Managing out-of-pocket expenses for your Estonian company

Maya Middlemiss
Written by Maya Middlemiss
on January 03, 2023

It is important to track and account for out-of-pocket expenses in your Estonian e-resident business accurately. With Xolo, it’s easy and quick to do so.

Out-of-pocket business expenses refer to certain costs that a business incurs through conducting its operations. It’s a super-simple but important thing to understand, especially if you are transitioning from being a freelancer with a single bank account and bucket of money, to a business-of-one with separate accounts (and accounting) for your business transactions.

Out-of-pocket costs can include a wide range of different expense types, from purchasing supplies and materials to the cost of traveling for business purposes. What unites them is that instead of coming out of the business account, they come from a personal one — literally, out of someone’s pocket.

There are two main kinds of out-of-pocket expenses to think about:

Out-of-pocket expenses at the start of your business

Many freelancers who start one-person businesses with Xolo have very low setup costs, and the beauty of the knowledge work economy is that you can get your minimum viable hustle on with very little upfront spending.

However, the flip side of that is that most Xolopreneurs have no external investment and are entirely self-funded. So if they do need any essentials to get going business, they’re going to have to pay for it themselves.

So if you need to buy something like a laptop to do your work on, this is a totally legitimate business expense, even though you have to incur it before you can do the work ON the laptop to pay for it. The forward-thinking entrepreneur has no choice but to dip into their own funds or borrowing, before they take a trip to the Apple Store (or somewhere much cheaper, just to get started! Come on, something basic will do!)

Although the business owner uses their own funds, this is never intended to be a personal expense, IF the equipment will be used solely for the business. In that case, costs like this can be treated as a preemptive out-of-business expense, which will be claimed back as soon as the business earns some money to cover it, and provided they are incurred within a reasonable time period before you start trading - generally this would be within 3 months, but the nature and relevance of the expense is most important.

Another set of expenses in this category is the upfront costs of applying for, and traveling to collect, your Estonian e-Residency digital kit, from your nearest collection point — which you also have to do ahead of even creating your Estonian business.

Get into good habits early, of keeping your receipts! As soon as your company is operating, your Xolo accountant will tell you what to do with them.

Read more: Accounting obligations for e-resident businesses.

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Incidental out-of-pocket expenses

Even when your business is happily cash-flow positive, plenty of Xolopreneurs incur out-of-pocket expenses from time to time. these are easy to account for in the Xolo Leap dashboard.  

For example:

  • You pay for something through a phone app — but your app store funding is hooked up to a personal payment source. Nope, your Candy Crush boosters are not an allowable business expense! But business apps are like a productivity tool, or purchases like a travel ticket
  • You are on a business trip and need to pay in cash at a place where cards are not accepted. Got to keep the local taxi guy sweet! Just make sure he scribbles something legible by way of receipt.
  • You have to buy something in a cellular coverage not-spot (which still includes some flights)
  • You jump in an Uber, without realizing that last time you paid for one was for a personal trip (or, I am sure the app just muddles it up sometimes, doesn’t it?)
  • You just forget, and flash the wrong card or pick the wrong one in Apple Pay, for an expense that is related to your work. With the highly blended lifestyles of the typical Xolo-solo, anything can happen… And you always realize just after you made the payment…

How do I manage my out-of-pocket expenses with Xolo?

Don’t panic! Provided you have a valid receipt containing all the required information, you can claim it back as an out-of-pocket expense, so it is accounted for within your business rather than out of your taxed personal income.

This saves you a lot of money, and is just one more advantage of using Xolo and an Estonian e-resident business. We know that in some countries you can wind up having to absorb plenty of business expenses out of taxed income, if you use the wrong payment method or fail to get ultra correct documentation in the moment. It’s all part of the user-centered Xolo tech stack we are continually refining and improving for you, so you don’t have to worry about anything except conducting your business.

You don’t even have to have a legal invoice--but you do need a document that makes it clear who paid (which must be you personally), for what (which must be a legitimate business expense), how much (including currency), to whom, and when. A till receipt probably won’t be valid, but online billing for software will usually produce something usable you can download.

