Out-of-pocket costs refers to expenses incurred by employees that require a cash payment. The employer typically reimburses employees for these costs through an expense reporting and check payment system. Examples of out-of-pocket costs are:
- The purchase of gasoline, parking, and tolls while engaged in company business
- The cost of a business lunch with a client
- The cost of a reward card given to an employee
If employees are not reimbursed for these costs, they may be able to list them as deductible expenses on their individual tax returns, which reduces their income tax liability.
The term has a more specific application in regard to health care expenses. In this case, an individual incurs out-of-pocket costs when required to pay a portion of the cost of health care to the health care provider. This includes deductibles and co-payments.
Conversely, all non-cash expenses, such as depreciation and amortization, are not considered to be out-of-pocket costs. Further, major expenditures such as for fixed assets, or planned expenditures such as for invoices submitted by suppliers are non considered to be out-of-pocket costs.