Without a clear, well-drafted compliant expense reimbursement policy, your startup risks legal exposure, financial penalties, and frustrated employees.

As remote and hybrid work become the norm, those risks increase: out-of-pocket costs for phone, internet, travel, and home office supplies aren’t trivial for many, and failing to reimburse them properly can lead to lawsuits or regulatory enforcement (or both).

In California, for example, under Labor Code Section 2802, employers are legally required to indemnify employees for “necessary expenditures or losses” incurred in job duties, and failure to do so can result in claims for full reimbursement, interest, and attorney’s fees.

Illinois has a similar requirement under its amended Wage Payment and Collection Act, which mandates reimbursement for reasonable, necessary expenditures or losses related to an employee’s scope of employment.

New York doesn’t have as broad a statute, but employers there must honor any agreed expense or wage supplement policies, or risk liability; New York law also criminalizes certain failures depending on the circumstances.

What CA, IL, and NY startup teams need to know is: what expenses are considered “necessary,” how timely you must reimburse, whether a written policy is required, and what documentation and record-keeping you’ll need.

This guide will help seed-to-Series B founders, finance leads, and HR/operations leaders who are scaling fast and can’t afford the risk of poor reimbursement practices.

What Is an Expense Reimbursement Policy?

An expense reimbursement policy is a formal document or plan that defines how a company compensates employees for out-of-pocket business expenses.

It establishes what kinds of costs are reimbursable (e.g., travel, meals, supplies, remote work costs), how employees must report them (receipts, logs, invoices), the deadlines for submission and approval workflows, and what expenses are not allowed.

A clear expense reimbursement policy is important for a startup scaling from Seed to Series B. Here’s why:

• As the team grows and more employees incur expenses, informal or ad hoc reimbursement processes become issues. A proper policy standardizes submissions, speeds up approvals, and helps finance teams budget more accurately.
• Without defined rules, startups are exposed to internal misuse (expense fraud) and external risks (tax audit, loss of deductions, misclassification). A strong policy ensures every expense is legit, properly documented, and aligned with financial controls.
• When cash is tight, which is common for early-stage startups, being precise about what is reimbursed and when helps avoid unexpected outlays and budget overruns.

Components of a Compliant Expense Reimbursement Policy

A clear, enforceable expense reimbursement policy protects your startup from tax mistakes, state wage claims, and unhappy employees. Here are the main components every policy should include:

Covered expenses (what you’ll pay for)

List categories explicitly (e.g., client meals, airfare, ground transportation, lodging, home-office stipends, hardware and software tools, and mileage). Specify limits or per-diem rules for each category and whether vendor invoices can be paid directly instead of reimbursing employees.

Documentation requirements

Require original receipts (or clear photo uploads), business purpose, date, amount, and attendee names for meals.

For mileage, require odometer logs or approved mileage-rate calculations. State whether digital submissions (apps, PDFs) are acceptable and how long to retain records for audits (usually several years).

Submission timelines

Adopt timelines that meet IRS accountable-plan guidance. Substantiate expenses within 60 days of the expense and return excess advance payments promptly (often within 120 days). Define consequences for late submissions (taxable income treatment or denial).

Approval workflow (manager to finance)

Document a simple approval chain: preapproval rules (for large or out-of-policy spends), manager verification of business purpose, then finance review for receipts and payment. Automate routing and escalation to reduce manual bottlenecks and ensure audit trails.

Payment methods and timelines

State whether reimbursements are paid via payroll, corporate card, or accounts payable and set a firm payout timeline (e.g., within 7 to 14 business days after approval).

Clarify tax treatment if reimbursements are processed through payroll (possible withholding if not substantiated).

Non-reimbursable expenses

List non-reimbursable items (personal travel upgrades, alcohol beyond business meals, fines, luxury lodging, and family expenses). Explain exceptions (preapproved client entertainment) and the process for appeals.

State-by-State Compliance: California, Illinois, New York

California Expense Reimbursement Laws

California Labor Code § 2802 requires employers to indemnify employees for “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties or obedience to the directions of the employer.”

This includes hard costs (e.g., tools, equipment) and recurring costs (e.g., phone, internet) when those are “necessary” for performing the job.

Examples:

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• Cell Phones: In Cochran v. Schwan’s Home Service, Inc. (2014), the California Court of Appeal held that if an employee is required to use a personal cell phone for work, the employer must reimburse a reasonable percentage of the personal plan, even if the plan is unlimited and the employee incurs no additional costs.
• Internet/ Home Utilities: Remote work implies increased costs for internet, increased utility usage, etc. Courts have interpreted § 2802 to cover “reasonable” portions of these costs if needed to do the work and “necessary expenditures,” especially when employer-required.
• Mileage/ Travel: Any work-related travel (other than commuting) must be reimbursed; personal vehicle use, business travel, mileage; if incurred as part of job duties, falls under “necessary expenditures.”

