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How to Setup and Manage a Tool Allowance or Tool Reimbursement Program for Your Employees

This article assumes that the user is already familiar with payroll and payroll set up. The instructions below do not offer extensive details on payroll items and set up.

Contractors often ask if they should pay for their employee’s tools or if they should compensate employees for normal wear and tear on their own tools. One option you have is to pay your technicians a little more and ask them to provide their own tools. This is often easier than debating how a tool was lost or broken.

Option 1: Offer a Tool Stipend

You can offer extra pay to help employees cover the cost of acquiring or replacing personal but use for company purposes. One method is to pay employees 20 cents (or any amount) more per hour. This money is paid to them regardless of what they spend on tools. They will be responsible for providing the required tools.

Setting The Program Up

This part is very easy. You only need to give them a raise. We recommend that you create a dedicated earning item for this purpose. That same earning item can be used for all technicians. You can change the amount paid in the Employee Payroll Items form, if needed.

Option 2: Offer a Tool Allowance Savings Program

You can offer extra pay to help employees cover the cost of acquiring or replacing personal but use for company purposes. This method is to pay employees 20 cents (or any amount) more per hour but place that money in a “savings account”. In other words, that money is placed into a fund and may only be used to pay for replacing broken tools or acquiring additional tools.

Setting The Program Up

The following is an example of how to set up and manage a tool allowance program where you are paying an extra hourly amount to cover the cost of wear and tear on the employees own tools and set that money aside for when the employee needs it.

This program is a little harder to manager because the employee will be required to check tool fund balance and request reimbursement. That’s more paperwork for your company.

  1. Create a new earnings item. Use the Hourly type. Call it something like “Tool Allowance Stipend”.
  2. Set the earning item to the correct amount, such as $0.20, or the amount you decode on.
  3. Set up the employee as a Vendor.
  4. Set up the Chart of Account and Other Current Liability
  5. Set up the Employer Liability Payroll item.
    • Enter the Hourly Amount. Example: The amount could be .20
    • In the Account ID, enter the chart of account you just set up in step 2.
    • For the Expense, select whatever chart of account used for recognizing tool expenses.
  6. Create a payroll Deduction item. This should go to the same liability account associated with the Employer Liability Payroll Item.
  7. Add this item to the employee’s Payroll Items | Deductions tab.
  8. In the Deductions tab, set the various properties as needed, such as Amount, Percent, Limit, Start Date, End Date, and more.
  9. Repeat this for each employee and set up separate accounts to represent the separate, respective tool allowances.

Option 3: Deduct Money from Their Paycheck

Under this program, you are simply offering to deduct money from their paycheck and keep that money for them until they need it. This would also work if you wish to loan your employee money to buy tools and let them pay you back.

Setting The Program Up

  1. Set up the employee as a Vendor.
  2. Set up the Chart of Account and Other Current Liability
  3. Set up the Employer Liability Payroll item.
    • Enter the Hourly Amount. Example: The amount could be .20
    • In the Account ID, enter the chart of account you just set up in step 2.
    • For the Expense, select whatever chart of account used for recognizing tool expenses.
  4. Create a payroll Deduction item. This should go to the same liability account associated with the Employer Liability Payroll Item.
  5. Add this item to the employee’s Payroll Items | Deductions tab.
  6. In the Deductions tab, set the various properties as needed, such as Amount, Percent, Limit, Start Date, End Date, and more.
  7. Repeat this for each employee and set up separate accounts to represent the separate, respective tool allowance.

How to Manage Options 1 or 2

  1. When purchasing tools off this account, under the Expenses tab (on a bill, credit card charge, or check) enter the Other Current Liability that you set up earlier. Enter the amount of the purchase and select the Vendor set for the employee.
  2. The financial balance of the liability account will be reflected on the balance sheet. Because payroll is a separate function, you will have to do periodic payroll liability adjustments to make the payroll liabilities match the General Ledger. Important: When making the Payroll Liability Adjustment, ALWAYS check the “Do Not Affect Accounts” option (at the bottom of the form).

Create a Required Tool List

Create list of tools that your company requires its employees to own. Include specific model numbers or specifications if needed. Make it clear what they must own and maintain and what your company will provide.

Tips for Tool Allowances and Reimbursements

  1. As payroll processes, the amounts will accumulate. This process recognizes the expense and liability.
  2. Consider adding the Tool Allowance Program to your Company Policy Manual. You want to make the terms and conditions very clear. It is a great idea to check with a qualified labor lawyer to be sure that you are in compliance with any applicable laws.
  3. Program rules to consider:
    1. If an employee is fired, any remaining balance stays with the company.
    2. If an employee quits on good terms and in accordance with policy, the remaining balance will go to them.
    3. Consider paying more for technicians that are skilled in multiple trades. They will likely own or need to own, additional tools and more expensive versions of tools.

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