Accountants are one of the most crucial and difficult hats to wear for small business owners. Keeping track of revenues and expenses is critical, and understanding the jargon associated with each financial component that contributes to a thriving firm is part of that process. “Billable expense income” is one of those concepts that the average business owner may not be familiar with or use on a daily basis. What is the meaning of billable expense income, how do you track it, and can it be used to generate money for your company?
What Is the Meaning of Billable Expense Income?
Revenue generated by purchases made on behalf of a third-party client or customer is referred to as billable expense income. A common example is the things purchased by a caterer to put on an event for your company. The caterer pays for the trays and burners and then itemizes those expenses on your invoice—that piece of the invoice is billable expense income.
Other billable expenses include research and planning, online payment processing fees, client interaction tools, materials costs, service provider subscriptions, and fees, and travel expenses.
Sources of Billable Expense Income
#1. Planning and research
If you need to perform extensive study and planning before providing services to a client, the time spent doing so may be considered a billable expense. As a service provider, your time and work are your most precious assets, so it is critical to charge appropriately for them.
For example, if you’re a freelance copywriter paid to create blogs, you’ll need to plan out your content. To produce the finest blogs possible, you may need to speak with stakeholders at your company, analyze the competition, and undertake additional digital marketing research. While this time is directly related to your services – website copywriting – it is different and might be considered a billable expense.
You should include research and planning fees as line items on your invoices for invoicing and accounting purposes. These should also be recorded in your accounting program as billable expenses.
#2. Fees for online payment processing
If you incur payment processing expenses when receiving payment from a client, you could include these as a billable expense and factor them into your pricing. The ease of use of digital payment platforms for both service providers and clients means they are more common than ever. Accepting most or all payments through a digital platform, on the other hand, means that payment fees might eat up a significant portion of revenue. Explain to your clients that payment fees will be included in the final bill and that they will be accounted for as billable expense income.
Similarly, if you incur payment processing expenses as a result of material and supply purchases required to execute a work for a client, you might include those fees as billable income on your next invoice. Outgoing payment fees can eat into profit just as quickly as incoming payment fees, so keep watch of them as well.
#3. Communication with customers
A free consultation can be an excellent way for service providers to engage potential customers. However, if pushed too far, the free consultation becomes a public display of your expert knowledge. If you spend time discussing a client’s goals and strategies in-depth, you must bill them for your time. Set a time limit on any free consultations so that it is evident when the dialogue is entering the billable territory.
This billable expense is not limited to consultations. If you have a client who calls regularly and unnecessarily, billing them for time is a wonderful approach to make those calls worthwhile. While client contact should always be accounted for as a billable expense, make sure you properly express your policy with them upfront to avoid an unpleasant surprise when they receive your next invoice.
#4. Materials
Billable expenses include any supplies acquired to accomplish a job for a client. Anything directly linked to the work you are doing for them is acceptable.
Landscapers, for example, frequently purchase supplies such as mulch, flowers, and topsoil. They might also use pavers to build raised beds and gardens. All of these items could be deemed billable expenses and charged to the client’s account. However, rakes, shovels, and buckets carried by a landscaper from job to project are not considered billable expenses because they are not directly related to the individual work.
#5. Provided services
If you need to interact with service providers to execute a job for a client, their invoices might be passed on as a billable expense to your client. These include advertising charges, intellectual property licensing fees, and shipping costs.
#6. Travel expenses
Any business-related travel required as a condition of completing a job for a customer may be deemed a billable expense. Saving receipts and running expense reports during the duration of your trip is vital to pay your client for the expenses you incur in a fair and transparent manner, just as it is when a corporation sends someone on a business trip.
Flights, car rentals, and hotel rooms, for example, could all be considered billable expenses during your trip. However, invoicing for non-essentials such as room service or drinks at the hotel bar should be avoided. Prior to leaving for your trip, it is recommended practice to get an agreement with your client on billable travel expenses. That way, everyone is on the same page regarding how your travel will affect your overall spending.
What Does NOT Qualify as a Billable Expense?
At this point, you should have a good understanding of what a billable expense is and why you should charge for it. Keep in mind, though, that not everything you buy should be passed on to your consumer for reimbursement.
Anything deemed necessary for your business is not a billable expense. For example, the cost of printer ink or your monthly internet connection charge is not considered billable expenses.
Even if you purchase a product or service for your client, do not include it in your billable expenses if you intend to use it again for other clients in the future. That is why it is critical to carefully consider what you include as billable charges.
Regardless, consider identifying and tracking each of these expenses. While you cannot seek reimbursement from your clients, you can deduct these expenses from your income taxes each year. As a result, you should always include any billable expenses in your invoice.
