As a solopreneur, consultant, agency owner or other small business operator, properly tracking “billable expenses” that you incur out-of-pocket during projects for clients and later get reimbursed for is a key pillar of accurate financial record keeping and bookkeeping.
Thoroughly tracking billable expense income and keeping it separate from your core service/product revenues allows you to avoid headaches like underreporting taxable business income. Let’s look at some best practices to simplify managing billable expenses and reimbursements.
This guide will clearly explain what exactly constitutes billable expense income, why rigorously tracking it is so essential for small business owners, and provide tips on best practices for recording reimbursable billable expenses in accounting software programs like QuickBooks Online or QuickBooks Desktop.
Key Takeaways
- Billable expenses are costs a business incurs on behalf of a client.
- Tracking and billing these expenses correctly can boost net income.
- Tools like QuickBooks Online can simplify and automate the process.
- Understand the tax implications of billable expense income.
- Always communicate transparently with clients regarding billable expenses.
What is Billable Expense Income?
Billable expense income refers to reimbursements that solopreneurs, agencies, contractors and other small business owners receive from clients to cover out-of-pocket expenses incurred while providing services to those clients.
Some examples include:
- A social media marketing agency charging a client for ads the agency paid for and placed on the client’s behalf on Facebook or Google. The cost of those ads gets billed back to the client.
- A contractor hiring a rental vehicle needed exclusively for a specific client’s special project. The rental car fees then get recouped from the client.
- A freelance writer paying a small fee to process a client’s invoice payment through PayPal then passing that processing fee back on to the client.
The reimbursements received for these types of operational expenses needed to deliver work for clients represents billable expense income.
Why Tracking Billable Expense Income is So Important
Here’s why taking the time to properly track any billable expenses that you plan to bill back to clients and record the subsequent reimbursements is so important:
- It provides you with an accurate and complete record of all your revenue sources. Failure to capture billable expense income could flag you for an audit for underreporting business revenues.
- You can only deduct eligible business expenses from your taxes that directly align with billable income recorded. Unreported income means lost deductions.
- Correctly tracking billable expense reimbursements enables you to precisely reconcile expenses incurred on behalf of a client versus amounts actually reimbursed.
- Careful billable expense tracking helps avoid incorrectly double-counting or deducting expenses that were already reimbursed.
Doing your due diligence with tracking billable expense income reduces headaches and penalties at tax time and generally improves the financial clarity and accuracy of your books.
Moreover, Multiple income types for better financial oversight can empower you to make informed decisions, ensuring a comprehensive review of potential income streams and financial strategies that align with your goals
Sources of Billable Expense Income
There are several sources of billable expense income:
- Travel Expenses: This includes flights, hotels, and meals incurred while serving a specific client.
- Office Supplies: These can be billed if bought specifically for a client’s project.
- Processing Fees: If using payment gateways or other tools that charge fees, these can be passed onto the client.
| Source | Typical Expense | Billable |
|---|---|---|
| Travel | Flights, meals | Yes |
| Office Supplies | Print materials | Yes |
| Processing Fees | Payment gateway fees | Yes |
Billable vs. Non-Billable Expenses
While billable expenses can be charged to clients, non-billable expenses cannot. For instance, general office utilities would typically not be billable, but office supplies purchased for a specific client project would be.
How Should Small Business Owners Track Billable Expenses?
Here are some tips and best practices for staying on top of tracking billable expenses:
- Save receipts for all potential billable expenses tied to client work as they are incurred. Digitizing receipts by taking photos or scanning makes accessing them easier later on.
- Log all billable expenses in your accounting software in real-time (whether QuickBooks, Freshbooks, Xero or another platform) including key details like date incurred, amount, client associated with the project, work project name, and expense details. Designate the expenses as billable.
- Use a standardized submission process for regularly submitting billable expense invoices or reports to your clients for reimbursement. Ideally automate expense submissions for quicker payments.
- Only submit expenses relevant for that specific client to avoid confusion, complications or pushback. Clearly separate expenses across clients.
- When you receive reimbursement checks or payments, properly record the deposits in your accounting software as billable expense income to the appropriate income account. This better enables matching expenses you billed against amounts reimbursed later.
