Shawnee Love   •  
August 29, 2013

Last week, we discussed the merits of business expense reimbursement and this week we want to look at why allowances could be the better choice.

The beauty of expense allowances for the company is twofold:

1. Cost Predictability- Each month, the company knows exactly what it will pay out for the expenses covered by allowance which makes it easy to budget and easy to control.  If someone spends more than the allowance, that is their problem, not the company’s.
2. Simplicity-  If you pay a flat rate each month, there is no reviewing line by line on an expense form or verifying each receipt.  Instead, you just pay what you promise on the predetermined schedule and merrily go on your way.  No fuss, no muss.  The simplicity factor makes expense allowances excellent choices for companies who don’t have large accounting teams and those companies that place a high value on efficiency.

If you are a company considering expense allowances, you should have an excellent idea of what it would actually cost someone each month as well as some inkling of the “going rates”.

From an employee’s perspective, expense allowances are a nice way to receive a bit of extra compensation that isn’t taxed as income (although companies must take care to ensure the allowance is reasonable or the employee could end up being taxed anyway).   Employees also like the simplicity and the fact that they don’t have to worry about when they will be paid as allowance payouts are usually regularly scheduled.  However, I have seen employees get burned when their allowance is way below the actual costs (i.e., that is why I tend not to include fuel costs as an allowance anymore- prices are too unpredictable to be confidently identifying a fair allowance).

Expense allowances I often encourage include:

• Car allowances- intended to defray the costs of insurance, maintenance and minor repairs, etc. but as mentioned above, not usually including fuel costs,
• Home office allowances- intended to cover the costs of internet and phone connections, supplies, couriers, postage, etc. and may also include peripherals like printers, scanners, etc.
• Cellphone allowances- intended to cover talk, text and data.

That is why I like allowances, how about you: expense reimbursement or expense allowance which do you prefer?