Five Easy Steps to Keeping Track of Expenses for the Self-Employed

By Nora Dunn on 27 September 2007 (Updated 26 April 2010) 7 comments
Photo: William Fish

 

I have had as many as five separate businesses at once to keep track of, including proper accounting of expenses for tax purposes. And it takes me no more than 5 minutes per week to do.

A big hassle for most people I know who are self-employed or in contract positions (especially in creative fields) is the boring necessity to track expenses and receipts for tax purposes.

 

There are a few methods I've seen employed that leave a little to be desired:

 

The Shoebox Approach.

This usually entails a nightly or weekly emptying of the wallet or pockets into a shoebox labelled "taxes". At the end of the year, one of two things happens: The culprit dedicates long days upon days to "file their taxes". Really this process is less about the tax preparation itself and more about sifting through piles of receipts, tallying up everything with calculators, and hoping that everything adds up.

The other option for the shoebox guru is to simply take the unkempt pile of receipts into their accountant or bookkeeper and get them to sort through everything.


I see two problems with this strategy:

1: The daunting task of taking time off to sift through receipts and prepare taxes makes it one of the dullest and soul-sucking chores around. So consequently throughout the year there is less motivation to save the right receipts since it will just have to be tallied at the end of the year and less receipts to tally means less of a pain in the you-know-what to contend with. It also means less tax dollars saved.

2: For those that go with the bookkeeper option, you are spending more money paying somebody else to do something that could easily be maintained yourself. For the frugal business owners in us, it's not always a wise expenditure.

The Day-timer Approach.

You know those expense logs that often come with the reference pages for most day-timers and schedules? Well, I haven't actually seen anybody use them successfully, but they keep coming out every year so I have to assume that somebody uses those pages and likes them.

My beef with that approach is that there is no proper filing of the receipts which are needed for the actual tax preparation (which relegates even the Day-timer User to the Shoebox Approach in a manner), and when it comes down to tax time even the expense logs need to be re-categorized and shuffled by hand according to the types of expenses incurred.

Here's what I personally do with my receipts, and it seems to work out quite well for me and is not time consuming at all:

1: Whenever I incur an expense, I usually stuff the receipt in my wallet until I get home, or until there are enough receipts in my wallet that it occurs to me to take them out. (This usually happens about once a week).

2: Once I've pulled the pile of receipts from my wallet, it's time to deal with them right then and there. I enter the following information into a spreadsheet:

Date

Vendor

Type of expense for tax purposes (eg: auto, office expenses, advertising, insurance, etc)

Amount of money spent

ARTICLE CONTINUES BELOW

Additional notes (eg: that dinner I'm claiming was when I took John Doe out to discuss ABC business, or that auto expense is specifically for gas or repairs.)

3: Once entered, I file the receipts away. I have a file folder that stores all the receipts for the year, and I clip all the receipts together by expense. For example, within my folder is an "auto" pile held together with a paperclip to which I attach my gas receipts.

This way if I ever need to reference the original receipts again, I can easily put my hands on that specific receipt since it's already filed according to category and roughly by date as well since I enter and file the receipts regularly.


That's it for the daily or weekly maintenance. No more than five minutes each week once you get into a system that works for you, I promise!

When it comes to tax time, I go through a few additional steps to make things easier on my accountant:


4: Since all my receipts are logged in spreadsheet format, all I have to do now is organize the spreadsheet. Using data sorts and searches, I create a page for each type of expense and print it out. For example my advertising page itemizes all the expenses I incurred for that category, showing dates, amounts, and special notes.

This process can be tedious especially if you are still learning how to categorize your expenses or manipulate spreadsheet information. But it gets easier and easier each year, and at the height of my business frenzy, it sill only took me a couple of hours to do.


5: I take all the printed spreadsheets (along with the original receipts just in case we need to reference them) to my accountant. I sit there with my accountant as we review the spreadsheets. If he or she feels that a certain expense is best claimed in another area, then we can easily subtract it from the total on that sheet, and add it to another sheet. It's a great learning experience for me, so the following year I can better manage my receipts and have a greater understanding of how to file taxes to get the best bang for my bucks spent.

Not only is this approach easy and helps me to maintain some semblance of control over my finances, but I also save money even with my accountant, since I've already done a lot of the prep work. All he or she has to do is plug in the numbers and tell me how much money I saved!

 

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Myscha Theriault's picture

I've just been sitting here over coffee feeling like I needed to go the extra mile with the information for taxes this year. We've taken on some new projects and some new investments with retirement and I've been feeling like it's just enough to tip the scales into driving me bonkers. I think your ideas might be that added little "streamline option" I needed. Thanks.

 

Guest's picture
Guest

Quicken works well for me. It has the advantage of being able to instantly see how you are doing for the last month, quarter, year, or whatever. I manually enter each transaction, but it is possible to set things up so your credit card transactions automatically download from your bank's web site. Quickbooks might be fancier, but Quicken is all I need for my little business. The Windows version is better than the Mac version.

There are online web apps that offer the same functions as Quicken. They might be convenient, but I don't trust those companies to stay in business and keep my data for the rest of my life. Quicken lets me back up unto a disk and keep a spare at my mom's house.

Nora Dunn's picture

Great suggestion on Quicken! I've never really used those programs so can't speak to them specifically, but I know many people who successfully organize and manage their finances that way.

As long as your receipts are filed in an organized manner (not imperative, but let me tell you it's way easier if you need to reference them again - read: audit)!

Guest's picture
Shannon

Hello, what I use for everything is docs.google.com , here you can upload spreadsheets, documents etc and access them from anywhere! Its great if you are traveling like I do. I keep my check book and expenses as well, its really great! You do need to get a google/gmail account if you dont already have one.

Guest's picture
Hadias

My hubby and I are entreprenuers and we have tried to spreadsheet method. We later moved to creating a budget sheet on the computer, but we now just use a reglular budget ledger that has spaces to fill in expenses such as mileage, gas, tolls etc. concerning our business. This is a great tip for self employed people.

Guest's picture
Catie

Thanks! This post was VERY helpful!!!! :)

Guest's picture
Q

Any chance we can obtain great spreadsheets?