What Is an Expense Allowance?

An expense allowance is the money a company pays an employee or contracted worker for personal expenses incurred in the course of doing a job. Commonly, such expenses include meals, transportation, fees, tolls, and possibly expenses for entertaining clients. Those who are working for a company with an expense allowance should carefully review the policy before incurring an expense to make sure it is covered. Companies have no obligation to pay for expenses not covered in the policy.

One of the most common expenses is payment for mileage used when taking a personal vehicle on company business. This is a common expense in a number of professions including sales agents, journalists, salaried lawyers, and many others. The mileage is calculated based on fixed rate, such as so much per mile or kilometer. That rate may be subject to change with the average fuel price at the time of payment taken into consideration. The money is usually paid on a weekly or monthly basis.

The mileage expense allowance does not just cover fuel costs, however. It is also supposed to give the employee or contracted worker some money for wear and tear on the car, assuming a personal car is being used. Therefore, some workers may put aside a portion of that reimbursement for things such as regular vehicle maintenance or repairs that will be needed in the future. The company does not normally specify how the money must be used once the expense is incurred, so employees must choose on their own how to use that money responsibly.

Meals are another common expense allowance item. Typically, if the course of the job requires a person to travel outside of his or her home area, the company will pay for meals. These meals are usually payable only up to a certain amount. If an employee goes over that amount by choosing a more expensive a meal, he or she is responsible for the difference. If the employee is taking a client to a meal, that will also typically be reimbursed. Some companies decline to pay for alcoholic beverages, so this should be verified ahead of time.

The other thing an expense allowance is often used to pay for is entertainment, especially of a client. This could include taking the client to a sporting event, or on a golf outing, just to name a couple. Entertainment expenses can run very high so the employee should ensure these expenses are covered. Some of these types of expenses may require prior authorization, where the employee or contracted individual must first call a supervisor or manager, and get approval for the expense.

Typically, an expense reimbursement is not subject to income taxes. This is because the money received is not income, but rather a replacement of money that was spent on behalf of a company. Those with questions should check with a local tax professional to ensure they are in compliance with all tax laws.