I’m thinking of adding a tool allowance to an employee’s pay. I know I have seen this discussed here before, but I can’t find it at the moment so bear with me while I ask again.
To any of you who do this or have received an allowance from other employers, here are a couple of questions,
1. When you pay the allowance to the employee, is it included in with his paycheck?
2. If it’s inlcuded in the paycheck, how do you keep the amount of the allowance separate from the wage so that you are not paying workman’s comp, liability, withholdings, etc., on the amount of the allowance also.
3. Or, is the tool allowance really part of the hourly wage and therefore subject to the same payroll taxes?
I’m hoping that a tool allowance could be considered a business expense rather than a payroll expense and if it is, what category do you list it under in your bookkeeping?
I’m interested to hear how you do it.
Thanks in advance,
Brad
Replies
Good question I would like to hear some advice on this also.
Here's how I have seen it done... and I ain't sayin' it's legal.
The employee is given an allowance equal to a certain amount per hour, say $1. When they build up enough allowance to buy a tool, they do so on one of the company's charge accounts, and the company pays for it. The written policy is that the tool belongs to the company, but the employee is allowed to keep it with them, and it does not go into the company tool crib. If the employee leaves the company, the boss asks for the item back.
In practice, the tool quickly becomes personal property of the employee. It's a sort of 'don't ask don't tell' method that sidesteps the employment taxes that would ordinarily be due on compensation paid directly. I've known two companies use this method.
I think a better (more legit) way could be to pay the employee rent on the tools they bring. Those rent payments would amount to a cash payment to the employee that they could use to buy tools. I would talk to your accountant about whether or not this can be done legally. Same as a mileage allowance (which is supported by IRS rules at a certain per mile rate), only different.
Where I work we have an incredibly good tool policy. The company buys everything: hand tools, power tools, new tools, fun tools, good tools... whatever I want. Since I'm the only employee it works great. I guess if I get another guy I might have to change that.
All.... I once worked for a GC that "gave" tools for special occasions. These were for anniversary of start date ,Christmas,etc. He would ask employees what tool they might have thier eye on and act accordingly. He would add 2 % to his contracts to cover the expense , buy the tools himself and use them as a company write off. Everybody got what they wanted and of course on site construction improved along with personal pride and care of tools.
BC,
Check with your accountant to be sure, but here is what I believe;
1. Tools are tax deductable for an employee, therefore they are a business expense for you.
2. Break the allowance out on the pay stub. Do not deduct taxes or other government mandated fees, (SS, UI, WC, etc.) Keep them in a seperate column in your bookkeeping.
Treat them like milage funds.
SamT
Employee expenses aren't taxable - per diem when working remotely, personal vehicle miles, company supplies paid by employee and reimbursed by employer.
So if the company is buying tools for the company - that's easy. And someone's don't ask, don't tell policy above seems like it might be just fine with all the people on your jobsite (i.e. the non-accoutants).
But if you give money in a paycheck, that's usually taxable - if the employee gets to spend it however they want. What if $20/week or $1/hour or whatever accrues in an account at local, quality tool vendor for each employee.
Or, better yet, each month everyone in good standing gets a $100 gift certificate to the tool store. And maybe the employee of the month (more on time, more productive, or turned some gone-to-heck task around, etc) gets $200. Gifts aren't taxable (up to $11,000 per person per year). Everyone has to be pretty honest about it (can't hock the gift cert for booze, etc) because everyone is curious next week, "What tool did YOU get?"
Note that you should only go down this path if you expect to continue the practice. There is a concept of employee "entitlement" and once they've gotten something for free (tools, health insurance, etc), it like pulling teeth to retract the benefit.
But I like the approach. It is a perk other don't offer. It is a fair way to compensate for tool use. It is a fun thing for the guys to look forward to.David Thomas Overlooking Cook Inlet in Kenai, Alaska
Here is the wqay I have seen it in practice at two places and how I have done myself, all under the advice of an accountant.It is paid as a part of the payroll, but listed separately and not subject to FICA or income tax. The amt is never reported as income in fed forms for the employee. On the emploers side, it is a tool deduction.It is considered a re-imbursement for tools in the possesion of the employee to cover the wear and tear on them, tools that normally would, could, or should be provided by the employer, but when the employee brings his own, it saves the company money but it is a fair recompense to the employee. That the employee is expected to spend the money on tooling is a given and understood but not subject to a tally.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
I just got one of these to try; I'm unsure how new they are, but I use it all the time now and have more on order:
http://qwiklok.com/
A quicksdisconnect for electric cords. Works great, installation is fairly straightforward, but more difficult for thicker cords.
Company pays for ALL tools, without discretion, no matter what.
