How to Record Employee Expenses in Xero: Reimbursing Staff Fairly

Recording and reimbursing employee expenses fairly is critical, yet most companies struggle to do it efficiently.

Luckily, Xero makes it simple to track expenses and reimburse staff in a streamlined, standardized way.

In this post, you'll discover the step-by-step process for recording expenses in Xero - from submitting claims to approving reimbursements. You'll also learn policies and integrations to automate the workflow, ensuring staff get paid back promptly and your financials stay accurate.

Introduction to Reimbursing Staff in Xero

Reimbursing employees for work-related expenses in a timely and organized manner is critical for any business. Xero offers a user-friendly expense management system to streamline this process while ensuring fairness and transparency.

Understanding the Importance of Recording Employee Expenses

When employees make purchases for your business, whether it's office supplies, travel costs, or client meals, they should be fully reimbursed. Failing to do so hurts employee morale, makes recruiting more difficult, and may even violate labor laws. Recording these expenses properly is key for:

Reimbursing staff fully and quickly
Tracking expenses for accounting and tax purposes
Monitoring spending to control costs
Maintaining compliance and fairness

The Advantages of Using Xero for Expense Management

Xero takes the hassle out of expense reimbursement with features like:

Mobile app for easy photo capture of receipts
Automated approvals based on policy rules
Direct bank payments to employee bank accounts
Reporting for all expense activity and audits

This saves time for staff and finance teams while ensuring expenses are processed faster.

Exploring Key Features for Reimbursing Staff in Xero

With Xero, employees can:

Capture receipts on mobile devices
Enter expense details like amount, category, client/project codes
Submit expenses for approval with one click

Managers can:

Review all pending expenses
Approve or ask for supporting documents
View reporting on expenditure

Finance teams can:

Pay back employees directly or integrate with payroll
Stay on top of expense processing status
Configure approval rules and policies
Audit all expense transactions

Xero connects the entire process so that employees are reimbursed quickly while you maintain control over spending.

How do you record employee reimbursed expenses?

If you have an accountable plan, the business expenses you reimburse to an employee are not treated as wages and not taxed. You do not report this amount with the employee's wages on Form W-2; you should record the amount in box 12 of Form W-2, with code L.

To record reimbursed employee expenses in Xero:

Have the employee submit the receipt for the expense in Xero. They can upload the receipt directly or email it for you to add.
Review the expense receipt and confirm it is a valid business expense.
Approve the expense report in Xero so it moves to the next stage.
When you reimburse the employee, record it against their name in Xero as a bank payment.
Add the appropriate expense account it should be matched to, like Travel, Office Supplies, etc.
The payment to the employee offsets the expense account, keeping your reporting accurate.

This allows you to keep detailed records of expenses and reimbursements in Xero without needing to add tax. It also gives you oversight and approval control, ensuring compliance with your policies.

The key things to remember are:

Use an accountable plan so reimbursements are non-taxable
Have employees submit expense receipts in Xero
Review and approve the expenses before reimbursing
Record reimbursements against the employee's name
Match reimbursements to the appropriate expense accounts

Following this process correctly allows you to reimburse employees fairly while staying tax compliant.

How do you account for employee expense reimbursements?

When accounting for employee expense reimbursements in Xero, there are a few key steps to follow:

Decide if the expense is valid

First, review the receipt and ensure the expense is appropriate and billable to the client based on your policies. Some common valid expenses include:

Travel costs like flights, hotels, meals, transport
Purchases made for a client project or event
Office supplies

If the expense seems unreasonable or unrelated to work, consider denying the reimbursement request.

Have the employee submit the receipt

Require employees to submit receipts for all purchases made. This provides proof of payment and makes accounting easier. In Xero, employees can upload receipts directly when submitting expenses for approval.

Add the reimbursement line item

Log in to Xero and go to Accounts Payable > Expenses. Click "Add Expense" and select the employee. Enter the expense details, category, amount to reimburse and attach the receipt.

Route for approval

Submit the expense report in Xero to route through the appropriate approval workflow you've set up. Once approved, Xero will record the expense as awaiting payment.

Pay the employee

Once fully approved, you can pay employees directly through Xero's integrated payment processing. The software will automatically reconcile these transactions.