Startup Best Practices in California

• Define “necessary” and “reasonable” clearly: Specify which categories are covered (e.g., cell phone, internet, home utilities) and what metric is used for “reasonable portion” so expectations are set.
• Written policy and communication: Include a written reimbursement policy that explains what costs qualify, how to submit, deadlines, and what documentation is needed (receipts, usage logs).
• Pre-approval workflows: Require manager or finance authorization for recurring expenses or reimbursements above a set threshold.
• Stipends vs itemized reimbursement: For recurring small costs (e.g., home internet), using a fixed stipend or monthly allowance may simplify and reduce disputes, provided the amount is defensible.
• Track expenditures/usage: Though employees need not prove exact incremental cost in all cases (per Cochran), having usage records or estimates helps defensibility.
• Review and update policy annually (or when state decisions update thresholds), especially given recent case law and increased remote/hybrid models.

Illinois Expense Reimbursement Laws

Amended effective January 1, 2019, Section 9.5 of the IWPCA requires that employers reimburse employees for “all necessary expenses or losses incurred by the employee within the employee’s scope of employment and directly related to services performed for the employer.”

“Necessary expenditures” are further defined to include those required in performing job duties and which provide primary benefit to the employer.

Examples include home internet, cell phone data, routers, and other equipment used at home; but expenses due to negligence, wear and tear, or not complying with policy might not be reimbursable.

For remote or hybrid workers, if the job requires the use of personal devices or the internet, those costs may be reimbursable. Illinois has clarified via regulation that expenses like cell phone data and internet must meet the scope and “primary benefit” tests.

Employers may require that expense requests be submitted within a deadline (30 days after incurred) with the necessary documentation.

Startup Best Practices in Illinois

• Implement a clear reimbursement policy: List eligible categories, define “primary benefit,” and set thresholds.
• Set submission timelines: 30 days is standard under IWPCA; enforce this to avoid disputes.
• Use estimates or caps for recurring costs: Set monthly allowances for internet/phone rather than elongated ad hoc claims.
• Ensure consistent enforcement across roles and locations to avoid discrimination or claims.
• Record keeping: Keep reimbursement requests, approvals, denials, and documentation for at least 3 years.

New York Expense Reimbursement Laws

Unlike CA or IL, New York has Labor Law § 198-C (“Benefits or Wage Supplements”), which includes reimbursement for expenses if there is an agreement between employer and employee (policy, contract, or other written commitment).

The New York State Department of Labor (NYSDOL) and courts treat promises or written policies as binding. If you promise to reimburse employees via job offer, handbook, or policy, then failure to do so can lead to penalties under § 198-C.

The Fair Labor Standards Act does not mandate reimbursement. However, it prohibits employers from deducting so much in expenses that an employee’s hourly wage falls below minimum wage, i.e., the “kickback” rule.

Under that rule, if your policies or practices of non-reimbursement make the employee earn less than NY’s minimum wage or federal minimum wage, you’re on risky legal ground.

Best Practices for New York Compliance

• Document any reimbursement obligations: If you intend to reimburse remote-work expenses (internet, phone, equipment), include them expressly in an employment contract, offer letter, or employee handbook/policy.
• Define requirements for submission: Receipts, logs, deadlines for claims. Even if the obligation is promised in policy, without process, disputes arise.
• Ensure pay and expense obligations do not push wage below minimum wage: Monitor any recurring deductions or costs employees incur, especially for hourly / non-exempt roles.
• Stay aware of changes in NY wage laws: For example, adjustments in thresholds for exempt vs non-exempt employees, wage supplement definitions under law amendments.

How to Create and Implement a Startup-Friendly Expense Reimbursement Policy

When you’re building or refining your expense reimbursement policy, you want something that’s legally compliant, operationally efficient, and fair to the company and your employees. Here’s a step-by-step process that will help you achieve these:

Assess Typical Startup Expenses

List all expense types your company currently or potentially incurs. These often include travel, meals, lodging, remote work equipment (internet, monitors, and office supplies), software subscriptions, phone bills, mileage, and client entertainment.

Review past expense reports to identify recurring and high-volume categories. This gives you data to set realistic reimbursement limits and budget forecasts.

Align with IRS and State-Specific Laws

To ensure tax efficiency and legal safety, your policy should be structured as an IRS accountable plan. That means setting rules so that reimbursements are not treated as income: business connection, adequate substantiation (time, amount, business purpose), and returning excess advances.

Also, incorporate state requirements. For example, California Labor Code § 2802 mandates “reasonable and necessary” expenses be reimbursed (even for remote/hybrid workers).

Illinois’s Wage Payment and Collection Act also requires reimbursement of “necessary expenses or losses incurred by the employee in the discharge of his or her duties.”

Define Categories Clearly

Be explicit about what is reimbursable versus what isn’t. For example: travel (airfare, lodging), meals, phone/internet (for remote work), home office supplies, and mileage.

