What expense category is Checkr?

Checkr is a technology company that provides background check services to businesses. These services are crucial for employers to verify the accuracy of information provided by job applicants, helping to mitigate risk and ensure a safe workplace. Common background check services include verifying criminal records, employment history, driving records, and more. 

Understanding the correct expense category for Checkr services is essential for accurate financial reporting, effective budgeting, and tax compliance. This guide will provide a comprehensive overview of how Checkr expenses are classified, offer key considerations for businesses, practical examples, pro tips, and delve into the relevant tax implications.

How to Classify Checkr Under Expense Categories

Checkr provides background check services used by businesses during hiring or tenant screening. Accurately categorizing these expenses is essential for maintaining organized financial records. 

Generally, Checkr service expenses are classified as operating expenses, most commonly as professional fees or human resources expenses.

1. Professional Fees: These costs align with professional fees because Checkr's services are specialized, similar to those provided by legal or consulting firms. Businesses pay for Checkr's expertise and processes in conducting background checks.
2. Human Resources Expenses: Given that background checks are an integral part of the employee recruitment and onboarding process, these expenses are also appropriately categorized under human resources expenses. This category includes costs associated with managing the employee life cycle, from hiring to termination.

Expense Categories to Avoid for Checkr

1. Compliance Expenses: While background checks do contribute to a company's compliance efforts (e.g., ensuring a safe workplace, adhering to regulations), "compliance expenses" is a much broader category. It could include legal fees, audit fees, regulatory filing fees, etc. Classifying Checkr expenses solely as "compliance expenses" obscures the specific nature of the service received.
IRS Publication 535 emphasizes the importance of accurately reflecting the nature of the expense. A general "compliance" category lacks the specificity needed for clear financial reporting.

2. Software Expenses: While Checkr may utilize software to deliver its services (and may even provide a platform for accessing reports), the core of what a business pays for is not the software itself. It's the service of conducting the background check.
IRS Publication 535 provides guidance on software expenses, often differentiating between purchased software, subscriptions, and custom development. Checkr's fees are not solely for the use of software but for a service facilitated by software. The software is a tool that Checkr uses to provide the service, not the end product that the business is purchasing.

Classifying Checkr expenses as professional fees or human resources expenses provides a more accurate and detailed representation of the economic substance of the transaction. It aligns with the principle in IRS Publication 535 that expenses should be categorized to reflect their true nature, enabling clearer financial reporting and analysis.

Examples of Checkr Services and How To Categorize Them?

To illustrate the categorization with greater clarity, here are specific examples of Checkr services and how they are typically classified:

1. Criminal Background Checks: Costs for verifying an applicant's criminal history, including database searches, court record retrieval, and analysis, are classified as professional fees or human resources expenses.

Pro Tip: For businesses with high turnover or in industries with strict compliance requirements, detailed criminal background checks are essential.

2. Employment Verification: Fees for confirming an applicant's past employment, including contacting previous employers and verifying dates of employment and job titles, are categorized as professional fees or human resources expenses.

Example: A staffing agency would likely categorize these expenses under HR expenses, while a law firm might include them in professional fees.

3. Motor Vehicle Records (MVR) Checks: Expenses for obtaining driving records, especially for positions involving driving (e.g., delivery drivers), are classified as professional fees or human resources expenses.

Pro Tip: Regularly running MVR checks on current employees who drive for the company can help mitigate liability.

4. Drug Screening Coordination: While Checkr might coordinate drug screening, the lab fees are often separate. Checkr's coordination fees fall under professional fees or human resources expenses.

Example: A construction company might have significant expenses in this category to comply with safety regulations.

5. Background Check Packages: Checkr often offers packages that combine several services. The total cost of the package is classified as professional fees or human resources expenses, even though it includes various components.

Pro Tip: Analyzing the cost of different packages can help businesses optimize their spending on background checks.

Considerations While Classifying Checkr Expenses

Accurate classification of Checkr expenses requires careful attention to the following factors:

1. Regularity of Expense: If background checks are a routine part of the hiring process, the expenses are consistently classified as operating expenses (professional fees or HR expenses) in each accounting period.

Pro Tip: For budgeting purposes, project the number of hires and the average cost of background checks to estimate future expenses.

2. Scope of Services: Carefully review Checkr invoices to understand the specific services provided. While the core service is background checks, any ancillary services should be classified appropriately.
3. Accounting System Structure: The specific chart of accounts used by a business will influence the precise categorization. Some companies may have dedicated accounts like "Recruiting Expenses" or "Compliance Costs" within operating expenses.

Example: A large corporation might use a more granular chart of accounts than a small business.

4. Departmental Allocation: If different departments within the organization handle hiring, Checkr expenses may need to be allocated to those departments. This provides a more accurate view of departmental expenses.

Pro Tip: Use cost centers to track background check expenses by department.

5. Legal Compliance: Ensure that background check practices and expense handling comply with all applicable federal and state laws, such as the Fair Credit Reporting Act (FCRA).

• The FCRA regulates the collection, use, and disclosure of consumer information, including background check reports.  
• Proper expense tracking and categorization can help businesses document their compliance efforts and avoid penalties for non-compliance.

Pro Tip: Stay updated on changes to background check regulations, as they can vary by jurisdiction. Consulting with legal counsel specializing in employment law is recommended.

What Are The Tax Implications of Checkr Expenses?

Properly categorizing Checkr expenses has significant tax implications for businesses. Understanding these implications is crucial for optimizing tax deductions and ensuring compliance.