Establishing a clear, consistent process for managing billable expenses makes it far easier to track than tackling it ad hoc each time.
How to Track Your Billable Expense Income
To track your billable expense income, you can use the Income vs. Expense report. This report shows you a breakdown of your income and expenses by category.
To view the report, go to Reports > Business Overview > Income vs. Expense.
The Income vs. Expense report will show you a line item for Billable Expenses Income. This line item shows you the total amount of income that you’ve generated from billable expenses.
Example of a Billable Expense
Here is an example of a billable expense:
A web designer incurs the following expenses on behalf of a client:
- Domain registration: $10
- Web hosting: $20
- Graphic design: $50
The web designer can bill the client for these expenses as billable expenses. The client will then pay the web designer for the expenses, plus a markup.
Benefits of Tracking Billable Expenses
| Benefits | Description |
|---|---|
| Increase profits | By charging clients for expenses incurred on their behalf, businesses can reduce the amount of money that they have to spend out of pocket. |
| Track and manage expenses more effectively | By keeping track of your billable expenses, you can identify areas where you can cut costs and improve your efficiency. |
| Improve cash flow | When you bill clients for expenses, you typically receive payment for those expenses sooner than you would if you were to pay for them out of pocket yourself. |
Best Practices for Handling Billable Expense Income
Here are some top practices to follow to smoothly handle billable expense income:
Use a designated income account in your chart of accounts labeled something like “Billable Expense Income” to record the amounts you bill to clients for authorized expenses and the subsequent reimbursements you receive. This keeps it cleanly separated from your core product/service revenue.
Automate your expense reimbursement submissions through an online form or standardized spreadsheet template to save time hunting down paperwork each billing cycle.
Only bill back expenses clearly aligned to the work of that specific client to avoid confusion or pushback that slows down getting paid. Avoid mixing expenses across clients.
Cleanly and accurately record reimbursement deposits in your accounting system to the appropriate billable expense income account. Again keep billable expense reimbursements separated in the books from product/service revenues to avoid mischaracterizing revenue sources.
Reconcile expenses submitted to a client against amounts actually reimbursed to confirm the client paid as expected. Follow up on any discrepancies.
Adhering to these best practices right from the start helps proactively avoid many of the billable expense tracking ambiguities, mixups and headaches business owners grapple with.
How to Add Billable Expenses to Invoices in QuickBooks Online & Desktop
Intuit QuickBooks, both the Online and Desktop versions, is one of the most widely used small business accounting software platforms. Here’s a quick step-by-step look at how to correctly add billable expenses to invoices when billing clients in QuickBooks:
- Create the main invoice billing for your services, mileage or hours worked as usual in QuickBooks.
- When ready to add billable expenses to the same invoice, click “Add” in the Expenses or Items section.
- Select the relevant billable expenses you’ve already pre-entered into the system incurred for that client from the dropdown menu.
- Enter key details for each expense like quantity, rate, tax status etc.
- The expense amount will automatically populate and be added to the total invoice amount due.
Be sure to always keep billable expense items or line items separate from and listed below your main service/product billing lines on the same client invoice. This helps avoid accidentally burying expenses within your services.
How Small Businesses Can Track Billable Expenses
Here are tips for tracking billable expenses:
- Save receipts for all expenses tied to client work. Digitize receipts for easy accessing.
- Log expenses in accounting software like QuickBooks with details like date, amount, client, project, etc. Designate as billable.
- Use a standardized process for submitting expenses to clients. Automate if possible.
- Only submit expenses relevant to that client to avoid confusion.
- Record reimbursement deposits received as billable expense income for accurate financials.
Proper tracking takes the headache out of managing billable expenses.
Automating Billable Expense Tracking
By leveraging tools within QuickBooks Online, businesses can automate the process of tracking and billing for expenses. Automatic expense tracking ensures that no billable expense slips through the cracks and that every expense is accounted for in client invoicing.
Tax Implications of Billable Expense Income
Billable expense income is taxable, much like other types of income. However, the expenses themselves can often be deducted from business taxes, which can result in a higher net income for the business. Always consult with an accountant to understand the specific tax implications for your business.
