Should expenses be paid through payroll?

Introduction

Complicated and time-consuming, business expenses can be an unwieldy process for any organisation’s payroll team. Busy Aussie teams like yours, with staff out and about or working from home, can incur countless business expenses that need managing through helpful payroll software options. In the last few years, Australia has had a swathe of new payroll compliance legislation to keep your finance team on their toes. So, dotting the i’s and crossing the t’s has never been more important, cheers to responsive payroll solutions keeping us up to date—and by the book.

To kick-off, let’s define some terms. A “business expense” refers to any financial outlay or expenditure incurred by an employer in relation to the compensation and benefits due to employees. Such expenses can be made up of different components such as salary, commission and bonuses, benefits contributions, and reimbursements for business-related expenses.

Business expenses can be paid in two ways:

• Through payroll
  Administered alongside the regular payroll run and paid as part of weekly/fortnightly/monthly wage packets.
• Directly reimbursing employees
  Separate payments, distinct from payroll, generally paid into an individual employee’s bank account.

Choosing which business expense payment method works best for you and your business depends on your current setup and finance system. Today, business expense processing via bespoke expenses software and all-encompassing payroll software are both easily doable. Just ensure you pick a payroll solution that will make your life easier, whatever business you’re in. Fair dinkum!

Advantages of paying expenses through payroll

Helpfully for many businesses, using payroll software for business expenses has bags of plus points, including:

• Streamlined process
  
  Keeping it together, integrating business expenses with your payroll solution simplifies the tracking and reporting of business expenses. Everything is organised, joined up in the same place and laid out in a clear, understandable manner. Payroll software has established categorisation of business expenses, with the option to tweak to your business’s unique needs.
  
  Maybe you have lots of reps on the road or many large-scale events, so business expense receipts are coming from every corner of the country. Managing all this information can be tough, especially in a paper-based system. Fortunately, these days there is payroll software, platforms and mobile apps to make this easier for both employer and employee.
  
  Using payroll software to update business expense forms automatically updates the system, so relevant information is ready to collate and analyse for business reporting. This all comes together to reduce the administrative burden on your undoubtedly hectic finance team, all meaning improved efficiency and, ultimately, time and money saved.
  
  
• Improved cash flow management
  
  Making sure those Aussie dollars flow seamlessly is key for any finance department and often vital for your employees, especially in these tougher economic times. Making business expense payments via payroll software equals faster expense payment runs, as it’s all rolled into one regular payment – no need for separate, timely extra processing.
  
  Payroll software is ideal for negative pay scenarios. Sometimes required contributions like pension or tax contributions outweigh income, especially with more flexible working and short-term contracts meaning variable income, so an employee can end up in a negative pay. Or, if this isn’t to be expected, a negative pay figure could be an indication of an input error.
  
  Payroll software is made to deal with such complications, clearly delineating deductions and carrying over negative pay figures into the next payroll run to keep an accurate tally over the financial year.
  
  
• Tax implications
  Robust and detailed, the Australian system of Fringe Benefits Tax (FBT) leaves businesses, not employees, accountable for the tax paid on fringe benefits, those extras beyond the salary that make the job more enticing and sustainable. Fringe benefits support not only employees but also their families, such as company car, private education or low-cost loans.
  
  Today’s payroll software is made to seamlessly fit in with Australia’s pay as you go (PAYG) taxation system, which includes allowable benefits given to employees, such as tax credits, charitable donations or childcare reimbursement.
  
  In short, FBT and PAYG calculation and payments can be wide-ranging and complicated to administer. Happily, for finance teams, such business expenses can also be processed through a complete payroll solution.

Please note: Australian taxation is a complex topic, please consult a tax professional for specific guidance.

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Disadvantages of paying expenses through payroll

On the other side of the coin, payroll software can have a few downsides, including:

• Payroll complexity
  
  Payroll can be a tricky business. Adding business expense payments to a payroll solution adds extra complexity to payroll processing. Especially for smaller businesses, separately putting through expenses in batches may well be easier to administer periodically rather than week-in-week-out. Additionally, the categorisation and tracking of business expenses can be challenging and require an expert eye to not get in a muddle.
  
  
• Managing Fringe Benefits Tax (FBT)
  
  As we’ve discovered, some business expense reimbursements may be subject to FBT, a tax administered and paid by employers for certain benefits offered to employees. Expenses subject to FBT aren’t quite as simple as bosh, here you go, as further calculations are needed.
  
  FBT can be complex to understand and more work for finance teams to keep sorted. Therefore, a specialised level of calculation, record-keeping and accurate payment processing is required to stay legally compliant. Whether that’s via a payroll solution or another simpler method, which can work deftly on a smaller scale.

Alternatives to paying through payroll

Bonzer payroll solutions for every type of business. Some businesses, especially on the smaller end of the spectrum, prefer to pay business expense reimbursements directly to employees – essentially bypassing payroll software.

Direct expense reimbursements can be advantageous for some, as business expenses are tackled as a separate entity. Finance teams can concentrate on expenses as a whole, not restricted by rigid payroll timeframes, quickly raising a business expense as they go or processing in periodic batches. Payroll software integration can be a complicated process that smaller teams might find daunting, so a lighter footed distinct expense run might be more straightforward for some.

For many, the disadvantages of direct expense reimbursements stem from different systems not working together, meaning less coherence and visibility. Payroll solutions give an overarching view of the expenses process, joining up the relevant data, therefore ideal for ongoing financial reporting. Ensuring that business expense payments stay in step with salaries and tax payments all in one place is invaluable for many payroll teams.

However, some finance teams may prefer to keep payroll and expenses completely siloed. Usefully, ADP offers expense management software options that can square this circle, through streamlined expense tracking and reporting that is separate from payroll software.

Find out more about ADP payroll management software.

Conclusion

You little beauty! Every business is unique. So, their business expenses solution needs to be too. From Tazzie to Darwin, Australia is at the vanguard of employment legislation, so there’s plenty of business expense compliance to think about wherever you are. Aussie rules have some teeth, so you don’t want to risk dire legal and financial ramifications for non-compliance. So, it’s worth thinking carefully.

Some organisations choose an established all-in-one payroll solution which features business expense processing as standard. Large organisations with masses of information require everything in one place; keeping processing, payments and reporting all under one roof may well work best for them. But such bigness can mean complex systems that may be confusing and unwieldy. Whereas separate business expense processing—whether manually or via specific business expense software—will suit many smaller businesses that prefer processing expenses as a block or piecemeal as they go. Great for lithe, nippy expense processing adapted to individual company needs.

There are plenty of ways to go. Expense type can be key in picking your business expense software.

• Are you bombarded with trillions of receipts for everything under the sun? Then, maybe payroll software with an app that scans and processes receipts would work for you.
• Are your business expenses few and far between? Then, potentially, you don’t need all the bells and whistles, but something that works for you and your petite petty cash box.
• Do you offer a multitude of fringe benefits in your salary packages? This can get complicated. Perhaps, an overall payroll software solution may work better to handle these complex calculations.

Remember: any Australian business expense payroll solution must factor in FBT requirements, so businesses must comply with these additional tax obligations unique to business expense protocol. So, always keep these obligations in mind when considering your ideal expense software solution.

Give yourself a fair crack of the whip. Choose the business expense solution that works for you and your organisation, both today’s payroll software and business expense software have plenty to offer any forward-looking finance team.