If your business has employees, keeping track of any allowances you give them is an important part of updating your accounting records.
But what exactly are allowances and how do they work?
Let’s take a look.
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What are allowances? Types and examples
What is an allowance?
In business, an allowance is a payment made to an employee to cover expenses or compensate for specific working conditions.
For example, many employees are given an allowance to pay for the cost of travel or entertainment.
Allowances can also be compulsory for employees in certain situations. For instance, employees who work overtime are sometimes given an allowance to make up for their additional working hours.
The rules around allowances depend on the business and the country it operates in. It’s a good idea to check your local labour laws if you have employees and think they might need to be paid an allowance.
Types of allowances
Allowances can vary from country to country and business to business. That said, some of the most universal allowances you’ll come across include:
Transport allowance
This includes expense allowances paid to employees to compensate for the cost of travel for business using their own vehicle, or by other means such as public transportation.
A transport allowance can be calculated as a fixed dollar amount per unit of time (such as a week) or by distance travelled.
Travel allowance
Employees who travel for work can be paid an allowance to cover things like meals, accommodation and other related expenses.
A travel allowance isn’t a reimbursement of exact expenses, but rather a reasonable estimate of costs based on how often that employee travels as part of their job.
Entertainment allowance
If any employee pays for meals or entertainment as part of their job, they may be given an entertainment allowance.
This type of allowance is most common for employees who regularly entertain clients or customers.
Housing allowance
In cases where an employee has to live in a specific location or relocate for their job, they can sometimes be given a housing allowance to account for things like moving and transportation.
Tool and equipment allowance
Employees who have to provide their own tools or equipment for business purposes may be given an allowance as compensation.
Uniform allowance
If an employee has to wear a uniform or special clothing such as protective gear for work, their employer may provide an allowance to reimburse them for the estimated cost of purchasing, washing, drying and ironing work attire.
Medical/health allowance
Employers can sometimes provide an allowance to account for the cost of medical care, private healthcare and other related expenses.
Common taxable allowances
Taxable allowances refer to any allowances that are taxed in the same way as an employee’s regular salary.
As a general rule of thumb, most employee allowances are taxable. This means tax needs to be withheld when paying the employee.
The rules differ from country to country, but some of the most common taxable allowances include:
- Transport allowance
- Travel allowance
- Entertainment allowance
- Uniform allowance
- Housing allowance
- Tool and equipment allowance
- Medical allowance
Non-taxable allowances
Most allowances are taxable, but there are some exceptions. For example, in some countries, transport allowances are non-taxable up to a certain threshold.
The rules around non-taxable allowances vary depending on the country, so it’s always best to check your local laws or consult a tax specialist to find out what applies in your situation.
Setting up allowances with accounting software
Whether you need to set up an allowance for employees on an ongoing basis or as a one-off, the quickest and easiest way to do the job is by using accounting software.
With QuickBooks Online, you can set up an allowance so it automatically appears in each pay run for specific employees, or only apply allowances whenever you need them.
Access exactly what you need, when and where you need it with QuickBooks.
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