How to create a budget for employees' entertainment expenses

Apr 05, 2024

Employees spend a fair amount of time at their workplace. This time shouldn’t force them to sit at desks and have awkward conversations with coworkers throughout the day.

To encourage team bonding and let your employees mingle with themselves and with potential clients outside, your budget should have room for employee entertainment expenses.

Business meals, fairs, company-organized events, and participation in local trade shows can be some of the go-to morale-building activities for SMBs.

Why should businesses plan for entertainment expenses?

But why should your company allocate money for staff entertainment costs? Should you really overload the accounting team with more work? Yes.

They are deductible

As a rule, IRS doesn’t allow tax deductions for any cost that’s labeled as entertainment or recreation. Yet certain categories of business entertainment expenses are tax exclusive.

More than the expenses, the motive and overall experience you plan to deliver are considered for a tax-exclusive exemption. If you carefully plan and categorize them, you can get 50% to 100% tax deductions on these staff entertainment costs.

If the expenses are spent on a common event where your customers or client were present, they are eligible for 100% tax deductions.

Creating a business expense plan is the way to track all these expenses and be prepared to avail of the deductions.

Show employees that you care for them

Business entertainment expenses don’t end with taking them out on office trips and business lunches. Creating space for employee entertainment expenses through T&E policies is conducive to optimistic and protective workspaces.

Furthermore, organizing public events and meets gives a chance to employees to know their customers better.

What is included in the employee entertainment budget?

Here are the categories of staff entertainment costs that can be included in your budget. Some of the categories qualify for a tax deduction while some don’t. It depends on the situation where the costs are spent.

Food and beverages - Whether you order in for your clients or employees or organize a formal dinner party, the expenditures can be included in the budget. IRS allows businesses to claim 100% tax deductions for this category.

Venue booking - if you are planning to conduct an event outside your office, the booking charges of the location will be also a part of the employee entertainment expenses.

Hotel booking and overnight accommodation - when your company is planning office trips to a distant destination, the overnight stay will be a part of it. Your budget will carry this category too.

Other entertainment costs - This includes other miscellaneous staff entertainment costs like when you hire someone for a performance, arrange live music in your venue or gifts for employees and other attendants.

Steps to calculate employee entertainment expenses

You can estimate employee entertainment expenses through simple steps. In case you want to cut through all this and eliminate manual processes, implementing a cost management application will do it for you.

1. Keep track of expenses

Someone from the accounting department must take in-charge of this and handle everything finance. They can have a separate file where they record the numbers and collect invoices and bills.

This data will be very resourceful when you are filing the tax for entertainment expense deduction. Along with the amount spent, they should also enclose the event name, location, date, and time.

Since some business entertainment expenses qualify for full tax deductions and some don’t tag them accordingly for your future reference.

2. Specify what is qualified and unqualified expenses

Some expenses like decoration, club fees, recreation tickets offered to clients, etc aren’t eligible for tax write-offs.

But if your business meals and entertainment expenses still include them, make sure that it’s known to everyone. Create a separate account to handle the expenses in order to keep chaos at bay.

3. Smartly divide the 50% and 100% tax exemption categories

The accounting team should follow the 50% and 100% tax exemption rules for categorizing the business meals and entertainment expenses of their company.

Here is one example that denotes how the write-off percentage instantly changes even with a small modification in the spending scenario.

If you treat your client in your location, the food and drink expenses will fall under the 50% exemption category. If the same lunch with the client happens in a hotel, then it qualifies as a 100% write-off.

Likewise, these exemptions are available for other staff entertainment costs too. You will have to segregate those expenses and record them.

This way, you minimize the efforts you have to take while filing taxes and gather proof accordingly for each expense.

4. Combine categories to calculate the total employee entertainment expenses

In this last step, the accountant in charge should converge the listed expenses from the 50% and 100% tax exemption categories.

Summing this up, you will get your total business entertainment expenses for the given time period.

What entertainment expenses employees can claim?

IRS has made many changes in the allowed tax exemption in the entertainment category till 2018.

IRS usually doesn’t allow tax exemption for any expense category that’s marked under amusement, entertainment, or recreation. But there are some exceptions available and businesses have to carefully consider and spend.

Expenses eligible for 50% tax write-off

• Food that is provided to employees when they extend their work timings, during office trips, and during work-related conferences, and hospitality expenses are eligible for a 50% tax write-off.

• Beverages and alcohol distributed at the office location.

• Treating your client or partner with a meal or drink within your office premises.

Expenses eligible for 100% tax write-off

• Entertainment expenses that are deducted from employees’ monthly compensation.

• A special meal arrangement for your employees either at the office location or at some other place (e.g. an award ceremony or a holiday celebration).

• A lunch with a client, employee, or partner in a restaurant, where at least one of your employees is present and is not a family gathering.

• Year-end party for employees where their families are present too.