1. Deductible Business Expenses: Generally, expenses for background checks conducted by Checkr are considered ordinary and necessary business expenses, and therefore, they are tax-deductible. To be deductible, an expense must be:

• Ordinary: Meaning it is common and accepted in your industry.
• Necessary: Meaning it's helpful and appropriate for your trade or business.
• IRS Publication 535 provides detailed guidance on what constitutes ordinary and necessary business expenses.

2. Capitalized Expenses: In some cases, if you pay for customized implementation or integration services related to Checkr, these costs might be considered capital expenses. Capital expenses are costs that add value to or extend the useful life of a business asset.

Instead of deducting these expenses in the current year, they are capitalized and depreciated over time, following the guidelines in IRS Publication 535. Depreciation is the process of allocating the cost of an asset over its useful life.‍

3. Compliance and Recordkeeping: Accurate classification and thorough documentation of Checkr expenses are essential for maximizing potential tax deductions and ensuring compliance with IRS regulations. Maintaining detailed records is crucial to substantiate deductions in the event of an audit.

These records should include invoices from Checkr, proof of payment, and any documentation that connects the expenses to specific business activities (e.g., hiring for a particular role). IRS Publication 463 and 535 emphasize the importance of proper recordkeeping for all business expenses.

4. Tax Reporting: Grouping Checkr costs under the correct expense category is vital for accurate tax reporting. This ensures that expenses are reported on the appropriate lines of tax forms, leading to a correct calculation of taxable income.

5. Professional Advice: Tax laws and regulations can be complex and may vary depending on the specific circumstances of your business.It is strongly recommended to consult with a qualified tax advisor to ensure compliance and optimize tax strategies related to Checkr expenses.

How Fyle Can Help Automate Everything Expense Mangement

Fyle significantly simplifies the management and tracking of Checkr expenses, offering businesses enhanced efficiency, control, and valuable insights into their spending on background checks. Here's a detailed explanation of how Fyle helps:

1. Automated Expense Tracking: Employees or HR personnel can easily submit invoices from Checkr through Fyle's mobile or web app. Fyle automatically extracts key data from the invoices, eliminating manual data entry and reducing errors, streamlining the entire expense reporting process.
2. Automated Expense Categorization: Fyle's AI can be configured to automatically categorize Checkr expenses as "Professional Fees" or "Human Resources Expenses," based on pre-set rules. This ensures consistent and accurate coding of expenses, saving time and improving accuracy.
3. Seamless Accounting Integration: Similar to how Checkr integrates with HR platforms, Fyle integrates with popular accounting software (e.g., QuickBooks, Xero) to automatically sync Checkr expense data. This eliminates the need for manual data transfer, speeds up reconciliation, and improves overall efficiency.
4. Customizable Approval Workflows: Fyle allows businesses to create customizable approval workflows for Checkr expenses. This ensures that expenses are reviewed and approved by the appropriate personnel, providing greater control over spending.
5. Detailed Reporting and Analytics: Fyle provides comprehensive reporting and analytics on Checkr expenses, giving businesses valuable insights into their spending on background checks. This data can be used to track trends, identify cost-saving opportunities, and improve budgeting accuracy. You can analyze Fyle's reports to identify trends in background check expenses and negotiate better rates with Checkr.

6. Compliance and Audit Trail: Fyle maintains a detailed audit trail of all Checkr expense transactions, making it easy to track who submitted, approved, and processed each expense. This helps businesses ensure compliance with internal policies and external regulations, simplifying audits.
7. Cost Savings Insights: Accurate expense tracking and analysis within Fyle can help businesses identify cost-saving opportunities. For example, it can reveal whether bundled background check packages are more cost-effective than individual services. Fyle's reporting features can show a company the average cost of background checks per hire, allowing them to assess the cost-effectiveness of different recruitment strategies.

By automating and streamlining the management of Checkr expenses, Fyle helps businesses save time, reduce administrative burden, and gain better visibility and control over their hiring-related costs.

FAQs Based on Categorizing Checkr Expenses

1. Are background check expenses deductible?

Possibly. To be deductible, a business expense must be both ordinary (common and accepted in your industry) and necessary (helpful and appropriate for your trade or business). If background checks are ordinary and necessary for your business, they are likely deductible.

2. What makes a background check expense "ordinary" and "necessary"?

An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business, though it doesn't have to be absolutely required.

3. Can I deduct background check expenses for all potential employees?

If it's standard practice in your industry to conduct background checks on all potential employees, then it would likely be considered an ordinary expense. It also is necessary to ensure a safe workplace.

4. Where do I record background check expenses?

Business expenses are typically reported on Schedule C (Form 1040) for sole proprietors.

5. When can I deduct background check expenses?

Generally, you can deduct expenses in the year you pay or incur them. However, if the expense is considered a capital expense, you may need to recover the cost over time through amortization or depreciation.

6. Are background check expenses considered capital expenses?

Background check expenses are generally not capital expenses. Capital expenses are for assets with a useful life of more than one year. Background checks are a current operating expense.

7. What records do I need to keep for background check expenses?

You should keep records such as invoices or receipts from the background check service, along with documentation showing why the background check was necessary for your business.

8. Are background check expenses for independent contractors deductible?

Yes, if the background check is ordinary and necessary for your business.

9. If I reimburse an employee for a background check, how do I handle that?

If you have an accountable plan, you can reimburse employees for business expenses. The reimbursement is not included in the employee's income. You can deduct the reimbursement.

10. What if my business is in the gig economy?

The rules for deducting background check expenses are the same. The IRS Gig Economy Tax Center may have specific guidance.

Important Note: These FAQs are based on the general principles outlined in the provided IRS publications. Tax laws can be complex, and the deductibility of any specific expense can depend on the individual circumstances of your business. It is always recommended to consult with a tax professional for personalized advice.