against their claim, and have that person's own claims approved by someone else.

## How does the payroll cut-off decide which run pays a claim?

A claim substantiated and approved before the cut-off goes in that run. One approved after the cut-off waits for the claimant's next run; never key an unapproved or unsubstantiated amount to catch a run. Set the claim deadline so claims are substantiated well inside the reasonable period; a late pay date does not extend it.

An amount paid before substantiation is an advance. The regulation treats an advance arrangement as meeting the return requirement only if the advance is reasonably calculated not to exceed the anticipated expenses, is made within a reasonable period of the day they are paid or incurred, and any excess over substantiated expenses must be returned within a reasonable period after the advance is received. Pay it through the advance item; Intuit's Desktop article says to choose an asset account for an advance. Settlement and return are separate entries (last section).

On accrual books the expense belongs to the period it was incurred; OpenStax's section on adjusting entries defines accrued expenses as expenses incurred in a period but not yet recorded, with no money paid. At month-end, accrue approved claims awaiting a later run (debit the expense account, credit employee reimbursements payable) and reverse the accrual on the first day of the next period; the run then posts the reimbursement to its item's account as usual. Accruing approved claims does not capture expenses incurred but not yet claimed.

With more than one pay frequency, each claim goes in the claimant's own next run and on that run's schedule, and the expense keeps the date it was incurred; a monthly-paid employee may wait weeks.

## How should the payroll posting separate the reimbursement from wage expense?

OpenStax's section on recording payroll recognizes gross pay, the amount earned before any reductions, in Salaries Expense and employer payroll taxes in Employer Payroll Tax Expense, with each deduction liability in its own account. The reimbursement belongs in none of these; it goes to the claim's expense account or the clearing account.

Example: a biweekly run has gross wages of 4,000.00, employee withholdings of 612.00, employer payroll taxes of 306.00 and one approved travel claim of 245.00 paid through a travel reimbursement item.

| Account | Debit | Credit |
|---|---|---|
| Wages expense | 4,000.00 | |
| Employer payroll tax expense | 306.00 | |
| Travel expense | 245.00 | |
| Employee withholdings payable | | 612.00 |
| Employer payroll taxes payable | | 306.00 |
| Cash (net pay including the reimbursement) | | 3,633.00 |
| Total | 4,551.00 | 4,551.00 |

Net pay is 4,000.00 less 612.00 plus 245.00, or 3,633.00. Payroll cost is 4,306.00 and the 245.00 reaches travel expense; posted with wages, wages expense would show 4,245.00 and travel expense would miss the claim, and neither the pay stub nor the bank statement would show it.

Where payroll posts to the ledger itself, never enter the run again by hand; make only the reclassifying, settlement or return entries described here. After each run, confirm that wage expense equals the register's gross wages excluding the reimbursement item (subtract it first if your register includes it in gross or total pay) and that the reimbursement accounts received exactly the item's total. If your payroll journal arrives summarized with the reimbursement inside wages, reclassify each run line by line from the run schedule: debit each claim's expense account for reimbursement lines and employee advances for advance-item lines, credit the account the journal used, and confirm the total equals the register's reimbursement and advance items.

## How do you reconcile reimbursement pay items to approved claims?

After every run, someone who did not key it compares the register's reimbursement lines by employee with the run schedule and the approval records:

| What you find | What it indicates and what to do |
|---|---|
| A reimbursement with no approved claim | Unapproved or miskeyed; treat it as unsubstantiated and use the correction steps |
| One claim paid twice | A duplicate; the second payment is an excess your arrangement requires the employee to return |
| A claim paid to someone other than the claimant | The recipient holds an excess to correct, and the claimant is still unpaid |
| An amount above the approved amount | The difference is an excess your arrangement requires the employee to return |
| An approved claim with no register line | A missed payment; schedule it in the claimant's next run |

Each month, list open advances by age against the reasonable period, so none rides from run to run unsettled. Also list approved claims with no payment note whose claimant has since been paid, and amounts paid below the approved amount; schedule each missed claim or shortfall in the claimant's next run.

## What if an amount paid through payroll turns out unsubstantiated or too large?

A payment that has gone through payroll cannot simply be voided. Work through these steps:

1. Ask the employee to substantiate the difference or return it within the reasonable period, and note the request on the claim file.
2. If the employee substantiates it, file and approve the receipts and, for an advance, record the settlement. If the employee returns it, debit bank and credit the account the payment was charged to, note the return on the claim file, and leave the pay run unchanged. Before recovering an excess by deduction from pay, confirm with your provider or adviser that it is permitted.
3. If the reasonable period ends with neither, the regulation keeps only the amounts up to the substantiated expenses under the accountable plan; the excess is treated as paid under a nonaccountable plan and is subject to withholding and payment of employment taxes no later than the first payroll period following the end of the reasonable period, except that per diem and mileage allowances follow their own rule. The regulation also lets the employer treat any amount not substantiated or returned within the safe-harbor periods as not substantiated or returned within a reasonable period.
4. In that payroll period, add the excess to the employee's taxable wages without paying it again, as described below.
5. After the run, check its posting: the excess appears in wage expense once and leaves the expense or advance account once, and employer taxes are posted once, by hand only if your payroll does not post them.
6. Note on the claim file the amount converted and the run that carried it.