• Travel and accommodation expenses for employee outings and trips, golf game outings for employees, or any team-building activities for employees conducted both in your venue or outside. 

• Business travel expenses of employees (travel + lodging).

• Other expenses that fall under this category are company-wide celebrations or holidays, free food offered to customers/public, and office snacks, meals, and beverages provided to employees that are already a part of their taxable compensation

Business entertainment expenses that are not eligible for a tax write-off

• Lavish and extravagant meals and entertainment spending for your employees or clients.

• Tickets to movies, games, or charity events are offered to clients.

• Annual parties for customers.

Other miscellaneous expenses

• Gifts and coupons you send to clients and employees qualify for a tax deduction. For each person, you send a gift to, a $25 tax deduction is allowed. (This rule doesn’t apply to entertainment tickets).

Employee entertainment expenses accounting

Entertainment expenses accounting denotes the process the recording, monitoring, and reviewing business meals and entertainment expenses transactions.

This process should be taken seriously to regulate your entertainment expenses and not lose track of it. You need proof and documentation to back them for taxation and audit purposes.

Since the expenses get divided based on their tax exemption qualification, the accounting team should categorize the expenses accordingly while recording them. Manual or spreadsheet accounting can take you hours for this. 

Other than having a well-designed travel and entertainment expenses policy, you need a streamlined payment management system that smartly allocates funds and keeps note of them.

This can reduce the manual workload and expense reporting oversights. So, what you need is a superpower called ‘virtual cards’ from Volopay which can simplify accounting entertainment expenses.

Basically, Volopay is an accounts payable software that can make local and international payments in a jiffy. Virtual cards, in particular, allows you to create multiple of them and allocate them for different one-time or monthly payments.

You can assign limits to keep the expenses in control and if one requires more than the set budget, they can request, wait for it to get approved, and spend.

These cards work similarly to physical cards and each card has different card details. You can allocate one card to each sprint or spending category.

Every payment made through the card will be visible on the admin platform. So your employee entertainment expenses are very well under control and you can see their spent amounts and balances in one place.

Running short on budget? You can borrow credits within the Volopay application itself and spend them for payments through cards and other transfers.

In any case, if the employee has to incur the business meals and entertainment expenses, they can place a reimbursement request through Volopay mobile app.

It’s as easy as placing an online order. They have to scan the receipts, choose the required fields, and send them in. It will pass through levels of approvals and money will be automatically credited into their account. 

Accounting entertainment expenses this way is much more efficient than traditional methods. 

Tips to save money on business entertainment expenses

Money-saving strategies are one of the biggest facades. You will never know when certain employee entertainment expenses sneak up on your records and trespass the budgets.

Follow these steps to keep the entertainment expenses under control.

1. Creating business entertainment policies and budgets

Not all staff entertainment costs are planned company-wide that gets planned and approved by the management. Internal teams plan and lead employee engagement and customer experience conferences too.

There must be an entertainment budget and policy in place to guide them on allowed expense categories and spending limits. 

Setting approvers for expenses ensures that every expense that the company has to bear is transparent. Over-expensive and unnecessary expenses can be cut in the nib and the organizer can be asked to find better alternatives.

2. Make use of company-exclusive discounts by vendors

There are food and entertainment vendors who specifically offer discounts for businesses as the purchase is made in bulk.

A little research online and in your locality will help you narrow down a cost-effective vendor list. Before you finalize them, don’t leave your chances to wiggle room and negotiate for better prices.

3. Promote value-based spending

Though employee entertainment expenses are important, mindless spending can block your profit margins. Allow yourself to answer the questions before approving an event idea or expenses to comprehend the value it can bring. 

How it can benefit my business/employees/customers? Who gets benefited the most? What’s the end goal of this spree? Is it quantifiable? Or is this going to produce long-term results?

What are the integral expenses of this event and what are the optional ones? How the overall experience can be elevated without increasing the financial estimate?

Satisfactory answers to these questions can justify the budget you decide to allocate.

4. Get a payment management system for closer tracking

An application that helps you send out payments and keep track of them is what you need to see if your budget is working.

Spreadsheets can be time-consuming to go through. But something like this application would show you the real-time status of what’s happening in your accounts payable department.

So, your business meals and entertainment expenses data will be available anytime at your fingertips.

With Volopay get a cloud-based for all you business accounting

Business meals and entertainment expenses form an inevitable part of your business to make your employees realize that they are part of the team.

If you have devised a clear accounting strategy, you can embrace it head-on and not worry about taxation. With Volopay, you can always be in the know of your general accounting and entertainment expenses details.

Volopay has physical and virtual cards features too. You can create as many virtual cards as you need and allocate them to your different employee entertainment campaigns.

These cards work great for one-time and recurring online payments. For domestic and international account transfers, you can make use of the bill pay.

All the data gets stored and can be synced with your other accounting apps (Eg. Xero). Get Volopay today and efficiently administer your business entertainment expenses.

Create a budget for your business without any hassle