Tracking expenses is one of the least sexy, but most important, things a freelancer can do.
Because tracking expenses accurately will help you provide the government with a realistic overview of the actual profits of your business. And if you're spending a ton of moolah on marketing, office space, memberships, subcontractors, equipment—the list goes on—then you absolutely, positively should not be paying taxes on that income. Period.
That means you should be tracking your expenses as you go—saving receipts in case you are ever audited, logging business-related mileage and tolls, and so much more. But don’t be overwhelmed. As you’ll see below, tracking expenses doesn’t need to be terribly difficult.
Let’s take a look at three of the biggest questions freelancers ask about expenses.
What can I expense? What’s tax-deductible?
As a freelancer, when you file your taxes, you will most likely file a Schedule C, which is for “Profit or Loss From Business,” and more specifically from a sole proprietorship.
Keep that in mind: what you are doing is running a business. You may not have a corporate headquarters, or even any employees or assistants, but in the eyes of the IRS, you are still running a business.
Fortunately, when it comes to tracking expenses, that means there are a lot of legitimate things you can deduct, such as:
- Your home office. But note that this has to be a true home office that is designated solely for the purpose of your business and is used on a regular basis. The deduction is based on a formula that includes the square footage of the space and the cost of your mortgage or rent and other expenses.
- Fifty percent of business meals. Meeting with a potential client? Save that receipt. Those lattes can add up, too.
- Your website. That means domain, hosting, or even fees paid to a web designer or graphic designer for your logo, as well as costs associated with ongoing maintenance of your site.
- Telephone and internet expenses—but if you use these for both personal and business uses, you can only deduct a percentage.
- The cost of hiring professionals, like a lawyer or an accountant. And, speaking of accountants, you should have one—especially because articles like this one can never be all inclusive, and because there is no one-size-fits-all answer to these questions. Having an accountant that understands your individual experience as a freelancer can be invaluable.
- Advertising. You can deduct advertisements in a variety of formats—from that sponsored post on Facebook to the fliers you posted at all those local cafes. If you use a service like Facebook, it’s easy to track those expenses in your account history, and you can set the ads to be be billed on a monthly cycle.
As noted above, this is not a complete list. I have both a sole proprietorship as a writer/editor and another as a musician—so for one I’m writing off guitar strings and for the other the laptop I purchased just to use for business, and I’m writing off mileage and tolls for both.
How big of a difference will tracking expenses make come tax season?
Tracking expenses can save you from a lot of headaches. According to CPA and blogger Gary Kaplan, “Tracking expenses during the year will streamline the tax preparation time, and [...] provide the necessary substantiation of the expense for legitimate tax return deductions.”
He points us to Sec. 274 of the IRS code, where it lays out how certain items should be substantiated. If not substantiated correctly, and you are audited, not properly tracking those expenses could come back to haunt you.
“The cost of an audit could be the disallowance of the expense, and the professional fees for representation in the audit,” said Kaplan. “Substantiation is the best defense if the expense is appropriate.”
So, to save time, money, and hassle, make sure you’ve got your expenses organized, with all of the appropriate information, and make sure to consult with an accountant ahead of time—it’s better to be prepared than to be blindsided by an audit and all of the potential costs associated.
What are some ways to track expenses accurately?
One of the main things you should make sure to do is track expenses as they are happening. It is too easy to forget a day or two later, or to lose a receipt. Services like AND CO can help you track expenses as you go by syncing with your banking institution and making it easy to add other expenses after the fact. AND CO does a lot more than just track expenses, but, just like with the rest of its services, expense tracking is simple, mobile, and efficient.
To track an expense, it’s as easy as pulling your phone out of your pocket, opening the app, clicking “create expense” and then entering the details. You can even upload a picture of the receipt, select which category of expense it falls under, list where the expense was incurred, note why it is deductible, select the date of the purchase, and, if applicable, bill that expense to a client or project. All of this can be done in under a minute, and, if you do it throughout the year, you will have an organized, easy to access list of expenses when it comes time to file taxes.
All of that time saved is, of course, time you can spend on other things—whether it’s picking up another last minute project or building out a new personal portfolio site.
As a freelancer, you will already be juggling so much, from a slew of projects and meetings to your family and social life. Expense tracking doesn’t need to be another issue weighing you down—get yourself organized now, and then when you’re working together with an accountant to file your taxes, it will be a breeze.
John Arthur is a freelance writer and musician, and a contributor for AND CO, the proactive app for managing your freelance business from proposal to payment. Read more insights from John and AND CO over on their Hustle&Co blog.
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