How To Track Business Expenses For Freelancers & Agencies

If you’ve gotten into freelance work or you’re running a small agency, you and I probably share some things in common. You probably don’t care for bureaucracy or arbitrary rules that come along with it, and you probably value creativity and freedom. Of course, neither of those seem to square particularly well with tracking business expenses.

But you obviously can’t avoid tracking your business expenses, either. That’s just a recipe for disaster for any business owner. So the trick is to try to do it with as little hassle as possible.

From personal experience running Pangea Marketing Agency, I can tell you that once you know how to manage your business expenses, you’ll sleep a lot better at night. That’s why I want to give you a quick overview of how you can do that, specifically in the world of freelance and small agencies.

My assumption in writing this is that you’re in the US, running a freelance or small agency operation. You’re probably a sole proprietor or single-member LLC. (You’re welcome to stay around if that’s not the case, though!)

You should also know that I’m not an accountant, though I do want to help you build a great relationship with yours. Turns out, they love it when their clients come prepared. Sloppy, disorganized clients that make their lives miserable every April.

OK, with that in mind, here are eight concrete steps you can take to get your finances in order.

1. Start a separate bank account for your freelance or agency business

Please don’t try to track your business expenses from your personal bank account. It’s a nightmare all around and really easy to avoid.

Starting up a separate bank account is the single easiest way you can make headway on good financial management. Make sure you use your business account for business only and your personal account for personal affairs only. This will make it way easier to tell the difference between the two.

This will also make your tax reporting a lot easier too. If you’re a sole proprietor or single-member LLC owner, your annual Form 1040 will need to be accompanied with a Schedule C. Without getting too much into the weeds here, your Schedule C is all about your business finances.

You really don’t want to be sitting in your office in spring smelling Bradford pears blooming as you try to figure out if that $6.17 charge at Starbucks qualifies as a business expense on your Schedule C. Not that I’d know.

If you’re just getting started, I recommend you look for banks offering small businesses bonuses for getting started. When I started my agency in 2019, Wells Fargo was running a promotion that would put $500 in my checking account if I opened one and kept an average of $10,000 in there. NerdWallet keeps a great running list if you’re looking for a recommendation.

2. Pick accounting software to help track business expenses

Back in 2016 and 2017, I was making board games. Specifically, I was making a card game called War Co. It never really took off in a big way, but it was a good business to get started on and I learned a lot.

One of the things I learned? Don’t try to manage all your business expenses in Excel. Seriously!

Find a decent software solution and stick with it. QuickBooks, though a truly annoying piece of software, is probably the best if you want to work with an accountant, because every accountant uses QuickBooks. FreshBooks and Xero are perennial favorites too. And if you’re the kind of person who can run sudo apt-get commands in Linux, you might like GnuCash.

Everyone loves to dunk on QuickBooks, but I guarantee you that any decent accountant will use it. Hard to put a price on that.

The specific software you choose to use here isn’t too important. What matters is that you have software that can capture receipts, help you categorize expenses, and that makes it easy to run reports (such as Profit & Loss statements).

I will also say that if you like one option over another, but a small price difference gives you pause, ignore the price difference. Accounting software is something you will use so often that you don’t want to cheap out on it. And I say this as a guy who has memorized the minute price differences between apples at Costco and Aldi. (Aldi’s cheaper in my area, if you’re curious.)

3. Keep excellent records to improve accuracy and make life easier

I won’t belabor this point, but it’s important enough to warrant its own section. The best way to keep track of small business finances is to be incredibly consistent. You need to do a few things:

  1. Go into your accounting software and hook up all your bank accounts.
  2. Categorize your transactions regularly. I do it weekly.
  3. Save a copy of your bank statements and receipts.
  4. Back up all your data.

If you just do these four things, everything from taxes to financial reporting will be much easier. Plus, taking the time to do this basic maintenance will help you feel like you know what is going on in your business.

4. Know what is and isn’t a valid business expense

According to the IRS, business expenses are the “ordinary and necessary” costs that you pay to keep your business running.

“Ordinary and necessary” is a funny phrase, loaded with meaning. The laymen explanation is that if it’s a normal expense that a standard business in your industry would have – and not something ridiculous like a case of caviar for your personal consumption – then it is a deductible business expense.

Generally not considered tax-deductible.

Now if you’re like me and you find that to be an unsatisfying answer, I recommend you contact a certified public accountant. That is the only thing that can give you the 100% certainty which you are seeking.

But to give you a clearer idea of what deductible business expenses, can be, consider this list from Investopedia:

  • Advertising and marketing expenses
  • Processing fees from business and corporate credit cards
  • Education and training expenses for employees
  • Certain legal fees
  • License and regulatory fees
  • Wages paid to contract employees
  • Employee benefits programs
  • Equipment rentals
  • Insurance costs
  • Interest paid
  • Office expenses and supplies
  • Maintenance and repair costs
  • Office lease costs
  • Utility expenses

For what it is worth, nearly every expense I have encountered as a direct result of my agency work has been deductible, with the occasional exception of some business meals. And even that is a very rare exception.

