What Expenses Should I Track and How Should I Track Them?
Business owners often ask us what expenses they should track and also how they should track those expenses. Whether you’ve just started a new business or you’re working as a 1099 contractor, it’s important to know that the IRS is going to tax you based on whatever you report to them at the end of the year. So how you track and report your activity will make a huge impact on how much you pay in taxes.
In this article, we’ll cover three tips to help you get started:
Track all of your income
Track all expenses related to earning your income
Compile your transactions as you go
Let’s dive in!
1. Track all of your income
Don’t rely on your clients or the company you’re contracting with to tell you how much you made at the end of the year via 1099s. We can’t tell you how many times we’ve seen a 1099 come in for one of our clients that’s just wrong. You don’t want to end up paying more than you should, so get into the practice of tracking your own income as it comes in.
2. Track all expenses related to earning your income
“What can I deduct?” is a common and valid question. It’s hard to make a list of what is deductible because it’s different for every business. Here is the IRS’ general rule of thumb for deductibility: is the expense “ordinary and necessary” for carrying out your business? Any expense that you can justifiably tie to earning your income should be included (and by “included” we mean send to your CPA to review). This could be travel, phone, internet, legal and/or professional fees, software, hardware, meals, mileage, etc.
You can be creative, but don’t go overboard. For example, your monthly groceries aren’t deductible even if they give you the sustenance you need to carry out your business. So is everything going to be deductible? Probably not. There are a lot of rules out there, but if you send a list to your CPA, he/she can help you determine what can and cannot be deducted on your return.
3. Compile your transactions as you go in an easy-to-follow format
Don’t want until the end of the year to figure out what happened. There’s no one right way to keep track, but the key is choose an easy-to-follow format that works best for you. Here you can either go cheap or you can go simple.
The cheapest way to track everything is an Excel spreadsheet.
If you go this route, set up an Excel (or Google) spreadsheet with three columns: date, amount, and description. Whenever business money comes in or business money goes out, you should record the date of the transaction, the amount of the transaction, and a description of the transaction. For example: July 10, 2023, $500, Sweet Calculator. Then the best part: just send your spreadsheet to your CPA at the end of the year and watch them get excited. (Because one thing you should know about CPAs is that we love Excel.)
The simplest way to track everything is to use an online tracking software.
There are plenty of online software options that help you easily track and categorize your business activities and expenses. The most common is by far QuickBooks Online. For about $50 a month, you can get QuickBooks synced up with your business bank account, which will pull all transactions in automatically and help you categorize everything in an orderly fashion.
If even those options seem like too much work, you can always pay a bookkeeper or CPA.
Bookkeepers or CPAs can track everything for you. This is the easiest, but most expensive option. Our firm charges a few hundred dollars a month for this service (at the time of publishing this article). We don’t recommend this option unless you are so busy that you don’t have time to even think about it, or you will be sending financials to outside parties that will expect a certain quality of presentation.