Making Business Expenses Easier to TrackSubmitted by JMB Financial Managers on August 10th, 2022
If you are among the fast-growing ranks of people compensated through 1099 income, you are enjoying the many benefits of being your own boss. But with that independence and flexibility comes new responsibilities you probably never had to consider when you worked for someone else.
As a 1099-independent contractor, you are, in fact, running a business, requiring you to track your gross income, expenses, payables, and receivables and report your profits to the IRS. This last factor - the internal revenue service - is why you want to be on top of how you spend money for business purposes as you will want to maximize your tax deductions.
When you work for yourself, it is easy to forget that you are actually a small business owner, but that is what you are. Therefore, you want to get the full benefit of the tax breaks coming to you. When you work as a 1099 contractor, you need to keep track of every dollar going in and out of your business that will impact your taxes. Not every expense qualifies as a business expenditure, so you may not need to track everything except for your own budgeting purposes. Understanding the difference between deductible business expenses and personal expenses will help you better organize yourself.
What Qualifies as a Business Expense?
The IRS defines a legitimate business expense as any expense that is "ordinary" and necessary to the conduct of your enterprise. So, if you need to buy software to conduct business, it's considered a business expense. Any activity pertaining to generating revenue for your business is a business deduction. If you need to travel overnight for a client, the cost of your travel, housing, and meals on that business trip are legitimate travel expenses. However, if you take a friend and include some side visits, those expenses must be excluded.
You can see the entire list of common business expenses typically incurred by 1099 contractors on the IRS website where you can review IRS publication 535 for more information.
How to Track Your Business Expenses
Maintain Copies of all Receipts
Maintaining and organizing every receipt you receive for a business expense is critical. These days, receipts come in both physical and digital forms, so you will need two systems to store them. For physical receipts, you should keep a folder or envelope easily accessible and labeled for the current month. At the end of the month, file it chronologically in a file cabinet.
For digital receipts, create a digital folder, again by month, to store them. If you want to combine your two systems, you can take your physical receipts and digitize them to be held in your digital folder. You can do that using a scanner or by taking a picture of them with your smartphone.
You must include essential information on every receipt, such as the business purpose or the client's name if it involves a meal expense. Also, you must maintain copies of your business receipts for at least three years in case of an IRS audit.
You have a couple of options for recording your expenses. If you keep a business ledger, you will be including the full amount of any necessary expense. Creating an electronic spreadsheet is a streamlined method of recording expenses. You can find free or low-cost templates online. The key is to maintain your spreadsheet regularly so you don't fall behind on your tracking.
Alternatively, you can purchase reasonably priced business accounting software that can streamline your process even more. Programs like QuickBooks, FreshBooks, and Kashoo cost less than $20 a month and are easy to use. Because they can link to your business checking or credit accounts, they're huge time savers.
When it comes time to file your taxes, they can do a lot of the work by categorizing your expenses, and some programs will even transfer data to your online tax return program. This makes it easy to produce an income statement, balance sheet, etc. I will also keep you continuously informed about your taxable income for the year and make year-to-year comparisons easy and convenient. This will aid you in your tax planning so there are no surprises at tax time.
Use an Expense Tracking App
If you're always on the go, you could consider an expense tracking app for your smartphone. In addition to the usual expense tracking functions, it can scan physical receipts and track your mileage to quickly record your expenses. Some apps that link to your business checking or credit accounts are excellent for organizing and categorizing your expenses while helping you determine which business deduction they're eligible for. The QuickBooks App can even log such things as mileage and photographs of cash receipts into your books and records automatically.
Do I Need to Track Business Expenses if I take the Standard Deduction?
Yes! The Standard Deduction is a completely separate issue because it is part of your personal expenses, not your business expenses.
The Bottom Line
Having that tax advantage is one of the primary reasons to be in business for yourself (aside from your independence and unlimited earnings potential). So, you don't want to squander it. It's critical to make setting up a system for efficiently and accurately tracking your business expenses a top priority.
Subscribe to our Blog
If you want to maximize the benefits of being your own boss and being compensated by 1099, subscribe to our blog to receive ongoing tips.
- How to Lower Your Taxes – A Guide for the Self Employed
- Record Retention Guidelines for Business Owners
- 3 Easy Ways to Improve Your Business Finances
About the Author
Jack Brkich III, is the president and founder of JMB Financial Managers. A CERTIFIED FINANCIAL PLANNERTM, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.
Connect with Jack on LinkedIn or follow him on Twitter.