Including Billable Expense Income in the Contract Agreement
Before we go any further, it’s important to realize that billable expense income isn’t a guarantee unless it’s in writing. As a result, any compensation for purchases made on behalf of your client should be mentioned in the contract agreement signed at the outset of a project with the client.
The manner in which billable expenses are handled inside a contract is determined by the document’s existing terms. If you’re unsure how to address reimbursement and billable expenses in your contract, consult with a lawyer.
Why Is Billable Expense Income Necessary for Tax Deductions?
When it comes to small business taxes, billable expense income is critical. Failure to record it or incorrectly classifying business expense income as general expenses might result in a larger tax burden for the company. In most cases, business expenses are completely tax-deductible. General expenses, on the other hand, may be subject to constraints.
Travel expenses are an excellent example of this. If you travel frequently but do not designate your travel expenses as a business expense for a specific client, the IRS may deny you the ability to deduct such expenses. Consider it as ensuring that there is a paper trail. Record the flight, rental vehicle, and hotel charges as itemized expenses and put them on the client invoice.
Vehicle usage, advertising, and promotional charges are also deductible company expenses. Business dinners are tax-deductible up to 50% if they are not extravagant and the business owner is present. The IRS provides more information on this in Topic #511: Business Travel Expenses, which is available online. It’s fine to blame them for a client relationship. Invoicing the client is considered bad etiquette, so make sure to write it off without charging them.
There are also indirect tax consequences to not properly tracking business expenses. The Trump administration added the “Qualified Business Income Deduction” in 2018. If your company’s taxable income is less than $163,000, you may be entitled to a 20% tax deduction. Failure to register business expenses in the appropriate category may result in the loss of this deduction.
Is Your Billable Expense Income Taxable?
Because you are incurring expenses, the customer should reimburse you as well. When a client pays off these reimbursable expenses, the expense and accompanying remuneration become null and void. Essentially, your expenses and their reimbursements are both included in your billable expense income. They add up to a net-zero expense.
To begin, you must report the reimbursed expenses as revenue. The money you initially spent can then be deducted as a business-related expense as part of your billable expense income.
Assume you are a specialist in marketing. You have an invoice for $400 in advertising charges for a new campaign centered on your client’s product. The $400 payment you will get from your client can be viewed as both revenues for you and payment to the initial invoice. As a result, the expense reimbursement procedure has been completed.
Reimbursed expenses are considered income because they are incoming funds. Nonetheless, the IRS taxes business entities based on their net profit rather than their revenues. As a result, there is no need to be concerned; billable expense income does not result in more taxes for you.
In Quickbooks, How Do You Monitor Billable Expense Income?
You don’t want to leave anything to chance when it comes to tracking expenses in your firm. Keeping track of business expenses is a process that is best completed with the assistance of an automated accounting system. If you use QuickBooks, you can enable billable expenses by following the steps outlined below.
- Navigate to Settings, then Account and Settings.
- Navigate to the Expenses tab.
- Select Edit from the Bills and Expenses section.
- Enable the following:
- Display the Items table on the expense and purchase forms.
- Keep track of your expenses and things by customer.
- Make certain expenses and objects billable.
- (Optional) Configure the following:
- % of markup
- Tracking of billable expenses
- Taxes on sales
- Terms of payment for bills
- Select Save.
When you enable billable expenses in QuickBooks, you can use the software to create bills and add billable expenses to invoices.
How Can You Be Certain That Your Billable Expenses Will Be Reimbursed?
There is one dependable method for obtaining compensation for billable expenses. They should be included in the contract you sign with your client. You are most likely financially secure if you both agree on the terms and conditions prior to the start of the actual project-related activity. It would be advantageous if you mentioned in the contract all conceivable areas of billable expenses. Your clients will be required to pay the expenses that fall within certain categories in this manner. To be legally protected, you could seek the assistance of a legal expert in determining the proper phrase for the billable expenses section.
Overall, you should pay particular attention to your billable expense income. If left unchecked, it is very likely that you will lose some of your earnings due to paying for your clients’ expenses. So, to avoid financial troubles, keep track of your billable expenses with the aid of invoicing software and bill them to your clients.
Billable Expense Income FAQs
Is billable expense income taxable?
Reimbursed expenses are considered income because they are incoming funds. Nonetheless, the IRS taxes business entities based on their net profit rather than their revenues. As a result, there is no need to be concerned; billable expense income does not result in more taxes for you.
What is the difference between billable and non billable expenses?
Billable expenses are costs that your client has agreed to be charged for. Company travel, database connection costs, and business supplies are some examples. Non-billable expenses are charges incurred as a result of your work with a Professional that the client refuses to compensate.
How do you categorize reimbursed expenses?
Because your deposit and reimbursement are not part of your business’s income or expenses, you can classify them as Transfers. This can be used in situations when you use your personal funds to pay for a business expense and then reimburse yourself. They will not be considered for calculating your taxes.
