Employees, business owners and consultants often incur extra expenses performing their work or services for their clients. In most cases, it is a perfectly reasonable expectation that organizations reimburse their employees for these expenses. Consultants and freelancers can usually add them to their invoices, provided they meet the guidelines that have been set out.
However, just because you can have an expense reimbursed or added to your invoice, it doesn’t always mean that you should. Expense policies are essential to keep everyone on the same page about what can and should be charged, and that invoices don’t include unpleasant surprises.
Save time in approvals when guidelines are defined and communicated clearly.
So, what costs can you include, and which ones should be left out? Let’s clear up any confusion by taking a more in-depth look at reimbursable expenses.
In this article you’ll learn:
Employees usually have it a lot easier than freelancers because most companies have a comprehensive reimbursable expenses policy they can refer to for specifics.
Consultants and freelancers don’t have this luxury and often choose not to include a reimbursement fee on the invoice because they aren’t clear on what they can and can’t charge.
Before we get started defining specific categories for reimbursable expenses, it’s a good idea to understand what constitutes a valid business expense that you could reasonably expect to pass on to a client.
The expense must have a clear business purpose and relate to a service you need to do your job. This definition is expansive and could cover anything from printing services to purchasing an airline ticket. The local legislation will also have a lot to say about what constitutes a valid business expense, so you make sure you understand the legal requirements for your country.
There will need to be some proof provided as evidence of the expense. Suitable forms of evidence include receipts, invoices, or some other document related to the cost. Also, keep in mind that proof of the payment is also a legal requirement for tax purposes.
The details required for expenses will be different for each country, but most will expect that you display the total amount, including tax, a description of the fee, and the place of purchase.
Employees will be required to report the expense as soon as possible, with leftover funds returned to the employer within a suitable time frame.
Any reimbursable expenses which fit the above criteria will likely be allowable tax deductions.
Now that you understand more about what a reimbursable expense is and your legal requirements regarding them, it’s time to consider the various categories of costs for which you can seek reimbursement. Many will be incidentals, such as meals and communication, but others will be significant expenses that can add considerable amounts to an invoice.
When everyone involved knows what the next step is, overall efficiency increases.
A reimbursable expense is not a license to go out and spend big. The usual procedure is to keep the costs reasonable by agreeing to an upper limit before work commences.
The vast majority of reimbursable expenses will fall into one of the following categories:
Occasionally, you may be required to travel vast distances to conduct business. If you are jumping on an airplane to travel internationally, then your costs will be high.
Further to the costs of travel will be the need to pay for a great many other things because of it, and most of them should be viewed as essential but reimbursable expenses.
Getting to the airport will usually involve a taxi or public transport ride, but it is just the start of your journey and the beginning of a long list of accrued expenses. The airfare will be a sizable percentage of your costs, and then there are the food and drink purchases you may need to make in-flight.
Once you arrive at your destination, you will have more transport fees as you make your way to your lodgings, which can be another sizable expense depending on the length of your stay.
Visas may be required if the trip takes you out of the country and traveling to international destinations will usually require vaccinations. Neither of these costs are insignificant and should be considered when costing a project. They are also mandatory requirements for travelers, so you cannot toss them aside as non-essential expenses.
Travel expenses are a regular part of doing business for many organizations, but there are also lesser known, sometimes overlooked expenses that are worth including in the discussion.
A lot of employees wouldn’t think of their internet costs as valid reimbursable expenses. After all, most would consider internet access a staple cost of doing business. However, if you are on the road and need to pay extra for mobile data, or stay at a hotel that charges for Wi-Fi, internet access is a necessary expense.
When a project requires a team, and the members are remotely separated, there needs to be infrastructure put in place to keep the lines of communication open and everyone synchronized and up to date about goals and deadlines. These items will all incur extra costs.
Employees will need to be careful about seeking reimbursement for meals and entertainment, as the client’s presence will usually be required to make it a legitimate reimbursable expense.
Of course, expenses for meals incurred as part of travel will automatically qualify as a reimbursable expense and won’t always require the client be present.
The list of office supplies and materials is expansive and covers everything from paper, printer ink, and coffee, to a new keyboard or courier costs.
For example, your client may have gotten tied up at the last minute and requires a courier to deliver the finished product. You now must pay transport costs, so it’s reasonable to expect that you will add this fee to the invoice as a reimbursable expense.