Following this streamlined process in Xero takes the hassle out of expense reimbursements so you can pay employees quickly and accurately.

What is the best way to reimburse employees for expenses?

You can reimburse your employees for their expenses through payroll. However, if employee expenses qualify for the accountable plan, you must ensure you don't tax them. Here are some tips:

Record Employee Expenses properly in Xero by having employees submit receipts and documentation. Add each expense line by line instead of in one lump sum.
Have employees Submit for Approval in Xero with notes on the business purpose. As the approver, review carefully to ensure the expenses qualify under IRS rules.
Once approved, Reimburse Staff Fairly by processing the reimbursement through payroll. Be sure to separate the reimbursements clearly from regular earnings on pay stubs.
For qualifying expenses, Pay Online directly to the employee's bank account without tax withholdings.

Keeping diligent records and processing reimbursements properly is key to staying compliant. With some care taken on the administrative side, you can simplify things for staff and make sure they are reimbursed fairly under accountable plan rules.

How do I enter employee expenses in Xero?

To set up employee expenses in Xero, follow these steps:

In the Business menu, select Expense claims.
Click Set up Expenses.
Click Turn on receipt analysis to allow Xero to automatically upload receipt data for you.
Select the accounts you want your employees to use when submitting expense claims, then click "Use [number] account for expense claims."

When an employee makes a purchase for your business, here is the process to enter and reimburse the expense:

The employee submits the receipt by taking a photo through the Xero mobile app or uploading the file.
You or the employee enters the expense details like amount, account, and tax.
The employee writes a description and selects the appropriate contacts and projects to tag.
You review the expense details and confirm the account coding is accurate.
Once reviewed, you approve the expense for payment directly in Xero.
When you're ready, pay the reimbursement to the employee's chosen bank account using Xero's integrated payment processing.

Following this streamlined process allows you to reimburse staff fairly while keeping accurate financial records of employee expenses. The automatic receipt capture and integrated payment processing through Xero saves your accounting team significant time.

How to Record Employee Expenses in Xero

This section provides step-by-step guidance for employees to add expense claims in Xero, including details on required fields, attaching receipts, and submitting for approval.

Starting a New Expense Claim in Xero

To start a new expense claim in Xero:

Log in to Xero and click "Expenses" in the left menu
Click the "New Expense Claim" button
Select your name from the drop-down menu
Enter the date or date range for the expense claim

This will open a blank expense claim ready for you to fill in the details.

Filling in Expense Details Accurately

For each expense item on your claim, you need to provide:

Date: The date the expense was incurred
Description: Brief description of the expense, e.g. "Taxi to client meeting"
Amount: The total amount spent, including any taxes
Tax Details: Mark if tax was included and the amount
Merchant: Who the expense was paid to

Provide as much detail as possible to ensure your claim can be processed smoothly.

How to Add Receipts to Your Expense Claim

To back up your expense claims, you will need to provide scanned or photographed receipts showing proof of payment.

To add a receipt in Xero:

When filling in an expense item, click "Attach Receipt"
Browse your files to upload the relevant receipt image or PDF
The receipt will now be attached to that expense item

Submit all applicable receipts to support your expense claim in Xero.

Submitting Claims for Approval in Xero

Once all expense details and receipts have been added, you can submit your claim for approval:

Review your full expense claim for accuracy
Click "Submit for Approval"
Confirm you agree to the declaration
Your claim will now be sent to the approver

You will receive a notification in Xero once your claim is approved and processed for payment.

Following these instructions will ensure you fill out accurate, compliant expense claims in Xero that can be quickly approved. Let your manager know if you have any questions.

Approving and Reimbursing Expenses in Xero

This section outlines the process for managers to review, approve, and reimburse employee expenses through Xero.

Reviewing and Submitting Expenses for Approval

Managers can access all pending expense claims from employees directly in the Xero dashboard. The status, date, merchant, amount, and category is visible for each request.

To review the details, managers simply click on the expense claim. Additional information like receipts, business purpose, and comments from the employee are shown. Managers should carefully validate that the merchant, date, amount, and category match the receipt and that the purchase was for legitimate business needs.

Once the manager finishes reviewing, they can either submit the expense for approval to be reimbursed or send it back to the employee for revision if any issues are found.

