Expense reimbursements
Light entrepreneurs expense reimbursements
What expenses can light entrepreneur reimburse? In this article we explain with example what expenses light entrepreneur can reimburse.
How to Add Travel Expense Reimbursements? - Briefly
According to the Tax Administration's guidelines, there are two ways to add an expense reimbursement so that it can be accepted as a tax-free cost. In both cases, the expenses must be itemized on the invoice. Additionally, a signed contract must be provided to the invoicing service, indicating what the light entrepreneur and their client have agreed regarding the reimbursement of travel expenses.
1. Example - Reimbursements Paid in Addition to Salary
The invoice provided to the invoicing service company’s client details:
- Work: 500 euros + 120 euros VAT 24%
- Three full-day allowances at 45 euros each, totaling 135 euros + 32.4 euros (VAT 24%)
The client pays the invoicing service company a total of 787.4 euros according to the invoice.
2. Example - Reimbursements Included in the Total Salary
The invoice provided to the invoicing service company’s client details:
- Work: 635 euros + 152.4 euros (VAT 24%)
- Mention on the invoice: The total compensation includes three full-day allowances (at 45 euros each, totaling 135 euros)
The client pays the invoicing service company a total of 787.4 euros according to the invoice.
If it is about travel reimbursements, the person performing the work must submit a travel expense report to the payer of the travel costs, i.e., the invoicing service company. The travel report must include, among other things:
- purpose of the trip
- destination
- travel route, if necessary
- mode of transportation
- start and end dates and times of the trip
Tax Administration’s Guidelines for Reimbursing Tax-Free Costs (01.01.2024)
What is an Expense Reimbursement?
An expense reimbursement compensates for costs directly incurred from work. Expense reimbursement is not a salary, so taxes or payroll-related costs do not need to be paid on reimbursements.
Tax practice has accepted that an invoicing service company can also pay travel expense reimbursements tax-free against a travel report if the invoicing service company and the worker have agreed on the payment for the work as salary. It is also required that the worker has agreed with the client on the reimbursement of travel expenses. In practice, the invoicing service company can know and verify this only if the worker and the client have made a written or electronic contract, which is available to the invoicing service company.
Source: Tax Administration's Guidelines for Reimbursing Tax-Free Costs (01.01.2024)
Travel Expenses and Reimbursements
If a light entrepreneur makes a business trip using their own car, the employer can pay tax-free mileage reimbursement. The amount of reimbursement is determined by the annual decision of the Tax Administration .
Example - Reimbursements Paid in Addition to Salary
The worker and the client have agreed that in addition to the 500-euro salary for the work, the client will pay the worker a daily allowance for work-related travel. The worker submits a travel report for three daily allowances to the invoicing service company, which verifies that the conditions for tax-free travel expense reimbursement are met. The invoice provided to the client by the invoicing service company details a 500-euro salary and three full daily allowances (45 euros each, totaling 135 euros). The client pays a total of 635 euros to the invoicing service company as per the invoice.
In this case, travel expense reimbursements are tax-free for the worker. The invoicing service company withholds tax and pays the employer's health insurance contribution on the 500-euro salary. The invoicing service company reports both the salary and the travel expense reimbursements to the income register.
The worker cannot claim increased living expenses as a deduction in their own taxation because the invoicing service company has paid them tax-free travel expense reimbursements.
Example - Reimbursements Included in Total Salary
The worker and the client have agreed on a total charge of 500 euros for the work, which includes mileage reimbursements and daily allowances. The worker submits a travel report for three daily allowances and mileage reimbursements to the invoicing service company, which verifies that the conditions for tax-free travel expense reimbursement are met. The invoice provided to the client by the invoicing service company details a total compensation of 500 euros, which includes three full daily allowances (45 euros each, totaling 135 euros) and mileage reimbursements (100 km x 0.46 euros, totaling 46 euros). The client pays 500 euros to the invoicing service company as per the invoice.
In this case, travel expense reimbursements are tax-free for the worker. The invoicing service company withholds tax and pays the employer's health insurance contribution on the salary, from which tax-free travel expense reimbursements have been deducted, i.e., from 319 euros. The invoicing service company reports both the salary and the travel expense reimbursements to the income register.
The worker cannot claim increased living expenses as a deduction in their own taxation because the invoicing service company has paid them tax-free travel expense reimbursements.
Only mileage can be claimed for reimbursement, not other car-related costs, such as windshield washer fluid. When adding the number of kilometers driven, there must be documentation from the logbook in accordance with the guidelines provided by the tax authorities. This is called a logbook and must be kept for possible future use. Expenses can also include, for example, public transport tickets related to the work assignment. Accommodation costs can also be included if the work assignment involves multiple days in another location.
The worker must submit a travel report to the payer of the travel expenses, i.e., the invoicing service company, detailing the purpose of the trip, destination, travel route if necessary, mode of transportation, and the start and end dates and times of the trip.
Meal allowances
If there is no possibility to eat in a normal dining place, and you do not earn per diems from the same days, food eaten during working hours can be added to meal expenses. Meal allowance the maximum amount is 12.75 euros (in 2024).
Payment of the meal allowance requires that no per diem is paid for the work trip and that due to work, the person does not have the opportunity to have a regular meal during the meal break at a regular dining place. Receipts for meals and proof of the need for compensation (e.g. work on the move) are to be kept personally for later use.
Expenses that cannot be deducted
Purchases that may involve private use or have longer-term use are not be accepted as reimbursement. For example, clothes, a phone or a computer are expenses which a light entrepreneur cannot reimburse as expenses. However, a light entrepreneur can add these to income acquisition expenses in personal taxation.
Meal and kilometer allowances are always reimbursed according to the tax value in the travel invoice that they are based on.
Expenses in personal taxation
Many expenses that cannot be deducted through the invoicing service are deductible in personal taxation. More information can be found at vero.fi: Calculation of taxable income in personal taxation.
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