Income and expenses are easy enough to understand. But combine the two into “billable expense income” and things become less clear.
In this article, we’ll expand on this concept and outline some best practices for tracking billable expense income.
What is billable expense income?
Billable expense income is revenue that is generated by purchases made on behalf of a third-party client or customer. A common example of this is the items that a caterer purchases to put on an event for your company. The caterer pays for the trays and burners and then itemizes those expenses on your invoice—part of the invoice is billable expense income.
Other examples of billable expenses include research and planning, online payment processing fees, tools for client engagement, office supplies, subscriptions, and travel expenses. Let's dive into exactly why and how certain costs are considered billable expenses.
Research and planning expenses
Offering your company’s services to a client is only the first step. Once the contract is signed, there may be a certain amount of research and planning required to fulfill your business obligations. Those both come with a cost, which includes time and labor. A best practice in this case is to itemize research and planning as a billable expense on your invoices.
An example of this is the research and meetings a freelance copywriter needs to do before they can start writing for a client. Many freelancers neglect the itemization and choose not to classify research as a billable expense, opting instead to bulk it into a per-page or per-hour rate. However, this increases their tax liability.
Digital payment processing fees
Digital payment platforms charge a fee to process payments—those fees qualify as billable expenses. Many small business owners make the mistake of only counting the portion they receive after the processing fee is deducted. The fee is a cost and should be treated as such. Accounting departments know this because invoices and accounts receivable won't match without including the fee.
The same situation applies if you incur fees when purchasing materials or supplies to properly service a client. An example of this would be buying additional hardware or software from an online vendor. The vendor may use a payment processor, like PayPal, that charges 2–3% for transactions. That portion of the payment should be listed as billable expense income on any income statement.
Tools for client engagement
Let’s use a marketing firm as an example. When a new client is onboarded, marketing firms implement a client engagement system that could include instant messaging, reporting dashboards, and automated emails. The fee for those tools is a billable expense. The time spent setting them up and using them also falls within this category.
Sometimes, client engagement doesn’t necessarily require new technology. Even so, it's good practice to note the time spent on a phone call as a billable expense.
Client materials
This is where expense management for small businesses can get a bit tricky. Your company may have multiple clients that require the same materials. In this instance, the natural tendency is to list them in bulk, creating a business expense category on one line in your general ledger. However, doing this can be a big mistake since costs incurred on behalf of a client should always be listed separately.
Imagine your company provides custom printing services. You have various clients for whom you purchase printing materials and also incur shipping costs to deliver the final products. Instead of lumping all the shipping costs together under a general expense category in your general ledger, it's advisable to itemize these costs per client. That way, if you have an agreement to bill these expenses back to your clients, you can accurately invoice them for the exact amount of shipping costs incurred on their behalf.
Shipping costs
Shipping costs can be considered either an expense or a billable expense depending on the situation. If your business is responsible for covering the cost of shipping as part of delivering a product or service, then the shipping cost is considered an expense. This cost is recorded on your income statement as an expense, which will reduce your net income.
If you pass the shipping cost onto the customer, then it's considered a billable expense. You’d invoice the customer for the shipping cost, and when the customer pays the invoice, that amount is recorded as income on your income statement.
Subscriptions and fees for service providers
Invoices from service providers that are needed to complete a job can be passed on to the client. Examples include advertising costs, licensing fees for intellectual property, and shipping costs. These should be itemized on receipts and included on the client invoice, then classified as a billable expense.
Like costs for materials, subscription fees can be a bit tricky when it comes to client attribution. For best results, try to keep expenses for each client independent from one another. Any fees incurred on behalf of your entire company that just happen to benefit you in that client relationship, like an industry newsletter for instance, should be kept separate.
Travel expenses
Getting on an airplane to fly to a client’s office is a billable expense. Add the cost of the trip to your invoice and include airfare, hotel, and rental car, but not drinks at the bar. You’ll also want to avoid invoicing for a client dinner. If you choose to pay that tab, that’s a magnanimous action, not something to include on the client’s invoice.
Use a corporate card for travel expenses to eliminate any confusion over whether it’s business or personal. Using a personal credit card and reimbursing yourself from the company may be a red flag if you’re audited. The IRS has the right to deny travel charges, or any expense, that they deem to be personal and not a business expense.
Billable expenses vs. sales of product income
Billable expenses are costs incurred on behalf of a client and later billed to them for reimbursem*nt, while sales of product income is revenue generated from selling products.
Imagine a landscaping company that sells ornamental plants and also provides garden design services. When a customer purchases plants, the revenue generated is recorded as sales of product income. However, if the company is hired to design a garden, and as part of the project, it purchases special outdoor lighting on behalf of the client, the cost of the lighting is a billable expense. The company will bill the client for the cost of the outdoor lighting in addition to the service fee for the garden design. In this scenario, the revenue from selling plants is sales of product income, while the reimbursem*nt from the client for the outdoor lighting is recorded as billable expense income.
Why billable expense income is important for tax deductions
Billable expense income is important when filing small business taxes. Neglecting to record it or miscategorizing business expense income as general expenses can result in higher tax liability. That’s because business expenses are generally 100% tax deductible, while general expenses may be subject to limitations.
Travel expenses are a good example of this. If you travel frequently but don’t attribute your travel costs as a business expense for a specific client, the IRS may not allow you to deduct them. Think of it as making sure there’s a paper trail. Track billable expenses while you travel and be sure to include them on the client invoice.
Other business expense deductible categories include vehicle usage, advertising, and promotional costs. Business meals are deductible up to 50% if they’re not lavish and the business owner is present. The IRS offers additional guidance on this in their online Topic #511: Business Travel Expenses. It’s okay to attribute the meals to a client relationship. Invoicing the client for them is considered bad form, so be sure to write it off without charging them.
There are also indirect tax implications of not properly keeping track of business expenses. In 2018, the Trump administration added the “Qualified Business Income Deduction.” If the taxable income of a company is below $163,000, you may be eligible for a 20% tax deduction. Failing to record business expenses in the right category could cost you this deduction.
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How to account for billable expenses in QuickBooks
In QuickBooks, accounting for billable expenses is a straightforward process. Here's a step-by-step breakdown of how it works:
- You incur an expense on behalf of a client, such as purchasing materials for a project or paying for shipping costs to deliver goods to them.
- You record this expense in QuickBooks in an expense account and mark it as billable to the appropriate client.
- When you create an invoice for the client, QuickBooks will prompt you to add the billable expense to the invoice.
- Once the client pays the invoice, the amount they paid for the billable expense is recorded as billable expense income.
To further automate the process and guarantee accuracy in your bookkeeping, you might consider connecting QuickBooks to a spend management platform to track all of your business expenses.
Connect your accounting software with Ramp
Through our Quickbooks integration, Ramp can help you digitize your expense policy, auto-categorize expenses, and automate reimbursem*nts. You can also split transactions, allocating business expenses by job, client, location, or project code.
Ramp also connects with a whole suite of popular accounting software including Sage, NetSuite, and Xero. Learn more about how you can save hours every month with our automated expense management software.