Thanks for the ideas. I think what piffin described is what I had in mind and I'll have to check with my accountant to find out the details on the bookkeeping end. In the past, I have given tools and gift certificates, as some of you mentioned when I knew it was something that they wanted. I do supply most of the tools used by everyone, except hand tools in your belt, but I know that some people, like me, prefer to use their own tools even if someone else is willing to supply it. I think most carpenters get used to the feel and the quirks of their own tools and when you pick up someone else's tools it almost feels alien. I just wanted this guy to know that I appreciated his willingness to use his tools.Thanks.
Brad,
I use a truck and tool allowance.
Truck allowance = $2.50 per straight time hour.
The tool allowance is paid on the capital investment the carpenter has invested in tools he or she carries.
I have a list of tools with an entry the employee has to fill in:
1) Age of tool
2) Make & model
3) Current value of tool.
I give $.40 per hour for every thousand dollars of current value.
NOTE: Paid on straight time hours only.
EXAMPLE:
Journeyman carpenter @ $6,000.00 of current vale = 6 X $.40 per hour = $2.40
Check with your accountant.
There should be no withholdings on this allowance/ lease agreement.
The crew loves it!
I also have seen a big jump in productivity with implementig this policy.
Nice to have a fixed cost also when it comes to this direct overhead expense.
I provide all blades and provide all sharpening etc.
Good Luck
Tom
Working for nothing is not getting any cheaper.
Tom,
As an underpaid Carpenter, I really like your plan!!
I want to pitch it to my boss, so I got some Q's...
Do you depreciate the tools over time?
How much?
Just power tools, or do specialty tools qualify? (electric+plumbing etc.)
You called it an allowance/lease agreement.
for accounting purposes are you leasing your employees tools?
Stay tuned I'll probably have more Q's...
Now I gotta get my tool inventory updated and on a spread sheet.
(gotta learn how to use a spread sheet first)"I think natural selection must have greatly rewarded the ability to reassure oneself in a crisis with complete bull$hit."
Witty tagline...
MrT,
Yes our agreement with the crew is a lease agreement.
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Much like you would do if you went down to the rental yard and rented a specialty tool.
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The crew obviously does not make the profit margin as a rental yard does.
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Set down with your legal counsel & accountant to insure you are in compliance with all laws etc.
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Check with your insurance provider with issues on insurance in regards to truck leases.
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We usually figure physical tool depreciation at 4 years.
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The goal with these allowances is to provide an adequate allowance for the staff and capitalize on the efficiencies this policy promotes.
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We still provide all the larger and specialty tools Ladders Scaffolding pump jacks etc.
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Whether the company provides the tools or the staff provides them there still is a direct cost associated with this necessary.
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The tool allowance is about (5%) of the total cost of labor. To me that means if the employee can improve production by 24 minutes a day we a money ahead.
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Bear in mind a savings of 24 minutes is compared to performing the work with absolutely no tools.<!---->
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Good luck<!---->
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Tom<!---->
Working for nothing is not getting any cheaper.
Tom,
just so I understand properly...
after four years a tool will have no value and not be eligible for an allowance?
or is there a residual value.
I try to buy top notch tools, so a lot of mine are way over 4 yrears old and still going strong.
But if it means I gotta buy more tools every year, then so be it!!!
thanx again!"I think natural selection must have greatly rewarded the ability to reassure oneself in a crisis with complete bull$hit."
I'm Swiss!
MisterT,
From an allowance perspective the tools that have been depreciated over (4) years.(25% a year depriciation only) As far as a residual value: yes, there is some therory that may be applied to that. I would hate to have to add a factor for that.
However, if reasonable compensation was given for physical depreciation, breakage, lost, repairs and maintenance, return on the capital investment etc. etc. during those (4) years, then the tool owner has received a reasonable schedule of return on ones investment.
After 4 years, (almost eternity) I can not wait to purchase the new <!----><!----><!---->wis<!----><!----> bang model that has replaced my old model.
What are your thoughts?
Tom
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Working for nothing is not getting any cheaper.
Edited 8/11/2005 10:43 pm ET by TomMaynard
I guess I was thinking that a rental type arrangement would be better for someone with alot of older tools.
And replacement value is not there.
but on the other hand if I had been in a program such as yours all along I would have recieved a good sum by now.
I DO like your system
Definately beats what I got now (diddly squat)
You are one of the GOOD guys!!"I think natural selection must have greatly rewarded the ability to reassure oneself in a crisis with complete bull$hit."
I'm Swiss!
I almost hate to bring this up, but...the 2 outfits I worked for in NY paid 100% if the tool was broken or worn out on a job site. tell'em it was burned out, shot, etc, and they replaced it with an exact match, usually they'd just give you the p.o.# and you'd go to one of their suppliers and get the replacement. It was billed to the company, but it was a known fact who it belonged to. We did have to turn in the old tool which was no big deal because it was kaput. Nobody I know of abused the policy.