A lot of smaller expenses can add up to significant amounts, so it is critical they are accurately tracked.
It can be tricky knowing what qualifies as a reimbursable expense and what doesn’t. Ask yourself some questions about the fee to determine if it qualifies, including:
If all your answers to the above are yes, then it’s likely you can claim the expense as reimbursable. Don’t write-off expenses you are unsure about before talking to an accountant, or a professional with experience in business finance.
There are many different types of reimbursables. Spend management software with automated expense reports can do a lot to help keep them under control, but how do you come up with reimbursable expenses to which everyone can agree?
Here are five tips to consider:
Clients will not appreciate a surprise inclusion on their invoice if they did not receive fair warning that they would be charged. For this reason, it’s always a good idea to set precedents before the start of a project, so everyone gets on the same page about billables.
Include an expense clause in the contract, and check with your clients and customers about whether they have their own policy regarding billable expenses.
Look at the expense from the viewpoint of your client. Would you find it to be reasonable? If not, then your client will not find it reasonable, either. Treat your client’s fairly when adding reimbursable expenses to their invoice, and you will keep them loyal to your organization.
Multiple expenses lumped into categories should be itemized out on the invoice to make everything clear to the client. A single category with a large sum next to it will probably get them asking questions. Spell out all expenses, so the client knows what they have received precisely, and for how much.
It’s also a good idea to ensure you can provide corroborating evidence about each expense should they ask. Spend management software with an automated expense report feature makes this a quick and painless task. The report will also contain essential information for tax purposes, which your client will appreciate.
Reimbursable expenses won’t all come with the same tax implications. Keep in mind that even though an expense might not reap a full tax refund or deduction, your company does not necessarily have to bear the full brunt of the cost.
Many companies like to add a margin when invoicing their expenses. In these cases, you will have to register the expense as the cost of goods sold (COGS) or claim them yourself.
The above is general information only, and it is always in your best interest to seek professional advice when it comes to maintaining accurate tax records. You do not want to get on the wrong side of the tax office or your clients when it comes to billable expenses.
Don’t wait too long before sending out your bill for reimbursable expenses. Deliver the invoice promptly so your clients will be expecting it when it arrives.
Another alternative is to bill for expenses as soon as they occur, as this could make it easier to settle disagreements as they arrive rather than waiting until the final invoice. Plus, the sooner you invoice your clients, the sooner you will get your money in the bank.
Businesses will always be incurring expenses on their client’s behalf; it’s the cost of doing business after all. However, you must bill your clients accurately and keep detailed records of every transaction for tax purposes.
You can do all these things easily by using fully featured spend management software that includes prepaid credit cards, and automated expense reports.
A journey of a thousand miles begins with a single step.Laozi
Tracking every reimbursable expense, regardless of amount or type, is critical for a couple of reasons. Firstly, should employers or clients ask for a record, you will be easily able to provide one. Secondly, not tracking your reimbursable expenses means you could be missing out on extra profit, or a much smaller tax return.
Spend management software has the features you need to track all your reimbursable expenses accurately. You can easily set up different categories and automatically track every payment without effort.
Ensuring you have the necessary features in your spend management software will also make it easier to keep accurate records, including:
Your only task with spend management software should be to investigate the accuracy of the expenses and that they have been entered into the correct categories.
For an extra level of efficiency, automated expense reports can use the categories in the spend management software to automatically deliver a report on all reimbursable expenses accrued on any project by any employee.
Recommended reading: How to Future-proof Your Organisation Through Your Expense Management Software
A prepaid corporate card is an excellent strategy to use that can help keep employees spending under control or at least help you prevent a budget blowout.
Employees can never use more than the amount allocated the card, and the expenses can quickly be reviewed should there ever be an issue. Because electronic statements provide an audit trail of the costs an employee is accruing, the card is unlikely to be used for anything other than legitimate reimbursable expenses.
Volve’s corporate card comes with an automated expense management solution and reporting tool. This enables all functions of business to capture productivity growth potential from time-cost reductions, greater accuracy, increased visibility and control.
From sales to human resources to finance operations, management can look forward to shifting resources from repetitive manual practices to realizing strategic goals that create more value and deliver higher returns.
Experience how one single solution can improve accountability, accuracy and efficiency. Test drive Volve today free for 30 days.