How do I handle expense reimbursements for clients?
The way you handle expense reimbursements depends on whether you’re passing costs through at your actual expense amount or adding a markup. Either way, you need a clean system to track what you’ve spent, what you’ve invoiced, and what’s been paid back.
There are two main accounting approaches. The gross method treats reimbursable expenses as income when you invoice and as expenses when you pay them. Your revenue looks higher, your expenses look higher, but profit stays the same. This works when you mark up expenses or want simpler tracking. The net method treats the expense as a receivable from the moment you pay it. When the client pays you back, you’re just collecting what they owe. Revenue stays lower but so do expenses. This works better for strict pass-through situations with no markup.
In QuickBooks, create a separate asset account called Reimbursable Expenses or something similar. When you pay for a client expense, code it to that account with the client name attached. When you invoice the client for reimbursement, apply the invoice to that same account. This keeps the expense off your profit and loss until you know whether you’ll actually get paid back.
Documentation matters more than people realize. Keep receipts for every reimbursable expense. Clients may ask for backup before paying, and the IRS expects documentation if you’re deducting expenses that eventually get reimbursed. If the reimbursement happens in a different year than the expense, the timing matters for your taxes.
Invoice reimbursable expenses promptly. Waiting three months to bill for travel makes clients question the charges and slows down your cash flow. Include enough detail that the client understands what they’re paying for. Many professional services firms attach receipts to invoices for transparency and to speed up approval.
Decide upfront whether you’ll mark up expenses. Adding 10-15% to cover the administrative hassle of fronting money and processing receipts is common. Put your markup policy in your engagement letter so there are no surprises when the invoice arrives.
The biggest mistake is losing track of what’s been billed versus what’s still outstanding. If you’re fronting money for clients regularly, you need a system that shows you aged reimbursables just like you’d track aged receivables. Otherwise you’re giving away money you forgot to bill for. A bookkeeping service can help you set up tracking that actually works and review it monthly so nothing slips through.
Another common issue is mixing reimbursable expenses with regular operating expenses. When everything goes to the same expense account, you can’t easily see what should have been billed to clients versus what’s just cost of doing business. Keep them separate from the start.
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