Updated for tax years 2023 and 2024.
Being your own boss comes with numerous advantages. For starters, you can set your own hours and vacation schedule, giving you more flexibility to work remotely and enjoy a nomadic lifestyle. If all goes well, you may not have to change out of sweatpants for the foreseeable future.
But those perks aside, there are some benefits to working for an employer that you may find yourself missing. When you leave the comfort of a traditional job, you’re not just walking away from a steady paycheck and benefits package — you’re also walking away from the convenience of an HR department. Life as your own boss means sending your own invoices, hounding delinquent clients for payment, paying income tax, and tracking your own business costs.
Here are some tips on tracking your self-employed expenses to help you navigate all the paperwork and make tax time a breeze.
Know what qualifies as self-employed business expenses for tax deductions.
First and foremost, it’s essential to understand what counts as a business cost in the eyes of the IRS — otherwise known as self-employed expenses that you can write off.
For example, domain hosting costs and the price of purchasing a URL for your business’s website count as tax-deductible business expenses. However, you can’t deduct the cost of a personal website that has nothing to do with your business. Similarly, if you’re attending a work conference, the ticket and flights could qualify as travel expenses. But getting a manicure to improve your appearance at the conference doesn’t — that’s still a personal expense.
Track business expenses.
There is no right or wrong way to track your business expenses as a self-employed small business owner. The most important thing is keeping all the necessary business records, but how you organize them is up to you. Here are a few solid bookkeeping options:
- Your preferred accounting software
- Business expense trackers/expense-tracking apps
- A separate business credit card and bank account
Keep in mind that the more employees your company gets, the more resources you’ll need. A simple spreadsheet may be sufficient if you’re a party of one, but you may need more than that if you’re a growing business.
Take pictures and organize receipts.
Thanks to our digital world, you’re likely to receive some of your receipts via email. To organize them, you could create a dedicated email folder to store your business expenses.
Don’t forget to save any paper receipts you may need as well. Some mobile apps have receipt scanning functionality and other handy recordkeeping capabilities to help streamline the process and cut down on time-consuming paper filing. Of course, if that’s your preference, there’s nothing wrong with kicking it old school and keeping hard copies in a filing cabinet. But it’s much harder to lose a digital copy!
A self-employment best practice is to record each business expense as it happens and file your receipts accordingly. That said, if we’re honest with ourselves, many of us tend to procrastinate on such activities. At the very least, save and store away your receipts in one folder. Then, note any expenses at least once a quarter when it’s time to pay your taxes.
Always keep your tax returns and receipts for at least three years in case of an audit. If you file for a loss or experience a bad debt situation, it’s a good idea to keep your tax documents and receipts for seven years.
File quarterly estimated taxes.
The final part of keeping your self-employed expenses in tip-top shape is filing quarterly estimated taxes. Failure to file and pay taxes each quarter could result in penalties from the IRS. Stay current with your taxes by paying throughout the year. This forces you to stay on top of your business expenses. Plus, it can help you avoid a big, unwelcome tax bill when you file your return. Don’t worry too much about accidentally overpaying or vice versa — you can easily adjust your tax payments the next quarter to make up for it if this happens.