Here, forget it. You bring it and it breaks, you shoulda known better....
If you aren't one of the one's I'm talking about,you shouldn't have any complaints....
I lived just south of Wellsville NY. for years.
The boss every day brought donuts. Wages Great! Bonus every year! Xmas party!
Benefit pkg., 10:00 break.
Out here I get no respect!
Rodney D.Working for nothing is not getting any cheaper.
Have you been reading the other posts on here? I've been talking up wages and conditions in NY for a few months now and for some reason there are some on here that think I'm better than others. I can't help it if the conditions are better there and they pay great wages to boot. Man, if only these guys would open their eyes and check it out, all these comments about "yankee" and the like are enough to drive ya......
Guess now that I'm not in NY anymore, according to the naysayers, I should be happy being paid a pittance compared to what I'm used to, or if I'm not happy I should keep my mouth shut and not talk about it, wouldn't want the word to get out that carpenters and the trades can actually make a living somewhere in the country and have some sort of retirement plan as well.
They call me arrogant...who's really the arrogant one anyway...the one who talks about how good it can be someplace else or the ones that sit there and think that their little corner of the world is the best there is?? I learned a long time ago to think outside the box, for some of these people the box doesn't have a lid to escape......
The tool allowance issue I spoke of is the truth, and I'm not going to lump my experiences in 2 different states into one response as there are 2 seperate lines of thought in the areas in question. Ones good, one is bad...I can't help it if the bad just happens to be in some good ole boys homestead state.......If you aren't one of the one's I'm talking about,you shouldn't have any complaints....
Surprisingly I agree. The outfit I'm with replaces tools that die on the job no questions asked, repairs them if they can be.
The first day I brought out my zip tool to rout out holes for electric in baseboards it died. The boss said go buy another and give me the reciept. I said thanks but he should know the tool was 6 years old and this was the first day out on this job. He said doesn't matter get a new one.
I don't think anyone trys to take advantage, it would be obvious. But I'm sure looking forward to a new Milwaukee reciprocating saw as soon as they need me to drag my 20 year old dinosaur out, it's gotta die soon. It's just that I do cabinets and trim not much reason to use a recip on new work, is there?
Your great grand kids MIGHT wear it out!!!
MIGHT mind you.
Ole Milwaukee sawzalls just keep on running.........."I think natural selection must have greatly rewarded the ability to reassure oneself in a crisis with complete bull$hit."
Witty tagline...
Is that your required tool list, or a checklist to arrive at an allowance?
That is the list of tools I will provide allowances for.
I have some flexibility here, if an employee has a tool that is not on the list but provides some definite value to his or her productivity and the quality of their work I would have them include it on the schedule.
If an employee had a back hoe for example he or she would not be entitled to schedule it for an allowance.
TomWorking for nothing is not getting any cheaper.
Tom...thats an impressive tool list...do you have carps that are actually bringing a majority of that stuff to a job site? I scoped the list out and it seems you've pretty much covered the gamut of stuff needed for a true operation.
I assume (perhaps incorrectly) that this is a list you review for new hires to ensure they are up to your standards? Or do you require them to bring the majority of the tools you have listed to most every job?
Either way, that list is impressive and you are to be commended. BTW...those were some nice pics you sent via e-mail, the design and craftsmanship is pretty apparent from the kitchen and bath remodel....
If you aren't one of the one's I'm talking about,you shouldn't have any complaints....
If one of my guys had a backhoe and I needed one on siote, we would negotiate a rental separately from other items.
BTW, I just had a discussion with my accountant re tool depreciation. She said the IRS requires all construction tool investments to depreciate over seven years. I informed her that most do not last that long in daily use and 4-5 years is mmore realistic. She replied that the IRS then requires a "proof" which is time-consuming.
I wasn't going to argue that point with her, and told her to expense thm all under four hundred bucks each as sec 179 writeoffs
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Taunton University of Knowledge FHB Campus at Breaktime.
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I was just kidding when I made reference to the scenario of one of my employees owning a backhoe. If they did however your idea of a separate rental terms sounds like a plan to me.
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The IRS regulation regarding depreciation from a tax perspective I am sure is right. The depreciation I was referring to is physical obsolescence or physical depreciation. And this schedule was set up strictly for my employee allowances.
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I had an employee bring a brand new 18 volt battery drill on the site one day; it was a small commercial project on the main street. From 2 stories up he dropped it to the sidewalk below (ouch!) (the area was fenced off) and no more drill. Trying to factor breakage like this is difficult at best.
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TomWorking for nothing is not getting any cheaper.