If you're self-employed, you can save a lot of money if you just remember to track what you spend on work.
Even something small — like parking fees for $10 a week — could be over $200 back in your pocket at tax time.
Want to track your business expenses as painlessly as possible — without cutting any corners that will make the IRS mad? Here's what you should know.
Let’s start with exactly what you should be tracking in the first place.
What business expenses should you track?
You should track any business expense that’s “ordinary and necessary” for your small business, freelance work, or 1099 gig.
“Ordinary” means other people who do your job tend to pay those same costs. “Necessary” means you need it to work efficiently.
That might still sound a little vague. So let’s look at a few examples:
For a web designer:
- ✓ An Adobe subscription counts
- ✘ Gaming software doesn’t count
For someone who owns a pilates studio:
- ✓ Yoga mats count
- ✘ A personal Peloton doesn’t count
For a wedding videographer:
- ✓ A business meal with the engaged couple to talk about the wedding video counts
- ✘ A new outfit to wear to the wedding doesn’t count
Common 1099 business expenses
As you can see, what’s ordinary and necessary varies from one business to another. Still, there are some common 1099 expenses most self-employed people should look out for.
- 🚗 Car-related expenses
- 🏠 Home office expenses
- 💻 Computer or laptop
- 📱 Cell phone bill
- 📶 Wi-Fi
- 🖊️ Office supplies
- ✈️ Business travel
- 🍎 Work-related education
How to deal with expenses that are only partially used for work
Some expenses are clearly used for both business and personal purposes. (Think, your car and your cell phone.) For these, you can only write off the portion you use for business.
For instance, take an Uber driver who uses their car for work 60% of the time. They can deduct 60% of their vehicle-related expenses.
4 simple tips for tracking business expenses
With the most common 1099 expenses covered, let’s get to tracking. It doesn’t have to be too complicated or time-consuming if you use these tricks.
1. Use an expense tracker app
A good expense tracking app is kind of like a bookkeeper in your pocket. For instance, take our app, Keeper! Download, and it’ll:
- Record your small business expenses and store digital copies of the receipts
- Scan debit and credit card records for tax-deductible purchases you made before you signed up
- Let you do your taxes right in the mobile app — or export an expense report to show your accountant
- Put you in touch with tax assistants to answer all your questions
An expense tracking app like Keeper can be a one-stop solution for most small businesses, freelancers, or gig workers.
That said, maybe you prefer manual recordkeeping. If so, the following tips will help you stay on top of things for tax season.
2. Open a separate bank account for business expenses
Keeper’s accounting software is good at picking out business expenses, even if you put them on a card that you also use for personal purchases. (Treat yourself to a $3 snack at McDonald’s, and the app will assume that’s not a business meal.) This makes it easier to keep your expenses in order without a dedicated business bank account.
Still, some self-employed people like to keep track of their expenses by hand. If that's you, mixing business and personal purchases on the same account can make things tricky. You can easily end up sorting through your bank statements till your eyes tear up, looking for 1099 expenses among your grocery and movie night bills.
Manual recordkeepers can make tax time easier by opening a separate bank account for business purposes, or signing up for a business credit card. That way, everything on that bank or credit card statement is a write-off.
Consider using a personal checking account as your business account
Tip: An official “business bank account” can come with high fees or minimum account balance rules. So if you’re a sole proprietor, you might just want to open a second personal account that you reserve for business use.
That said, some banks offer accounts with terms that are friendly to small business owners.
Note: If your business is incorporated, you’ll likely need an actual business account for any expenses you pay for in your business’s name.
3. Use a spreadsheet
Spreadsheets are one of the best ways to track your expenses. The trick is to create a routine for updating your sheet (and then sticking to it). Whether you’re doing it a daily, weekly, or monthly basis, a schedule will help you make sure nothing falls through the cracks.
Here are the basics your spreadsheet should track:
- What you bought
- How much it cost
- When you bought it
- A record
Make note of where the record is located, whether it’s a bank statement you can download, or a physical receipt.
Try Keeper’s free expense-tracking spreadsheet
You can find all of the above in our free Excel spreadsheet for 1099 contractors! It even comes with a few extras, like columns for:
- Business-use percentage
- Estimated tax deduction
- Where to put it in your Schedule C when you’re doing your taxes
4. Develop a receipt-storing system
Good news: You don’t need to worry about hanging on to the physical receipt for every tax-deductible expense.