The Role of Invoices in Managing Billable Expenses
Invoices play a pivotal role in communicating billable expenses to clients. They provide an itemized breakdown of all costs, ensuring transparency and building trust. It’s crucial to accurately represent all billable expenses on an invoice to ensure proper payment and clear client communication.
Best Practices for Handling Billable Expenses
For businesses, it’s crucial to:
- Clearly communicate about billable expenses with clients upfront.
- Ensure all expenses are documented with receipts.
- Regularly review and update expense tracking systems to ensure accuracy.
Laying the groundwork for accurate billable expense tracking from the start saves major headaches at tax season down the road. Consult an accounting pro with any questions on properly recording billable expense income.
FAQs
What is a billable expense income statement?
A billable expense income statement is a financial statement that shows a business’s billable expense income and expenses. This statement can be used to track the profitability of a business’s billable expense income and to identify areas where the business can improve its profitability.
What does billable expense income mean in Quickbooks?
In QuickBooks, billable expense income is income that is generated by charging clients for expenses incurred on their behalf. This type of income is tracked in the Billable Expense Income account.
What is the difference between billable expense income and sales of product income?
Billable expense income is income that is generated by charging clients for expenses incurred on their behalf, while sales of product income is income that is generated from the sale of products.
What is an example of billable expense income?
Travel costs incurred while meeting a client could be billed back, resulting in billable expense income.
What does billable expense income mean in Quickbooks?
In QuickBooks, it refers to the revenue earned from billing clients for expenses incurred on their behalf.
How do billable charges and expenses relate to tax filing, and are they tax deductible?
Billable charges are typically itemized expenses that a professional incurs on behalf of a client and then bills directly to that client. When it comes to tax filing, these charges can be deductible as business expenses, reducing the business tax liability. However, it’s essential to maintain an accurate record of these expenses using expense tracking tools or accounting software, ensuring they’re listed as billable and separated from general expenses.
Distinguish between billable vs. non-billable expenses, especially for small business owners and freelancers?
Distinguishing between billable and non-billable expenses is vital as it impacts net income and can influence tax deductions. Billable expenses, when reimbursed by the client, contribute to the income of the business. In contrast, non-billable expenses are typically general expenses that the business must bear and cannot be billed to a specific client. For small business owners and freelancers, accurately tracking these expenses ensures they’re billing clients correctly and maximizing small business tax deductions.
How can accounting systems like QuickBooks Online assist in managing billable expense income?
QuickBooks Online, among other accounting software, offers features that help professionals automate the process of recording billable expenses. Users can turn on billable expense tracking, categorize expenses, and even add them directly to a client’s invoice. Furthermore, with integrated expense management tools, keeping track of expenses incurred on behalf of clients becomes seamless, ensuring expenses are billed correctly and improving the accuracy of the income account.
Are all incurred expenses for a client considered as billable, and how can one determine what to bill?
Not all expenses incurred on behalf of a client are automatically billable. The decision to bill an expense directly to a client often depends on the agreement or contract with the client. Common billable expenses might include travel expenses, payment processing fees, or administrative fees. However, some expenses, like time you spend working on a project or general office supplies, may not be directly billable. It’s best practice to have a clear understanding with the client regarding billable expenses and ensure they’re itemized and transparent on the client’s invoice.
What is the difference between billable expense income and sales of product income?
Billable expense income comes from charging clients for costs incurred, while sales of product income come from selling goods.
Conclusion
Carefully tracking billable business expenses that align to specific client work helps small business owners like consultants, contractors and agencies avoid confusion around which costs were reimbursed versus paid out-of-pocket.
By following best practices like using dedicated income accounts for reimbursements, keeping receipts, logging details in QuickBooks, only billing back relevant costs, and reconciling reimbursements against billable expense invoices, business operators can get clarity around profitability.
This clear categorization of billable expense income enables identifying eligible tax deductions while reducing risk of an audit. Taking the time upfront to implement proper billable expense tracking processes pays dividends in function and focus for your business.