### How do you add the excess to wages without paying it again?

The employee already holds the money, so an ordinary earnings item would pay it a second time, less withholding. Intuit's Desktop reimbursement article sends taxable reimbursements to its "Add fringe benefits to paychecks" article, which for QuickBooks Desktop Payroll offers a custom Company Contribution item, which adds the value to be taxed but does not increase net pay, or an Addition item, which adds it to be taxed and increases net pay. Use the Company Contribution, with the Tax Tracking Type set to Fringe Benefits. That article has you select an Expense account and a Liability account for the item; choosing wages expense and a payroll clearing account gives the posting in the example below.

For Intuit QuickBooks Workforce, Intuit's fringe benefit article says "We don’t support other fringe benefits in QuickBooks Online Payroll," so get Intuit's written route for adding an unreturned excess to wages without paying it when you set up the reimbursement item, not at the deadline; with any other system or provider, get its written instructions. On the preview, confirm that taxable wages rose by the excess and net pay did not. If that run's pay cannot cover the withholding, settle how with your provider before the run.

Example: a 300.00 travel advance paid through the advance item, 260.00 later substantiated and approved, and 40.00 neither returned nor substantiated.

| Entry | Account | Debit | Credit |
|---|---|---|---|
| 1. Advance paid in the run (payroll posts) | Employee advances | 300.00 | |
| | Cash (in net pay) | | 300.00 |
| 2. Settlement of the approved claim (by hand) | Travel expense | 260.00 | |
| | Employee advances | | 260.00 |
| 3. Excess added to taxable wages (payroll posts) | Wages expense | 40.00 | |
| | Payroll clearing | | 40.00 |
| 4. Clearing the conversion (by hand) | Payroll clearing | 40.00 | |
| | Employee advances | | 40.00 |
| Total | | 640.00 | 640.00 |

Employee advances and payroll clearing both end at zero, and the run in entry 3 posts its own withholding and employer taxes; do not also move the excess into wage expense by hand. Had the employee returned the 40.00, one entry would replace entries 3 and 4: debit bank, credit employee advances.

In Example 9 of the regulation, an employer using the periodic statement method treated a $500 advance as wages after the employee let the statement's 120-day period pass; when the employee substantiated later, the employer had "properly reported and withheld and paid employment taxes on the $500 and no adjustments may be made." How a converted amount appears on Form W-2 is a separate question.

## Sources

1. Internal Revenue Service, Department of the Treasury (Code of Federal Regulations, U.S. Government Publishing Office GovInfo) — *26 CFR 1.62-2, Reimbursements and other expense allowance arrangements*, April 1, 2025 edition (CFR annual edition dated 2025-04-01). https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol2/xml/CFR-2025-title26-vol2-sec1-62-2.xml
2. Intuit Inc. — *Reimburse your employee*, updated 8/5/2026 (Intuit QuickBooks Workforce; QuickBooks Online Payroll Core, Premium, Elite, Advanced). https://quickbooks.intuit.com/learn-support/en-us/help-article/regular-payroll/create-reimbursement-pay-type-online-payroll/L1vnXgP6H_US_en_US
3. Intuit Inc. — *Reimburse your employee in QuickBooks Desktop Payroll*, updated 8/4/2026 (QuickBooks Desktop Payroll Assisted, Basic, Enhanced). https://quickbooks.intuit.com/learn-support/en-us/help-article/manage-expenses/reimburse-employee-inquickbooks-desktop-payroll/L805FBJPu_US_en_US
4. Intuit Inc. — *Change your accounting preferences in payroll in QuickBooks Online Payroll*, updated 9/11/2026. https://quickbooks.intuit.com/learn-support/en-us/help-article/payroll-processes/set-payroll-account-preferences/L9oiYu7wu_US_en_US
5. Intuit Inc. — *Add fringe benefits to paychecks*, updated 8/2/2026 (QuickBooks Online Payroll Core, Premium, Elite; QuickBooks Desktop Payroll Assisted, Basic, Enhanced). https://quickbooks.intuit.com/learn-support/en-us/help-article/worker-benefits/add-fringe-benefits-pay-checks/L0hV3mydJ_US_en_US
6. AccountingTools, Inc. (Steven Bragg) — *Payroll register definition*, September 06, 2026. https://www.accountingtools.com/articles/payroll-register
7. OpenStax, Rice University — *Principles of Accounting, Volume 1: Financial Accounting, 12.5 Record Transactions Incurred in Preparing Payroll*, Apr 11, 2019. https://openstax.org/books/principles-financial-accounting/pages/12-5-record-transactions-incurred-in-preparing-payroll
8. OpenStax, Rice University — *Principles of Accounting, Volume 1: Financial Accounting, 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries*, Apr 11, 2019. https://openstax.org/books/principles-financial-accounting/pages/4-2-discuss-the-adjustment-process-and-illustrate-common-types-of-adjusting-entries
9. Federal Bureau of Investigation, Internet Crime Complaint Center — *Cybercriminals Utilize Social Engineering Techniques To Obtain Employee Credentials To Conduct Payroll Diversion (Alert Number I-091818-PSA)*, September 18, 2018. https://www.ic3.gov/PSA/2018/PSA180918

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