Why Keeping Track of Business Expenses Is So Important
You likely didn't become self-employed because you really looked forward to keeping track of business expenses. In fact, it can be a downright pain. But logging your business expenses is crucial to saving money at tax time.
Indeed, knowing how to maximize your tax deductions is incredibly important to make sure your business stays financially healthy. When you don’t keep track of expenses for taxes, you’ll likely overpay — not to mention waste valuable time piecing together your tax return for the April filing deadline.
Here’s everything you need to know about self-employed expense tracking, including why it’s important and tools for keeping track of business expenses.
Keeping track of business expenses for taxes can save you money.
Why is it important to keep track of your expenses? Short answer: It can help you pay less on your tax bill.
When you prepare your tax return every year — more specifically, your Form 1040 — the IRS asks you to list how much and what kind of taxable income you earned over the past year.
When you earn certain kinds of income, the IRS will have you fill out an extra form to describe that particular kind of income. Made some rental income in 2023? You probably had to file an extra form called Schedule E to describe your rental income and expenses.
When you report that you earned self-employment income, you’ll need to fill out an extra form called a Schedule C.
What Is Schedule C? And what does it cover?
How much business income you received
How much you spent to keep your business running
How much net income (or net loss) you had for the year
The reason the IRS asks for all of the above information is because you only have to pay taxes on your profit from your business. That’s why it’s important to track business income and expenses — your business profit is your business income minus your business expenses.
Insider tip: If you use the Stride app and notice your "business profit" is $0, add your income information to your account. You can add your business income to your account by clicking the green "+" button on your screen, and then "add income."
Any “ordinary and necessary” payments that you make to keep your business running are considered business expenses. Business expenses are deductible on your Schedule C, meaning you can subtract them from your taxable income.
A good rule of thumb: If an expense is reasonable for your industry and unavoidable in the regular course of your business, then it’s deductible as a business expense. Even though it may seem strange, this includes your health insurance premiums (you need to be healthy to work, right?).
Business expenses: An example of Schedule C at work.
Let’s say you make self-employment income as an artist and earned $10,000 in one year for selling your paintings. If you report that $10,000 on a Schedule C when you file your taxes, an average 30 percent tax rate will mean you’re paying about $3,000 in taxes.
However, you also spent $3,000 on paint supplies so that you could create those paintings in the first place.
When you report your painting income on your tax return, you’ll do some easy math to show that your business profit was $7,000 ($10,000 in income minus $3,000 in expenses).
Because you’re only taxed on your business profit, you’ll pay taxes on $7,000 of income instead of the full $10,000. At an average tax rate of about 30 percent, you’re now paying $2,100 in taxes instead of $3,000. That’s a difference of $900 in tax money that you now get to keep.
How to track business expenses: A year-round effort
By keeping track of business expenses throughout the year, you’re essentially chipping away at your taxable income to lower the amount that will eventually be taxed.
That’s why it’s so important to track your business expenses throughout the year — every time you include an expense in your records, you’re literally putting money back into your pocket.
That said, if you’re self-employed, you probably have a variety of business expenses (especially if you’re self-employed full-time). Between the receipts, invoices, bank transaction records, and cash logs that build up over time as you run your business, you’ll have a lot of paperwork to keep track of throughout the year. You’ll also find yourself sorting through all that paperwork when you’re filing your taxes and need to tally up your expense totals. So, let’s take a quick look at how to track business expenses so you can be ready when it comes time to file your taxes.
The best way to keep track of your business expenses, stay organized throughout the year, and make sure you don’t lose track of deductions is to keep all of your expense records in one place and add new expense records as you go.
You may be wondering what tools you can use to help you with this cumbersome task of keeping track of business expenses. Just download the FREE Stride app, your one-stop platform to tackle all the challenges of independent work! It can help you save time and money on taxes by automatically tracking your mileage and expenses, surfacing money-saving deductions, and getting your forms IRS-ready.