According to the IRS, it doesn’t matter whether you have digital or paper receipts, so long you have the following information:
- What you bought
- When you bought it
- How much it cost
The records generated by the Keeper app qualify. So do simpler options, like your bank or credit card statements. If you pay for something in cash, you can always snap a pic of the paper receipt with your phone.
We always recommend keeping digital expense records: you’re less likely to lose them. And if you’re using our expense tracker template, you can attach any image files to the spreadsheet.
Tricks for organizing digital receipts
Are you taking photos of your receipts, or scanning them with an app like Tiny Scanner? Here are a few tips for keeping your images organized:
- Put physical copies into an envelope right away and digitize them in batches. You can destroy the paper copies after that. A regular schedule for digitizing will help you make sure you don’t lose any receipts
- Create a Google Drive folder with subfolders for each month. You’ll know exactly where to drop any digital files
- Label each record with the “when,” “what”, and ”how much.” For instance: “2022-09-29 — Laptop Charger — $50”
How long should you keep receipts?
In general, hold onto your receipts for at least three years. (This is just in case you get the dreaded IRS audit notice — which has a less than 1% chance of happening.)
If you run into a bad debt situation or file for a loss, hold onto those documents for seven years.
Remember: if you do end up misplacing a receipt here or there, it’s not the end of the world. The only receipts you absolutely should hold onto are the ones for cash expenses over $75.
By now, we know how important expense tracking is for self-employed people. But what if you only do 1099 work part of the time?
Should you track expenses for part-time 1099 work?
Yes! You should always track of expenses for work — even if you only freelance or do gig work for a few hours a week.
That’s because self-employed work is essentially taxed at a flat 15.3% rate, on top of any income taxes. That’s true as long as you’re bringing home more than $400 after your expenses are taken out.
The key is to actually those expenses out, so you get taxed on less money.
How taxes work on part-time self-employed income
Even if you’re only working a side hustle, it’s easy to hit the $400 tax filing minimum for self-employed work. And taxes can cut into your earnings by a lot.
For example, let’s say you earn $50,000. Only $5,000 of that is from working part-time as a Postmates delivery driver, with the rest from a W-2 office job.
You’ll owe $765 in self-employment taxes on your Postmates income. (That’s 15.3% of $5,000.) That leaves you only $4,235 to take home — if you don’t subtract any of your business expenses.
Bottom line: Whether you do gig work on weekends only or pour 80 hours into your business every week, all self-employed people should be tracking their business purchases.
With this in mind, let’s cover another question 1099 workers tend to have about their expenses: what’s the relationship between the standard deduction and business deductions?
How do business write-offs affect the standard deduction?
Actually, business write-offs don’t affect the standard deduction at all. A lot of freelancers don’t know this, but you can — and should — claim them both.
You can learn more in our complete guide to the standard deduction for freelancers, but here’s the rundown.
Do freelancers have to choose between business expenses and the standard deduction?
No! You can always claim your business expenses on top of your standard deduction.
Freelancer who don’t know this opt not to track their business expenses at all, figuring they can’t rack up five figures in work-related purchases in a year.
But since you can take the standard deduction alongside any business write-offs, it’s always worth it to track your expenses — even if you’re spending nowhere near five figures on work.
If you only find $400 in legitimate business expenses, that’s $400 you’re not taxed on.
Why new freelancers can misunderstand the standard deduction
What causes this common misconception about the standard deduction arise? It’s because new freelancers can get business write-offs confused with personal itemized deductions.
These are tax-deductible expenses that you can only claim if you don’t take the standard deduction. The difference, or course, is that they’re personal — not business-related.
The key takeaway here: Tracking these personal expenses only makes sense of they add up to more than the standard deduction. Tracking your business expenses, though, is always a good idea.
Dealing with your personal finances can be hard enough. And as a self-employed person, you have to handle business finances on top of that.
Good recordkeeping is something you can’t afford to skip: it saves you money on your taxes and keeps you on the IRS’s good side. But it’s also one more thing to add to your plate.
That why you need the right tools. Save yourself time by automating the expense tracking process with an app that will do it for you. Or — at the very least — set yourself up for success at tax time with system that works for you.
If you need a hand claiming the expenses you’ve been tracking, check out our guide to filling out your Schedule C. Or file your taxes through Keeper, and we’ll take care of it for you.
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