How to manage contractor expenses for business travel

Does your company’s travel expense policy cover managing contractor expenses? It’s important to make your travel expense reimbursement policy clear when working with freelancers, consultants, or contractors.

In this article, we’ll cover the common challenges you’re likely to face when tracking and reimbursing freelance travel expenses. With a defined outline of allowable expenses, invoicing methods, and required documentation, you’ll ensure that finance teams and freelancers are on the same page.

Can you claim travel expenses as a contractor?

Yes, contractors can often claim travel expenses, but the process may be different than for full-time employees. Allowable contractor expenses include any costs incurred as part of doing business, such as traveling to visit a client or flights and accommodation costs from attending a trade fair.

Self-employed contractors or freelancers can usually claim travel expenses from their country’s tax authority or directly from the client. In either case, it’s important to keep accurate records of all expenses along with bills or receipts as evidence.

What expenses can contractors claim?

The rules for reimbursable contractor travel expenses are similar to any other business travel expenses. Generally, expenses are allowable if the money was spent during necessary business away from home or office rather than for personal reasons.

Rules vary by country. In most frameworks, allowable contractor expenses include things like airfare, accommodations, food, car rentals, fuel, mileage, parking fees, conference admission, and public transportation.

Depending on the type of work the contractor performs for your business, it could also include job-specific costs like renting audiovisual equipment.

In terms of non-allowable contractor expenses, freelancers shouldn’t expect reimbursement for personal expenses. This could include things like hotel room entertainment, everyday commuting, or a new outfit for a business trip. Expenses that go above budget, such as business class flights and luxury hotels, also may not be eligible for reimbursement. It’s important to clarify these allowable and non-allowable expenses with a travel policy for freelancers.

Contractor vs. employee: Classifying contract work

Before determining how to manage freelance travel expenses, it’s important to understand the tax implications. Start by defining the worker’s role within your organization and whether they qualify as self-employed.

The specific employee classification rules will vary by country. They’ll impact your company’s expense reimbursement obligations depending on whether you’re considered a contractor’s employer or client. A few questions to determine whether the worker is classed as employed or self-employed for tax purposes:

• Is their work considered essential to your business?
• Does the work impact your company’s future?
• Does the individual have significant impact on company profits?

If the answer to these questions is yes, they’re more likely to be classed as an employee.

• Does the worker control their own hours and level of involvement?
• Do they have a unique or specialist skill set?
• Does the worker have more than one client?
• Do they send your company invoices after project completions?

If the answer to these questions is yes, the individual is usually classed as an independent contractor.

You can also use your country’s government website for more information about employment classifications. Examples include the UK’s HMRC’s Check employment status for tax (CEST) or Germany’s Federal Ministry for Economic Affairs. In the United States, use the IRS website.

The difference matters for tax compliance – both for your company and the contractor.

Can agency workers claim travel expenses?

Agency workers, also called temporary or temp workers, can often claim travel expenses – but this should be handled by the agency rather than your business.

When businesses hire workers through a temp agency, it’s the agency that pays the contractor’s wages and expenses. That’s because the agency stands as a third-party service provider between the contractor and the business.

If your company hires contractors through an agency, travel expenses would need to be considered as part of any negotiated fees with the agency, not the worker.

The differences between full-time and freelance expense management

When there’s a clear distinction between full-time employees and freelancers, different expense management procedures may apply.

Per diem policies

Per diems are fixed amounts allocated to cover daily travel expenses including lodging, meals, and incidentals. Often used to reimburse employees, per diems can also pay for freelance business expenses and streamline reimbursement.

When working with contractors, some negotiation may be required to find a mutually favorable rate. As a starting point, companies can either follow standard rates set by government authorities or choose their own rates based on the current cost of living.

Selecting official travel regulatory rates is often preferred – these are frequently updated.

As a baseline for negotiation, here are some example per diems from the US State Department, the European Union, and the UK Government.

Once you’ve negotiated a per diem rate, put it in a written agreement. This should not only include the per diem amount, but also the expenses covered and their tax implications.

Invoicing methods

In addition to travel expense rates, another factor to consider is your billing method. When contractors travel on your behalf, they can charge you for the expenses, depending on tax classification.

Contractors usually send invoices according to one of these methods:

• Billing for total expenses before the trip begins using calculated prices
• Billing for all expenses at the end of the trip
• Billing using separate invoices for each category of travel expense, such as flights and hotels.

If you accept advance invoices, it’s important to verify estimated expenses. One way to do this is by using a SME travel management solution like Booking.com for Business, which will give you full visibility over rates for accommodations, flights, and car rentals, all in one place. You can also share approved vendors with contractors to keep travel costs within budget.

Tax considerations

Tax implications of freelance business expenses can get complicated fast. One important detail to consider is Value-Added Tax (VAT). If your contractor is VAT registered, they’ll need to charge VAT on any services provided and make sure VAT isn’t applied twice to expense reimbursement.

Why should businesses create a contractor reimbursement policy?

A clear contractor reimbursement policy takes any confusion out of the travel expense process. It not only helps your company stay within budget when paying for contractor travel expenses, but also sets expectations for both sides.

You can use an existing travel expense policy template and adapt it with contractor-specific details. Make sure it answers the following questions:

1. Does your company use a preferred platform for booking business travel?
2. Which freelance expenses will you reimburse?
3. Which freelance expenses are non-reimbursable?
4. Do you cover client entertainment expenses and business meals?
5. Do you have maximum per diem rates?
6. Which invoicing method do you accept?
7. Is there a preferred format for receipts and invoices?
8. Is there a preferred tool for submitting expenses?
9. What documentation or receipts must be included with travel expense invoices?
10. Where should freelancers submit expenses?
11. What’s the usual processing time for invoice payments?
12. How are freelancers paid?

Best practices for freelance travel expense management

The best way to handle contractor expenses depends on your business’s size and workflow. Here are a few final tips to optimize freelance expense management.

Be clear with timelines

To meet your own accounting deadlines, it’s important to receive all invoices and receipts in a timely manner. Otherwise, receipts can go missing and processing gets delayed. Working with contractors means you won’t always have your team on-site, so it’s even more important to set clear deadlines for expense report submission.

Use expense management software

Take advantage of technology to streamline the claims and reimbursement process. Ask contractors to digitally upload receipts and bills as they’re received to expedite the reimbursement process. Apps like Expensify let business travelers instantly upload photos of receipts on the go, and also include mileage tracking features as well as full integration with accounting tools for more accurate invoicing.

Keep on top of current rates

Average hotel rates can vary widely from year to year, particularly when factoring in currency fluctuations and regional inflation. Before negotiating per diem rates with new contractors, make sure you do some research on the real-time cost of travel. Use tools like Booking.com for Business to compare flight and accommodation prices and find the best corporate rates.

Investigate tax compliance

No matter what country you’re operating in, check local tax regulations for working with freelancers or employees. This will directly impact travel expense deductions, which is something you need to work into your budget. Accurate recordkeeping is also necessary to stay compliant with tax laws and regulations.

With expense tracking tools, companies gain real-time visibility over contractor travel expenses and cut down on paperwork. Plus, travel management software will help you streamline the travel expense reimbursement process for full-time employees and contractors alike. Booking.com for Business helps companies manage contractor itineraries while keeping business travel expenses in line with budget needs. Build policy compliance into the booking process while taking advantage of exclusive discounts and 24/7 customer support.