How to Approve Valid Expense Claims

To approve an expense claim in Xero:

Verify the merchant name, transaction date, amount paid, and expense category are accurate based on the receipt.
Confirm the purchase aligns with business needs and has an adequate explanation of purpose.
Check that the expense policy allows reimbursement for that category and amount.
If everything looks acceptable, click "Approve" and add any comments if needed.

Approving expenses in Xero is important to officially record it in the system and enable reimbursement payments.

Options for Reimbursing Employees in Xero

There are several options to reimburse employees for approved expenses in Xero:

Bank Transfer: Directly pay the employee by adding their bank details. Fast and simple reimbursement.
Payroll: Add reimbursement amount to next payroll cycle. Convenient but has a short delay.
Petty Cash: Use a petty cash account to pay employees. Easy for small amounts.
Check: Cut a physical check and mail it. More time consuming.

Managers should choose the best reimbursement method based on company policies, employee preferences, and amount owed.

How to Issue Payment Receipts After Reimbursement

Once a reimbursement is complete through any payment method, managers can export a receipt from Xero to send to the employee, confirming the exact amount reimbursed and method of payment.

Here are the steps to export a reimbursement receipt:

Navigate to approved expenses for that employee.
Check the box for any transactions to include.
Click "Print/Export" and select "Detailed Receipt".
Send the PDF receipt to the employee via email or print it.

Providing a formal receipt closes the loop so employees have record of reimbursements paid to them through Xero.

Streamlining the Reimbursement Process

Beyond the basics, this section will highlight other capabilities in Xero for tailoring and enhancing the expense management process.

Implementing Expense Policies in Xero

Xero allows businesses to customize expense policies to fit their needs. Administrators can set expenditure limits by employee level or expense type, require receipts for all or certain expenses, define eligible expense categories, and configure approval workflows based on things like employee seniority and expense amount.

Implementing clear expense policies in Xero ensures compliance, increases visibility into spending, and streamlines approvals. Key things businesses can specify include:

Expense type limits - Set per-transaction and monthly limits by expense category (e.g. $50 per meal, $100 monthly meals limit)
Required receipts - Mandate receipts for all or certain types of expenses
Eligible expenses - Outline allowable expenses like travel, materials, meals, and mileage
Approval rules - Define who can approve based on things like employee level and expense amount

Setting robust expense policies upfront saves time, prevents improper spending, and enables seamless reimbursements.

Integrating Expense Reimbursement with Payroll

Xero has deep integration between its expense management and payroll functions. When employees submit expenses for approval, the reimbursed amounts can feed directly into the next payroll run.

Key benefits include:

Automated reporting - No manual calculations needed for expense reimbursements on pay stubs
Easy tracking - Expenses appear alongside earnings for simplified reporting
Streamlined payments - Employees receive reimbursements directly via payroll

By integrating the systems, reimbursing employee expenses becomes a smooth, automated process with full visibility and simplified payments.

Utilizing Reports to Monitor Reimbursing Staff Expenses

To maintain control over spending, Xero offers several key expense reports:

Expense claims - Details all submitted expenses and their status
Spending summary - Tracks total spending by expense type
Category summary - Breaks down costs by customizable categories
Approval overview - Displays pending approvals by employee

Reviewing these reports allows for:

Monitoring budgets and overall spending
Analyzing trends and outliers over time
Optimizing policies and processes
Ensuring proper approval workflows

With robust reporting, businesses can closely track employee spend, identify issues areas, and continuously improve their expense reimbursement processes.

Conclusion: Ensuring Fair Reimbursement Practices

Recap of Recording and Reimbursing Employee Expenses

Accurately recording employee expenses in Xero provides transparency and ensures proper reimbursement.
Key steps include:
- Employees submit receipts and expense reports for approval
- Managers review and approve legitimate requests
- Expenses are reimbursed to employees fairly
Following this streamlined process builds trust between staff and leadership.

Next Steps to Optimize Expense Reimbursement

To maximize the impact of your expense reimbursement system:

Set clear guidelines on what expenses are reimbursable
Communicate policies to staff to align expectations
Automate approval workflows for efficiency
Pay approved expenses quickly to maintain positive cash flow

Establishing robust processes upfront ultimately saves time for finance teams and leads to fair, consistent reimbursement practices employees can rely on.