Then you simply claim it back via any of the 3 ways Xolo provides to get expenses into your business accounts system, which are:

1. Online via your dashboard — to upload a new document, find the relevant expense payment in self-service and under 'Attachments' click 'Choose files' and you'll be able to choose a file from your computer. Alternatively, upload the document under ‘Expenses’ section in self-service and click ‘upload expenses’. 

Then click ‘choose files’ and upload or drag the files from your computer. You can mark the expense as out-of-pocket using the slider switch.

2. Upload via the Xolo app — to upload a document via our app, first download it from your app store. Then simply register and login to the app, and you'll have access to your Xolo account. You can then either take a photo of the document or upload an existing one. Once you've done this, simply add a brief description if anything needs explaining, and tap the out-of-pocket slider, before you hit click 'Save expense' to upload the image. 
3. Forward via email — to forward documents via email, just go to your self-service dashboard and find your dedicated uploading email address under "Expenses" — "Upload expenses" — "Receipt forwarding". Use that dedicated email with your relevant vendors, and save it in your contacts. You can indicate the out-of-pocket status of the expense in the subject line, or at the top of the new message.

 

It’s really that easy, and because Xolo has provided you with so many frictionless ways to get your receipts in, it’s well worth doing even for tiny costs. Those few euros every month for the additional cloud storage, or whatever — just forward it in, and let it all accumulated quietly, in your very own tax-free special savings account!

Simply choose whichever method fits best into your personal workflow, to build the habits which work best for you — and recognize that those habits might be different, if you are on a business trip instead of your usual workplace. Once you get home and you’re clearing out your wallet and laptop bag, don’t forget to check for any viable expenses you could quickly snap, scan, and upload!

Tracking your out-of-pocket expenses with Xolo Leap

All your expense documents that you email or upload are processed in batches every few days by your Xolo accountant, and you can view their status in the dashboard. If any further information is needed about any of them, then you will get an email to clarify it. (And let's face it, all those fat-finger errors which can lead to incidental out-of-pocket expenses can just as easily happen the other way around, and are equally easily corrected. Our lovely customer support people won’t judge you for your late-night taxi hopping, or your Candy Crush habit...)

Assuming that all your out-of-pocket costs are justifiable, they will be added to a running account, which (if you are a one-shareholder company) you can view any time in the right column menu of your Xolo Leap dashboard. 

Reimbursing yourself for your out-of-pocket expenses

You can then reimburse yourself for these costs whenever you want to — so long as you have the funds and solvency in your business, obviously. 

Just as when you are in the bootstrapping startup days, you can leave funds in there as long as you need to, to support any temporary cashflow crunch. Otherwise, the timing is up to you — pull down all costs monthly when you do your brief monthly admin session, or treat yourself to some extra cash in hand on your birthday or holidays!

Simply make a payment to yourself from your business bank or fintech account, for any sum up to the total of the accumulated out-of-pocket expenses balance. For avoidance of any confusion, or in case you are ever subjected to a local tax inspection, you should clearly mark your payment ‘out-of-pocket reimbursement’ or similar.

This is because this payment, made from your business to you, is NOT taxable income. It is a straight refund of expenses you have made, out of your personal funds which have already been taxed. In the unlikely event you ever face questions about this from any tax office, Xolo can help you prove this very easily. 

Clearly labelling the payment also helps with the correct balancing of the running account in your dashboard, in which you will see the debit reflected in a few days time.

It’s all part of the service. With Xolo Leap, everything is as straightforward and simple as it can be to manage the flow between your business and personal funds, while remaining compliant and legal at all times.

You can find out more and try out Xolo Leap at https://www.xolo.io/zz-en/leap

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About Maya

Maya Middlemiss is a freelance journalist and author, excited about the future of work, business, money, and technology. She operates her e-resident business through Xolo Leap, so that she can work frictionlessly with brands and publications all over the world, and she is the host of the Future is Freelance podcast. Exploring the social impact of technology on our changing world, and bringing those stories to life in an accessible and inclusive way, is her passion — because all of this is far too exciting to leave it to the geeks. Maya is a 'digital slowmad', originally from London, presently living with her family in Eastern Spain.