As a rule of thumb, gifts, and entertainment costs are generally not tax deductible. Meals may or may not be, depending on the circumstances. And, finally, taxes are not, themselves, tax-deductible. (Don’t laugh at that one – I once paid over $3,000 because I mistakenly thought my 2021 tax payments came out of my 2022 taxable income.)

5. Choose cash or accrual accounting

There are two basic kinds of accounting that you can use to keep track of your business expenses.

You have cash basis and accrual basis. For cash basis, transactions take place when money actually changes hands. For accrual basis, revenue and expenses are recognized regardless of when money changes hands.

That might sound like a trivial difference, but if you send out an invoice on December 22, 2024 and it gets paid on January 5, 2025; then your accounting method clearly matters. According to cash basis, you don’t report that money until it arrives in 2025. But with accrual accounting, that’s a 2024 transaction.

Simply put, though, if you’re doing work as a freelancer or small agency, you are probably going to be doing work on a cash basis. You will probably continue working that way until you’re forced to use accrual accounting, which at the time of writing, doesn’t happen until you’re making $25 million in revenue.

6. Regularly view and categorize expenses and revenues

To help keep your financial information organized, you will want to regularly view and categorize your expenses and revenues. When you use accounting software, it will automatically pull in financial data from your bank account. Then you will need to go through each transaction and assign it to a category.

Revenues tend to be pretty easy in freelance and agency work. Expenses are trickier. For that, it’s helpful to look at the expense categories in section 4 and decide which category your expense falls into. You can add your own categories, too, just be wise about it.

Some Expense Categories I Use

For example, my accountant advised me to create a category for software expenses, which I use to categorize expenses I pay to various SaaS vendors.

There are a few reasons this process is beneficial. The first is that you’ll have a better sense of where your money is coming from and where it’s going. Another is that it will be way easier to tell what your net income is, and therefore, how much you will owe taxes on. Lastly, any time you need any kind of internal financial reporting, cash flow statements, or other useful documents like that, you will be able to simply run the report and get an accurate result!

7. Plan for taxes

Since you’re freelancing or running a small agency, you will probably need to pay estimated taxes on a quarterly basis. This means you will need to be able to estimate your expected annual income so that you can accurately calculate payments to send in.

To that end, here are three things that I have learned to do that will probably help you here:

  1. Keep track of your deductions year round. That way, all you have to do is run a report, and you will be able to see your taxable income for the quarter. You can use that to figure out how much you owe.
  2. Note the due dates. The IRS requires quarterly payments to be paid on January 15, April 15, June 15, and September 15. Apparently, they think sometimes 2 months is a quarter of the year. Work around their weird math.
  3. Set aside money for quarterly taxes every week. Once you have a rough idea of how much tax you will owe each year – and it might take you a while to get there – take that number, divide it by 50, and put it into a separate savings account. That way, you won’t see HUGE drops in your checking account every “quarter.”

If you do those three things, then the hardest thing about quarterly filings should be navigating the very-2000s looking EFTPS website.

EFTPS Website Screenshot
Your tax dollars at work.

8. Find a great accountant

Everything I’ve talked about up to this point will help you when you are at that small and scrappy stage where you don’t want to hire help with anything. And, honestly, I don’t blame you. I have been there – tracking finances in Excel, filing through TaxAct, begging Adobe for a discount on Creative Suite…

But please, take it from me, a profligate cheapskate – accounting is the first thing you should hire help with. Even sooner than hiring your first contractor or employee. I’d argue before you even find a lawyer or paralegal too.

No matter how diligent you are, your accountant will find you more ways to save money. Once you’re making a healthy, middle class salary on your business, hiring an accountant will probably be a breakeven prospect for you.

Look for one that knows how to handle freelance and small business operations. Start by having them handle your annual taxes, then consider getting their help with quarterly taxes, bookkeeping, and/or financial planning.

Online reviews can help you find someone if you’ve never done this before and don’t have business contacts near you. Otherwise, consider asking your friends in business for referrals. If nothing else, you can always hit up your local Chamber of Commerce for advice.

Final Thoughts on Tracking Business Expenses for Freelancers & Agencies

I know that tracking your business expenses probably feels like a pain, and maybe even scary. But once you get the hang of it, it will be much easier. Then you’ll come to realize that being able to manage business finances like this is actually incredibly empowering.

Keep separate bank accounts and use good software, and you’ll be able to automate a lot of the tracking. Then all it takes is some regular upkeep, particularly around categorizing expenses and planning for taxes. And if you do all this right, you’ll be able to very easily start working with an accountant when your operation scales.

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