Should Expenses Be Paid Through Payroll (Guide)

By Linda RoperJuly 27, 2022
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Managing and reimbursing employee expenses has always been an important task within businesses; however, it is also one fraught with confusion. First you must make sure you have a proper expense policy in place. Then comes the challenge of determining how and when you should process and pay claims.

One of the most frequent questions regarding this process is “should expenses be paid through payroll?”. While there are some benefits to combining these two activities, for the most part, it can be more work than necessary.

We’ve written this in-depth guide to tell you everything there is to know about paying expenses through payroll, including its pros, cons, and more.

Woman sitting on desk and handing out a pay cheque

What is Payroll?

Firstly, let’s explain what payroll is to clarify why it might be used in relation with employee expenses.

Payroll is simply the process of paying employees, so they receive their wages. A company’s payroll will contain each employee’s details, including how much they get paid and when.

Payroll calculation is complicated and incorporates several factors. It involves keeping track of the hours that workers put in, figuring out compensation, and delivering funds through cheque or direct deposit.

Additionally, businesses must maintain accounting and record-keeping procedures as well as allocate money for national insurance and pension contributions.

This is why many businesses often outsource their payroll to another company or use cloud-based software to automate the process and handle the hard work for them.

Which Employee Expenses Can be Paid Through Payroll?

Employers can compensate employees for the costs they paid for out of their own pocket through their expense reimbursement procedure.

In order for an employee to receive reimbursement for an expense, they must have:

  • Spent the money themselves and not have been paid back

  • Made the expense in relation to their role

  • Require accurate documentation to back-up the expense claim, such as a receipt

These expenses may include categories such as:

  • Business accommodation

  • Food and drink purchased while on business trips

  • Bank charges related to business expenses

  • Professional subscription costs

  • Phone calls for business purposes

  • Equipment expenses

  • Professional development costs

  • Travel/transport costs for work

You can learn more about what types of expenses your employees can claim in the following articles:

Correct and timely reimbursement of employee expenses is paramount to your company. Otherwise, you risk frustrated employees, a time-poor finance department, or the other liabilities that come with slow expense repayment.

The Benefits of Paying Expenses Through Payroll

There is one major reason why a business might prefer to reimburse their employees’ expenses through payroll.

For many, it’s the convenience of only having to make a single payment that encompasses both a worker’s wage and any reimbursements or benefits they are entitled to.

Rather than distributing funds for expenses as each claim is processed, an employer can instead pay employees all of the money owed to them on a weekly, fortnightly, or monthly basis – depending on when their payroll occurs.

The Potential Drawbacks of Paying Expenses Through Payroll

While some business owners may find paying expenses through payroll to be easier or more convenient, there are some downsides to this process.

Most notably, this process still usually relies on manual methods of receiving, analysing, and maintaining employee expense claims. This information is then added into your payroll service.

As you may already know, manual methods can severely slow down your finance department and create a knock-on effect throughout other areas of your business. The latest advancements in expense management software automate much of the expense process for both you and your employees to prevent these bottlenecks.

Paying expenses through payroll also makes reconciliation more difficult. Payroll reconciliation involves checking that the numbers on the books match by comparing the current period's payroll with those in your payroll ledger. This serves as a last verification that the quantities you processed are correct.

When you’re using your payroll to also pay back employee expenses, it can be more difficult to separate these two amounts and track them accordingly.

Additionally, when using HMRC’s payrolling benefits and expenses online service, you still need to work out the Class 1A National Insurance contributions on benefits and complete form P11D(b). If using this service, you must register before the start of the tax year. Unless you have a legitimate excuse, you cannot payroll your employee's benefits or expenses until the next tax year if you miss the registration deadline.

How Cloud-Based Expense Management Software Can Help

Expense management software, such as ExpenseIn, lets you manage all aspects of employee expenses. This avoids the confusion of combining expenses and payroll into one, and instead lets you examine and manage each of these key processes separately – yet with more ease than ever before.

ExpenseIn uses features such as receipt scanning and automated expense policy enforcement to let employees submit expense claims within minutes. Plus, with a fast and flexible approval process, expenses can be reimbursed on-the-go. This means employees don’t even have to wait for their expenses to be paid back to them through payroll, thus saving time and frustration.

Forgoing manual expense management allows a business to keep vital expense information in a single platform. Real-time expense reports also keep vital data in one place, helping executives to make important decisions based on the most up-to-date trends.

Automatic mileage calculations, approval notifications, automated email reminders, and seamless integration with accounting software are some of the additional features that allow businesses to take their expense management to the next level.