I’m weird about money. I listen to financial podcasts in the gym, I read expat tax websites at midnight, and I click-through TopCashBack before booking business trips on booking.com, but even I don’t like filling out expense reports. Who does? Yet, it may just be one of the biggest money-saving things we can do on a regular basis.
Not expensing is expensive
Say what? Well, think about it. Let’s say every year I spend $1,000 on literature, $1,000 on translations, $1,000 on office supplies, and $1,000 on food for various short-term teams. Do you know how much that adds up to in a year? It’s $4,000, right? Not necessarily. The answer isn’t as easy as it appears. Your answer will change a lot based on…taxation.
What does taxation have to do with it?
Well, generally speaking, income is taxed while claimed expenses are not. And if you’re Earning a fairly low wage, have a modest net worth on PC, and can’t afford to be bleeding money every year, then you’ve got to be thinking about those taxes.
If I made $50,000 last year but notice my net worth actually decreased by about $2,000, I’d know that’s not sustainable. I’ll have to ask for a bigger salary of, say $55,000, so that I don’t lose any money next year and can put a bit more in my 403b. That’s great thinking! We all need to earn a sustainable wage which that $5,000 increase might give us, but there is one small caveat: taxation.
That increase of $5,000 in salary will be decreased by income taxes, right? Whether you pay a small percentage of income tax each year or a large percentage of income tax, you’re still paying a percentage. What if some of that $5,000 could be tax-free?
Let’s say you paid those $4,000 in expenses that we mentioned above but you never got reimbursed for them? Did you really need a $5,000 taxable raise this coming year? No, you needed about a $1,000 taxable raise and you needed to start filling out your expense reports! (Yes, I’m well aware that I’m yelling at my own lazy self now!)
Unless you live under some foreign tax regime that I’ve never heard of, approved expenses are not taxed – that is, if you claim them. In fact, they won’t even show up on your US W-2 which, for many of us, is the basis of our income taxes in our foreign country of residence and back in the US as well. Anything that you can make disappear from your W-2 is a good thing!
Who pays the price?
Not filling out expense reports is expensive! It could mean you are taking money out of your pocket, resulting in an annual loss in your net worth. Or that money could be coming out of your organization’s pocket (do organizations have pockets?) if they themselves pay your wage and expenses because paying it to you all as salary costs them more. Or, because I’m donor-supported, my laziness in not wanting to claim my expenses is actually costing my dear supporters extra money each year if I’m not expensing and receiving everything as salary. Those are my beloved supporters, and I know they have pockets, and those pockets are not bottomless.
Who reaps the benefits?
Do you know the only one benefiting from unclaimed expenses? Umm…the tax authorities. They have a job to do, but did you really want to donate money to them?
Are you paying income taxes in the US or abroad? Is your income tax rate 0%, 25% or even 50%? Did you remember to include US, state, foreign, regional, and local taxes? Are you a victim of double taxation? Is your income tax treated to a special surcharge or solidarity fee abroad? Do you pay any social security or similar taxes which are tied to your income? There are a lot of somewhat invisible factors here, and all of them favor the tax authorities. We need to earn a sustainable salary, but we also need to keep as much of our “inflow” in the expenses category as possible.
A low-ball example
Let’s be kind and say your total tax rate is a bargain at 15%. What does that have to do with expensing? It has 15% to do with expensing! If you’re not expensing, that $4,000 above may turn into $4,600 at a mere 15% tax rate. $600 is no big deal, right? Well, it’s $50 a month! Let’s do the math, shall we?
That extra $50 per month that we are gifting to the taxman will come to an extra $18,000 in income taxes over 30 years. If we had instead claimed those expenses and kept our salary lower, we would put that $50 into the S&P 500 every month for 30 years, right? With even a modest 6% annual gain, that $50 per month would result in a balance of $48,725.65. (You can do the math for yourself here on calculator.net. At $50 per month, we’ll contribute $18,000 that we saved in taxes, but we would also gain a whopping $30,725.65 thanks to the power of compounding, 6% growth.)
So, in 30 years time, we can pay $18,000 in taxes or we can receive nearly $49,000 in savings. That’s a swing of about $67,000 in a career of service. That’s enough to get even me filling out expense reports and saving crumpled little receipts! And, remember, that’s based on expenses of $4,000 a year and a 15% tax on income. What would your numbers look like?
The moral of this story is that your net worth has to grow every year or your ministry isn’t going to be sustainable. However, whether you need to increase or decrease your overall annual inflow, never reduce your nontaxable-expenses when you can reduce your taxable-salary instead. Said differently, never take a bump in salary, when you could just claim your expenses!
I did mine (finally)!
Before writing my first draft of this post and finalizing it, I sat down, gathered together all of my paper and online receipts, and submitted a request for about four months of expenses. If I can do it, so can you. I’d rather pay myself than pay the taxman even if it means digging out receipts and converting currencies. Because, yes, not expensing can be expensive for me, for you, for everyone…except the taxman.