Also, list non-reimbursable items (luxury upgrades, personal entertainment unless preapproved, etc.). If you set spending caps (e.g., per diem or per mile), clearly define them. Using real examples helps reduce ambiguity.

Add Approval Workflows

Establish who approves each type of expense and up to what dollar amount. For example, expenses below $200 might require manager approval; larger ones might pass through finance or the C-suite.

Include submission deadlines (30-60 days after expense) and rules about what happens if deadlines are missed. This helps with cash flow and ensures consistent policy enforcement.

Implement Digital Submission Tools

Use expense management software or digital tools to automate receipt capture, track submission status, enforce policy rules (e.g., limits, required fields), and generate audit trails.

Automation reduces human error, speeds reimbursements, and makes it easier to stay compliant with IRS and state laws. Tools also help your finance team see patterns and control spending.

Automating Expense Reimbursement Compliance for Startups

Tracking receipts, chasing approvals via email or Slack, and manually validating mileage all consume time, invite errors, and often lead to compliance gaps. A single expense report can cost up to 20 minutes to process and up to $58 in labor when done manually.

Here’s why automation is important:

Policy Enforcement

Automated systems allow you to encode reimbursement rules directly into workflows. Expenses that violate policy thresholds, lack documentation, or originate from non-approved categories get flagged or blocked immediately, not weeks later during reconciliation.

This reduces non-compliant claims and protects your company under IRS and state laws. Upfront policy checks cut down review time and ensure consistency.

Audit Trails for IRS/State Compliance

One of the biggest compliance advantages of automation is creating a detailed audit trail: time-stamped receipts, approvers’ identities, adjustments, mileage logs, and digital submission records.

Tools like Airbase record receipts as they happen and preserve these records retrievably, thus helping you meet state laws (like California’s Labor Code or Illinois’ IWPCA) and IRS accountable plan requirements.

Faster Employee Payouts

Digital submissions, auto-matching receipts, and mobile apps increase approval rates. Employees don’t wait weeks for reimbursements, thus boosting morale and reducing out-of-pocket burden.

When policies are enforced automatically, there’s less back-and-forth, fewer missing receipts, and fewer blocked claims that require manual rework.

Note: To get the full compliance and efficiency benefits, automation must integrate with your payroll, HRIS, or accounting/ERP systems.

When reimbursements and expense data feed directly into your payroll or GL (general ledger), there’s less manual reconciliation, fewer mismatches, and all relevant payments are included in tax and state-mandated wage/benefit calculations.

This demonstrates compliant reimbursements under laws requiring employers to “indemnify” employees for necessary business expenses (e.g., CA Labor Code §2802).

Automate Expense Reimbursement to Keep Your Startup Compliant and Scalable

For Seed-to-Series B startups, drafting a compliant expense reimbursement policy is only half the battle; you must also ensure it is consistently followed. This is where most teams fail. Manual processes create delays, lost receipts, and compliance gaps that can escalate into IRS issues or state-level claims.

Chore helps founders, finance leads, and HR/ops leaders build reimbursement workflows that automatically flag out-of-policy expenses, capture receipts in real time, and integrate with payroll and accounting.

Instead of chasing down managers for approvals or worrying about whether reimbursements meet IRS accountable plan standards, startups get an efficient process that scales as they grow.

With automated compliance, your startup can:

• Guarantee reimbursements are timely and IRS/state-compliant.
• Maintain audit-ready records to avoid penalties.
• Support employee trust with faster payouts and transparent rules.
• Control cash flow with real-time visibility into spend.

Ready to protect your startup from compliance risks while saving hours of admin work? Schedule a free consultation today to discover how Chore can help you simplify expense reimbursements.

FAQs

What qualifies as a reimbursable business expense for startups?

A reimbursable business expense is any ordinary and necessary cost an employee incurs while working on behalf of a startup. Under IRS accountable plan rules, the expense must be business-related, documented, and submitted on time to avoid being treated as taxable income.

The following are common reimbursable expenses for startups:

• Travel/transportation: Airfare, lodging, mileage, parking, ride-hailing.
• Meals/entertainment: Client meals or team meals tied to business.
• Office/remote work costs: Internet, phone, office supplies, coworking fees.
• Professional expenses: Training, certifications, conferences, memberships.
• Miscellaneous: Shipping, recruiting-related costs, approved client outreach.

What happens if a startup doesn’t reimburse expenses?

If a startup doesn’t reimburse employee expenses, it risks legal penalties (especially in states like CA and IL where reimbursement is required by law), financial costs (lawsuits, back pay, interest, attorney fees), and employee dissatisfaction (leading to turnover). Non-reimbursed expenses can also be treated as taxable wages under IRS rules, creating payroll tax liabilities.

Do reimbursements count as taxable income?

Reimbursements under an IRS “accountable plan” count as non-taxable income. Reimbursements under a “non-accountable plan” are taxable as wages. States like CA and IL require reimbursements, but federal tax rules still determine whether they’re taxable.

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