Reimbursable Expense Accounting: A Guide for Small Businesses

The IRS and the Department of Labor have standards, but state courts and lawmakers have added nuances—and the rules are still evolving. HR teams are trying to stay on top of these changes, but the tests for whether a worker is a contractor or an employee are still being set. One thing that is established is that companies will be fined big money if they get this wrong.

According to the US Bureau of Labor Statistics (BLS), most bookkeepers can learn the profession’s basics in about six months [3]. Once you become a qualified bookkeeper, you can work as a permanent employee or freelancer. Managing the general ledger is part of your daily responsibilities as a bookkeeper. You may determine if any payments are due, submit them, and record them in the financial ledger.

Accountable vs. Non-Accountable Reimbursement Plans

The client should claim 50% of your reimbursed meals as expenses to them, but you should received 100% of the reimbursement and NOT have that count as taxable income. While the IRS does allow employers to reimburse employee expenses through payroll, some tax implications can come with doing it this way. For example, if the reimbursement is not made as part of an accountable plan, it will be taxable to the employee as wages. The key to successful employee expense reimbursement is to have a documented policy defining reimbursable expenses and stipulating how they will be repaid. As your company grows and the number of employee expense reimbursement requests increases, adopting a leading expense management solution may help increase reimbursement efficiency and policy enforcement. Under the Fair Labor Standards Act (FLSA), employers are not required to reimburse employees for business expenses.

• Once you have recorded billable expenses in this way, when you invoice your customer that has an unbilled billable expense, you can add the billable expense to the invoice.
• While reviewing your financial statements, you can track your cash inflows and outflows and overall profitability.
• Monitor expenses as they flow through your process and provide a snapshot of those expenses anytime it’s needed.
• Instead, I sat down and examined the income statement in detail and discovered I could fire most of our clients, downsize the staff, and make a lot more money.

Some states, like California and Illinois, even have mandates requiring companies to pay back their employees for reasonable expenses like these. Recently, the IRAS also considered work from home expenses as tax-deductible. The employee’s bills on electricity, telecommunication, and wifi charges are considered reimbursable and taxable.

Independent Contractors and Including Expenses in the 1099

However, such expenses may not reduce non-exempt employees’ wages below the minimum wage, nor decrease their overtime compensation (state law may require employees to be reimbursed for business expenses). Depending on what type of expense is reimbursed, the amounts received may count as taxable income. For example, an employer may provide an employee with a set amount for expenses while traveling on https://www.bookstime.com/ business. Assume the reimbursement plan provides $75 per day for meals and the employee does not need to provide receipts for expenses. The employee is also not required to return the difference between what they actually spend and the $75 allowance. My client gave a fellow worker cash money (like a personal advance) for them to use for travel expenses in doing something for my client’s contractor.

A standardized reimbursement request form makes it clear to the employee which information they need to provide, and spares your team the effort of tracking down missing or incomplete information. One of the biggest headaches for finance teams is inconsistent or unstandardized reimbursement submissions that create additional, time-consuming work. The easiest way to avoid this frustration is to require the use of a standard reimbursement request form. Instead, I sat down and examined the income statement in detail and discovered I could fire most of our clients, downsize the staff, and make a lot more money. Look at your books and start canceling those subscriptions. It gives you an in-depth look at your expenses and revenue.

Accountants and Bookeepers

The policy should include ways to track the business expenses of each reimbursable expense. This can include a pre-made expense report as well as itemized receipts. The more documentation that can be provided the easier it makes the job for accounts payable. Identifying reimbursable expenses for both the employee and employers can be difficult at first. However, what’s challenging is tracking and recording these expenses to ensure the right amount of payments are made as reflected in the company’s chart of accounts. Employees who want reimbursements in their bank accounts should know which documents are required in support of the expense claims.

• Assets are resources that are owned by the company with a measurable future value.
• To maintain certification, you need to earn at least 60 continuing education credits every three years.
• For this reason, a clear policy can help define your company’s practice.
• In this example the liability account is shown as the employee reimbursement account.
• If an employee spends money on the company’s behalf, they may do so with the expectation that they will be reimbursed.
• He/She might have specific instructions on what accounts to debit or credit.

Bookkeeping is simply the tracking of your income and expenses. However, if you want clean and easy books, we highly recommend having a separate bank account for your business. Financial statements should be regularly prepared and used for decision-making. I have a similar situation but the difference is the employee had paid some company expenses. If you’re not sure about these process, reach out to your accountant for further guidance. They can add suggestions about the best ways in recording your transactions.

This is the most common type of reimbursable expense which employees spend for and need to claim from the company. When employees go out to buy office supplies, they need to pay for their transport from the office to the store and vice versa. If so, I’d suggest following the explanation with Rustler. This way, you’ll be guided accordingly in handling the 1099 contractor expense reimbursements.

In addition on the same side of the equation, the expenses of 200 decrease the net income, retained earnings, and therefore owners equity in the business by the same amount. Suppose an employee incurs travel costs of 200 and submits an expense claim for reimbursement of the amount at the end of the month. From the expense claim the business will post the following reimbursed expenses journal entry. Paying wages to employees always involves withholding and contributing taxes, but with reimbursements it all revolves around accountable and non-accountable plans. That’s because IRS reporting requirements are built around these two types of plans. Although employers may not be required to cover certain expenses incurred by employees, it’s still customary to do so.

At the beginning of 2020, the state reclassified many independent contractors as employees and required that many companies provide reimbursement for things like vehicle mileage. Whether you are starting a career or seeking a change, start building job-ready skills in bookkeeping and accounting with Intuit’s Bookkeeping bookkeeping 101 Professional Certificate and Bookkeeping Basics on Coursera. In these programs, you can learn accounting principles, accounting software, payroll, how to prepare financial statements, and more. You’re on the right track on creating an expense transaction to reimburse your employee’s business-related expenses.