Expenses are an unfortunate necessity of working as a freelancer or owning a small business. You might even be overwhelmed by the ever constant “Cha-Ching” of your credit card. However, by having an understanding of expense tracking and reporting, you can set your business up for financial success!
What is Expense Reporting
Expense reporting is a fundamental aspect of accounting that allows you to achieve your financial goals. Using spreadsheets, software, or an accountant, all business related expenses are recorded and tallied. Once expenses are logged into a spreadsheet, you can create reports which assist in budget planning, organize your deductions for taxes, and view an overall picture of your business’ finances. Tracking your expenses will look slightly different between freelance workers and small business owners, however, the goal is the same: to understand your cashflow, and organize your purchases/charges for tax and reporting purposes.
1. Small Business Owners: If your small business has employees, your employees may need to submit expense reports to your accountant or bookkeeper for reimbursement on eligible business purchases. Depending on how you manage your employees will depend on what purchases are deemed as eligible. For example, you may be in sales and encourage your staff to have business lunches with their clients. If this is a common expectation for your team, you can reimburse your employees for the cost of the meal.
2. Freelance Workers: Because you will be working for yourself, you can’t look to your employer for reimbursement of expenses. However, it is still important to track these charges to enter on your annual tax return as deductions. As a freelancer, you also want to ensure you record your billable expenses. These are fees that a freelancer may incur while working for a client. An example of this may be postage fees when sending something on behalf of or to your client. Accurately detailing these costs will ensure you are being compensated properly and will assist in completing a detailed invoice for the customer.
How to Track Expenses
Tracking your expenses is often done using an expense reporting spreadsheet or software. If you don’t wish to process expenses yourself, you can also reach out to your accountant or bookkeeper to assist you. It is also recommended to have multiple expense reports running simultaneously. One report should be created and updated for each month while the other report should be annually.
- Monthly Expense Reports: By tracking your expenses each month, you can ensure you are properly invoicing your clients or reimbursing your employees. You can also confirm that your total expenses don’t exceed your incoming funds.
- Annual Expense Reports: Tracking your expenses on an annual level will allow you to make larger business and budget planning decisions. Annual expense reports also prepare you for tax filing by having all of your eligible deductions in one organized location. When deducting business expenses on your taxes, it is important to have documentation to validate your deductions in case the IRS were to audit your tax return. Examples of valid documentation include:
- Receipts or Invoices: If you are deducting a business lunch expense, keep the receipt from your lunch meeting in a file, have a copy with your accountant, or scanned onto your reporting software.
- List Details: In addition to having receipts as proof of expenses, it is crucial to document any details of the event. Using an example of the business lunch above, document the date of lunch, the purpose for the lunch meeting, all attendees, and the outcome of having this meeting.
- Recording these details immediately following the event will ensure accuracy. After all, if you wait a few weeks before logging your expenses, you may not be able to remember the details of the event and properly document the expense.
It is important to understand which expenses are considered eligible to be written off or deducted on your annual taxes. Reaching out to your accountant will ensure you get the most expenses deducted from your taxes as possible. The most common expenses include but are not limited to:
- Home Office Expenses: If you work from home, you can deduct home office expenses on your taxes. This can include your computer, printer and even a percentage of your mortgage interest and utilities.
- Business Meals: With valid documentation, meals can be deducted from your taxes when the meal includes a client or is consumed when traveling. There are rules and restrictions to this deduction, such as the meal must be reasonable and not overly lavish.
- Travel Fees: Similar to deducting business meals, there are also requirements to deduct travel expenses. If you leave the state for business and are gone for longer than an average work day you can deduct expenses such as hotel and travel fare. Again, documentation to validate your trip and expenses is crucial in case of an IRS audit
- Mileage: If you use your car for business purposes, you can track the mileage and deduct this on your annual taxes. Ensure you track the number of miles you drove for business reasons, the date of the mileage, and the purpose. An example of valid use of your vehicle for business reasons is driving to a meeting or conference.
- Salaries or Wages: If you have employees working for you, then you can write off their salaries or bonuses.
Making money is everyone’s goal when starting a company or becoming a freelancer. Ensuring you have an adequate expense reporting process will allow you to better manage your business’ finances. Not only can you make better budgeting decisions, but you can stay organized and prepared for tax filing. After all, isn’t a little legwork now worth the savings you’ll receive later?