You’ve got your shiny new self-employed web work business up and running: congratulations! Now, there are things you need to do to keep it running smoothly. One of the most critical of these is keeping track of your expenses. There are two big reasons to do this. First, if you don’t know how much you’re spending on the business, you won’t know how much money you’re making (or whether you’re making any at all). Second, without tracking expenses, you won’t get the tax deductions you’re entitled to at the end of the year. (The usual caveat applies: I’m not an accountant or an attorney, so check with your own professionals to be positive about things.)
There are a few things to think about as far as the mechanics of expense tracking. First, it’s critical to not commingle your funds. That is, have a separate bank account and credit card (or piggy bank, if you insist on cash) for the business, and use them rather than your personal funds when paying for business-related things. This not only makes the bookkeeping simpler, but can keep you out of legal and tax trouble later on. Second, keep records as you go along. A shoebox full of receipts is the absolute minimum, but better records (kept on a spreadsheet or in an accounting application) will lower your tax preparation bill. You may want to look at a tool like Xpenser to help you keep track of things.
The next question is what qualifies as a business expense. While it’s impossible to give an exhaustive list for every type of business, here are a few things you should think about paying for from your business funds:
- Professional expenses, such as legal and accounting fees, along with costs of incorporating, filing fictitious business name statements, and so on.
- Any business licenses or professional association membership fees.
- Bank charges – but only for accounts that are used solely for business funds.
- Hardware and software expenses – if you use the hardware and software for the business. If it’s dual use (business and personal) consult your accountant.
- Any expenses related to advertising or public relations, from printing business cards to buying AdWords.
- Business insurance premiums.
- Telephone charges – again, if you have a phone line that’s just for the business.
- Auto expenses, if you use your car in business. If it’s dual use, you can deduct a proportionate amount of the expenses.
- Home office expenses. This one can be a bit tricky; we’ve written about it in depth before.
- The costs of attending professional conferences and other business-related events.
The basic rule of thumb is that to be deductible on your taxes in the United States, an expense must be ordinary (common and accepted in your industry) and necessary (helpful and appropriate for your trade). Note that “necessary” doesn’t mean “indispensable” to the IRS. When in doubt, ask your accountant, or check IRS Publication 535 for an overview.
Web workers may have fewer business expenses than some other professionals, but that doesn’t mean we get by without spending money. Tracking the money that you do spend is one of the things that will pay off for you in the long run.