Calculating your law firm operating expenses can be challenging when it comes to reimbursements. Since law firms tend to have reimbursements more often than other types of businesses, there is an enhanced need to accurately record and reflect this data in your books. Today, we’ll discuss multiple types of reimbursements and how to record these transactions accurately to ensure you get the clearest picture of what your firm is spending on reimbursements.
How to Record Your Law Firm's Client Reimbursements
It is extremely common for law firms to reimburse themselves for client costs associated with any given case. These are often referred to as advanced client costs. In order to determine the best method for reimbursement in your books, it’s helpful to understand the difference between hard and soft costs. These are the two categories of advanced client costs.
Hard Costs or Direct Litigation Costs
These expenses can be directly attributed to the case you’re working on. Examples include things like:
- Travel expenses
- Witness fees
- Transcription fees
- Court filing fees
- Court reporting fees
- Medical record expenses
- Deposition expenses
- Mediation fees
- Any other direct fees paid in the course of litigation
Soft Costs
These expenses are less directly attributable to the specific case at hand. These include:
- Postage
- Delivery fees
- Clerical work
- Research costs
- App costs
- Software costs
How to Reimburse Your Firm for Hard and Soft Costs
The reason you should know these types of costs is because the way you will account for them may be slightly different. For soft costs, we recommend that you charge your client a flat rate for these and count those solely as business expenses since they can be very difficult to track directly to one case or another. For hard costs, you’ll want to categorize these expenses inside of your client’s account in QuickBooks Online. This way, you’ll be able to see exactly how much will need to be reimbursed to your firm by your client.
When you do this, the costs you pay on behalf of your client is considered an upfront loan to your client. They are not considered as a business expense because you pass the liability on to your client when billing. They’re also not considered income because it’s repayment of an outstanding debt. In the case that a client doesn’t reimburse you for these costs, you can deduct this amount as a loss. However, we recommend billing at least partial payment up front and holding it in a client trust or IOLTA account that you can use to pay for direct case expenses while working on the case.
How to Record Employee Reimbursement in QuickBooks Online
In addition to client reimbursements, most small firms also need some system for entering employee expense reports in QuickBooks Online so that they can appropriately reimburse employees for business expenses. This is very important for law firms who want to retain top talent because attorneys and partners will grow frustrated if they are waiting weeks or months for reimbursement of business expenses. Setting up your employee expense reports will help you identify when and how much to reimburse each employee.
Today, I’ll show you how to enter employee reimbursement in QuickBooks and accurately reflect your law firm expenses including those that are paid for initially by your employees.
Step One: Employee Expense Report
The first step to a successful reimbursement process is to ensure you have all the information you need to appropriately reimburse your clients. We recommend setting up a spreadsheet where employees can independently track expenses that need to be reimbursed and then entering those into your Employee Expense report in QuickBooks at least once per month.
Step Two: Reimburse Employees During Payroll
The easiest way to reimburse your employees will be to add it as a line item on your payroll. This will allow them to get reimbursed alongside their paycheck and be easier to manage for your business.
Step Three: Record Reimbursements in QuickBooks Online
If your payroll software is separate from QuickBooks Online, you’ll need to make sure that the reimbursement is recorded accurately in QuickBooks. This is very important as employee payments will be subject to taxes, while employee expenses are tax deductible. To avoid paying taxes on deductible expenses, follow these steps:
- Click +New
- Select Journal Entry
- On the first line
- Under Account, select your liability account.
- Under Credits, enter the amount you owe your employee.
- Select the Name dropdown to find the name of your employee.
- On the second line
- Under Account, select the expense account that fits the purchase your employee made.
- Under Debits, enter the amount of the purchase.
- Select Save and Close
