When employees incur expenses while completing their work, many businesses may provide reimbursements or pay them an allowance. This is fair to employees, so they don’t incur expenses on behalf of their employers.
If there are employment-related costs that employers do not cover, employees can also deduct them as employment expenses when they file their personal income taxes.
Read Also: Singapore Employment Act: 10 Statutory Requirements To Pay Employees
What Does Company Allowance Mean?
Company allowances are usually fixed payments to an employee to cover specific types of employment expenses, regardless of how much expenses they incur for that purpose. For example, companies may provide transport allowances, meal allowances, mobile phone allowances, overseas expenses allowances, and any other types of allowance.
What Does A Reimbursement Mean?
Reimbursements are money that is paid to an employee to compensate them for an employment-related expense they have already incurred. This is usually an exact amount, rather than a fixed amount, and expenses can be wholly or partially reimbursed. This can include taxi fares or meals after overtime, medical expenses, mobile phone usage or overseas expenses.
What’s The Difference Between Providing An Allowance VS Reimbursements?
While both methods serve to cover employment-related expenses, they have different implications for both businesses and employees. We look at some of these considerations:
#1 Employers May Have To Pay CPF On Allowances, But Not Reimbursements
According to the CPF website, certain allowances may require CPF contributions to be paid on them. Such allowances include handphone, transport, meals, clothing, and overseas expenses; and even good attendance, festive allowance and other allowances also require CPF payments.
This means if employers provide a meal allowance to employees due to overtime work they are putting in, they have to also make CPF contributions – for both employer and employee – on the meal allowance.
In contrast, if employers require an employee to submit a receipt for their meal expenses after doing overtime work, it is considered a reimbursement. This would not oblige them to make any CPF contributions on the payment.
Read Also: Complete Guide To Employer’s CPF Contributions In Singapore
#2 Employees Have To Pay Taxes On Allowances, But Not Reimbursements
When employees receive allowances, they are typically taxed on it just like normal wages.
For example, if an employee is given a transport allowance each month to cover the driving and parking costs incurred in the course of their work, they have to pay personal income tax on this allowance.
However, if employers provide reimbursements based on car park receipts or mileage, this is not taxable.
Nevertheless, reimbursements for private benefit of owning/using the vehicle will still require employees to pay taxes on the amount.
This applies to other types of allowance VS reimbursement payments as well. However, for specific expenses, such as meal allowance for working overtime, employees do not have to pay taxes even though they are given an allowance. Employers can direct their employees to the IRAS website to verify other types of payments you are providing them.
In any case, most employers are on the Auto-Inclusion Scheme (AIS) – which requires them to submit the employment income of their employees. This is then automatically included in the employees’ income tax assessment.
Read Also: Guide To Providing Car Benefits To Directors & Employees Of A Company
#3 Separate Different Types Of Employees
By providing an allowance, businesses can clearly distinguish different types of benefits for different types of employees.
For example, an MNC may provide housing allowances for employees on foreign packages. This is to distinguish between talent they can find in Singapore VS talent they had to procure from elsewhere.
Other employees would also not see it as an unfair perk, as all employees who fulfill the criteria are paid the allowance. At the same time, it keeps the pay scale for employees at the same level, while providing a clear differentiating reason for the additional payment.
#4 Convenient Way For Expense Reporting
Administratively, it will be simpler and more straightforward for companies to just provide an allowance rather than require employees to keep and submit receipts, have the finance team process the receipts and pay the correct amount. This has to happen each and every month.
It is also more convenient for employees to get an allowance rather than keep track of the exact expenses they incur, ensure they don’t lose any receipts, and have to submit it every month.
If companies provide an allowance, it is just paid out without having to bear these administrative challenges. However, cost savings may be mitigated due to additional CPF payments required (and employees may not love it either due to additional taxes they may have to pay on allowances).
#5 Businesses Collect More Information Through Reimbursements
By reimbursing employees instead of providing an allowance, businesses are able to collect much more information on their operational expenses. Doing this also solves the problem of determining a fair allowance for employees – where some employees may incur more and others incur less, but all of them receive the same allowance.
If a business is providing transport allowance, it may not know whether it is too much or too little. The business may also not be providing employees who are working more/harder an adequate amount. On the other hand, it may be overcompensating employees who do not require much transport allowance. This way, businesses can allocate resources more fairly.
This information can also be aggregated to use for future bargaining purposes – either with employees or vendors they hire to take over such expenses.
For example, if a business provides travel allowance, it can keep track of its exact costs and employee travel patterns. This can help them make a more cost-effective decision on whether to work with a platform provider for employees to use for business purposes.
Allowances Require Both CPF AND Taxes To Be Paid
As covered in the points above, providing an allowance can be a more convenient solution for employers and employees. However, by doing so, employers have to make CPF contributions on most allowances. At the same time, employees have to pay taxes on allowances they are given.
With this in mind, it can be more beneficial and cost-effective for both employers and employees to utilise reimbursements for employment-related expenses. Employees aren’t going to be taxed on most reimbursements, while businesses don’t have to pay CPF, and can also make better cost-related decisions.
Read Also: 10 Types Of Employee Payments (Apart From Salary) That Businesses Need To Pay CPF For
Employees Can Claim Tax Deductions On Business Expenses That Are Not Compensated By Their Employers
Employers are not required by any law to pay for employment-related expenses. This means providing an allowance or reimbursement is purely for making the job more attractive and/or being fair to the employee.
Certain employment-related expenses may not make sense for an employer to compensate. This may include memberships for networking or certain types of skills upgrading. For such expenses, employees can claim tax deductions when they file their annual income tax returns.
This article was originally written on 19 April 2021 and has been updated with the latest information.
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