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This article assumes that the user is already familiar with payroll and payroll 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.

Contractors occasionally 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. That money is then placed into a fund to be used to pay for replacing broken tools or acquiring additional tools.


The following is an example of how to set up and manage such a tool allowance program.

  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
  4. Enter the Hourly Amount. Example: The amount could be .20
  5. In the Account ID, enter the chart of account you just set up in step 2
  6. For the Expense, select whatever chart of account used for recognizing tool expenses

To Deduct More from Paycheck

For employees wishing to deduct more money for tool allowances from their paycheck:

  1. Create a payroll Deduction item. This should go to the same liability account associated with the Employer Liability Payroll Item.
  2. Add this item to the employee’s Payroll Items | Deductions tab.
  3. In the Deductions tab, set the various properties as needed, such as Amount, Percent, Limit, Start Date, End Date, and more.
  4. Repeat this for each employee and set up separate accounts to represent the separate, respective tool allowances.


  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).


  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.