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?
What is an allowance?
An allowance is a payment made to an employee in order to cover expenses or as compensation for specific working conditions. For example, some employees are given an allowance to pay for the cost of travel or entertainment.
In some instances it can also be mandatory to give allowances to your employees. For instance, employees who work overtime are sometimes given an allowance to make up for the additional hours worked.
The rules around allowances will 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 by country and by business, that said, there are some universal allowances you’ll come across, including:
Transport allowance
This includes expense allowances paid to employees to compensate for the cost of travel for business, whether using their own vehicle or by other means, such as public transportation. A transport allowance may be calculated as a fixed dollar amount per unit of time, or by distance travelled.
Travel allowance
Employees who travel for work may be paid an allowance to cover things like meals, accommodation, and other travel 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 has to pay 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 are regularly entertaining clients or customers.
Housing allowance
In some cases, when an employee has to live in a specific location or relocate for their job, they may 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 the work attire.
Medical/health allowance
Employers may sometimes provide an allowance to account for the cost of medical care, private healthcare, and other medical and health related expenses.
Common taxable allowances
Taxable allowances refer to any allowances that are taxed the same as an employee’s regular salary.
As a general rule of thumb, most employee allowances are taxable, meaning tax will need to be withheld when paying an employee.
The rules will differ depending on the 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, however, there can be some exceptions. For example, in some countries, transport allowances are deemed non-taxable up to a certain threshold.
The rules around non-taxable allowances will 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 an employee on an ongoing basis or as a one-off, using accounting software is the quickest and easiest way to do the job.
With QuickBooks Online, you can set up allowances so they automatically appears in each pay run for specific employees, or, when you need them, apply one-off allowances.
Access exactly what you need, when, and where you need it with QuickBooks.
