It’s not uncommon for business owners, entrepreneurs, and freelancers to come across various business-related expenses when dealing with clients. Some of these expenses are already included in a service price, while others incur on a client’s behalf and should be reimbursed. The latter type of expenses is called reimbursable or billable. An employee or contractor pays these expenses out-of-pocket, hoping to charge its clients the same amount when the work is done. To get the money back, however, one should know how to invoice for reimbursement properly.
How to Correctly Invoice for a Reimbursement
If you want your client to cover the costs associated with the work you do for them, make sure to stick to this simple guidance on how to invoice for reimbursement: evidence of expenses that should be reimbursed, timeliness of the invoice, and taxes.
1. Provide Evidence of Expense
Always keep all bills and receipts proving that you paid for something in the course of work. Along with a total amount, your invoice should detail each expense and its cost. Alternatively, you may specify only a total amount in an invoice and then attach an expense report to elaborate on your expenditure. Either way, don’t forget to send copies of your receipts as supporting evidence.
2. Raise an Invoice as Fast As Possible
If you’re an employee of a company, you must issue an invoice within the time frame established by internal policy. Contractors and freelancers can bill their clients when it’s convenient for both parties — for instance, as soon as a new expense occurs or after the work is done and all associated costs are calculated. In any case, you should provide an invoice in a timely fashion as this will make it easier to resolve possible disputes.
3. Be Careful with Taxes
Normally, business expense reimbursement is tax-free unless you charge your client more than you paid out of your pocket. This extra is going to be deemed as profit and taxed accordingly. In all other cases, you need to make sure that your invoice and supporting documents meet the requirements of the tax authority for tax deductible expenses.
What Are Reimbursable Expenses?
First of all, it shouldn’t be a surprise for your clients that you’re going to bill them for expenses related to their case or project. The possibility of reimbursement must be discussed before you finish a contract. Along with this, business ethics suggests that you talk to your clients before expenses occur so that they can provide their permission. This will reduce the likelihood of disputes and allow a client to keep track of much they owe you and for what.
Reimbursable expenses arise from the need to purchase goods or services necessary for the completion of the assigned work. Examples of such costs are attending conferences, hotel reservations, travel expenses, specific software, overseas postage fees, etc. In normal business operations, these expenses do not occur. Therefore, their cost cannot be included in the price of service.
How to Determine Billable Expenses
Normally, companies have clear guidelines outlining how, when, and for what their employees can be reimbursed. However, when it comes to freelancers, contractors, and self-employed individuals, reimbursable items are less obvious. When in doubt about whether to include certain expenses in an invoice, you need to ask yourself:
- Were they necessary to complete your task?
- Did they incur as a result of acting on behalf of a client?
- Is it reasonable to claim compensation from your client?
If you answered “yes” to all three questions, you must invoice your client for reimbursement.
You may ignore some minor expenses such as printing services, courier delivery, business lunch, etc. In most cases, however, cumulative expenses are made up of small items, so unwillingness or inability to include some of them in the bill can eventually cost you a pretty penny.
If you’re an independent contractor, your contract must specify invoice payment terms. Should your client fail to cover your expenses, you can activate a late payment clause envisioned by the contract or go to the Small Claim Court. Be that as it may, you need to keep all receipts and proof of expenses before your bill is paid and for several years after that (depending on your jurisdiction) to avoid tax issues.