Transcript 0:00 Welcome back to my Money Notes from Building a Micro Business podcast. I might have mentioned something about this being a private podcast, and you might have noticed it's no longer private. 0:12 So sh- l- longest story short, I decided to just go ahead and just put this out there. Same premise though. I'm still sharing the backlog of content ideas that I have in a more unpolished way. 0:27 For today's topic, I am talking about ca- um, bookkeeping, accounting, specifically focusing on categories, categorizing transactions. How do you know what c- category to take? 0:40 If you've ever wondered or freaked out about, what should I use as a category, then this is probably for you. And in my idea notes I h- I put down it's another salted take. I don't know if I meant salty. 0:56 I think I meant salty. This is just something that I mentally rant about. So why? First, let me talk about that. So there is so much out there about categorizing your business expenses, 1:10 and it's still a question I get, I feel like the most. Like, if I go and try to share helpful tips with people, I don't always think about talking about categories because it's... 1:29 I mean, it's... I'm trying to think of another word. Boring is the wrong word, but it's, it's so, um... Yeah, we'll just go with boring. So it's kind of boring, and it's very simple, but I get why people have questions. 1:47 I get why it's a constant question, and I'll get into more why I think it's a big problem, a big question, but let me get into why I understand it. 1:56 So I understand because before I learned accounting and bookkeeping and how to categorize, I was a freelancer. 2:05 I was a freelance interpreter, a sign language interpreter for eight years, and I remember freaking out about how to categorize my transactions when I finally started using bookkeeping software. 2:17 And even when early in my journey of learning bookkeeping, I remember freaking out about like, "Oh, no, what category should I, uh, select for this transaction," like in QuickBooks. Like, "What if I put the wrong one? 2:28 Am I gonna get in trouble?" So I get it. I get the panic and the stress, but that's why I'm gonna share this rant because this is also partially for me back then who was freaking out about it. 2:38 So I think part of the problem is this whole tax write-off deduction idea just mudding the waters for people. Like, the... I, I, I almost wanna say, get rid of that. Throw it out. 2:53 Don't think about things in terms of tax write-offs and deductions unless you're a tax person and then you understand the difference in what those words actually mean and how to use them. 3:01 If you are not a tax person or tax professional, throw it out. Don't... Just don't. That's, that's making it more confusing. Okay. Now that we've thrown it out, 3:10 or at least you're, you're, you know, you're with me, you're, you're trying to see where I'm going. So now that we've done that, 3:16 the whole goal of that is to bring some more clarity to this conversation because categories really are not that complicated 3:25 for, for, for most people, especially if you're just sel- if you're, like, a freelancer, you're self-employed, you provide services or even if you sell products but you're, um, like, earlier in your journey. 3:40 So if you're listening to this, I'm gonna assume you probably don't have a complicated category situation. And so it shouldn't be complicated. My theory, I think what's making things confusing is people confuse 3:54 pr- preparing their records for taxes, including the numbers, with tracking business expenses and getting an idea of where their money's going. Those are two different things. 4:06 So now I'm gonna get into if you only care about taxes, if you only care about getting ready for tax season, handing your accountant your numbers, or you're doing your own taxes, getting your numbers ready for that, then if that is your only goal and you're worried about categories, 4:23 just use the Schedule C forms categories. So and, again, if you're listening to this, you are probably a Schedule C filer. That just means, um, you're just operating as a sole proprietor, maybe an LLC. 4:38 You haven't set up any sort of S corporation. You would fill out the Schedule C form along with your tax, the, to file your taxes, and that's just where you tell the IRS, "This is how much I made. 4:50 This is what I spent on, and this is what's left over." 4:53 On that form, there is a section where it has different kinds of expenses, and you need to tell them the numbers of how much you spent for each of those, like, um, office expenses. 5:04 So if you are only worried about, "I just need to get my numbers for taxes," then, then you, you just get those numbers. 5:12 Just track all your business expenses and then at the end of the year, you can look at those totals. How much did I spend on office expenses? How much did I spend on, like, bank charges? Like, how much was that? 5:24 Just get those totals, put them in little lines, and you're good. That's it. 5:28 Those are the categories you can use if you only spend for business stuff out of your business account or whatever account you're using for business. 5:37 And then at the end of the year, get your totals, put them on the form, you're done. It's simple. 5:42 Remember I said, like, I think a lot of this confusion is caused by people mixing up prepping for taxes versus tracking how their business is doing? Okay, so that was the first one, prepping for taxes. 5:54 Second one, how is the business actually doing? Where is my money going? Why am I making money but it's not staying in my bank account? 6:00 If those are the kind of questions you have, that's- That is beyond just preparing for taxes. 6:06 That is getting more into good bookkeeping, where they're really digging into the numbers and making sure the numbers make it clear where your money went. So for here, what categories are you using? 6:18 It gets a little bit more nuanced. So you can think of this as... 6:25 If you think of the categories as just buckets, uh, like the types of spending, the business expenses into different buckets based on the type or purpose of the spending, then for taxes, the Schedule C buckets are just the ones listed on the Schedule C form. 6:40 But if you were gonna look at your spending as, like, purpose based on what the business does and not on what the IRS wants to know, then you might have different buckets. 6:51 You might still have, like, office expenses, bank charges, but you might have some other ones that the IRS doesn't really care to know about, like different kinds of shipping expenses or different kinds of bank charges. 7:02 It might be good to know, like, "Hey, my payment processing fee has all of a sudden jumped. Like, what happened there?" So the categories you use when you're checking on your business health is... 7:15 basically depends on what do you need to know. If you look at your numbers and you're like, "Oh, I'm still confused," you might need some different categories to make it visible. 7:24 And then another thing is that things you track in your business that you spend on are not always deductible. If you have to pay a penalty for something, that w- that would not be deductible. 7:36 That's not on the Schedule C. But you still need to know how much you paid for that, how much money went out to it, so you know what's going on with the business. So... 7:50 And, and, and this is where a, a lot of it's just judgment of knowing what different categories of things to track, 'cause it's not gonna be on the Schedule C. 8:00 It depends on your business and what you need to know and your, what your goals are. And, 8:07 and then another layer is knowing what's deductible versus not deductible, because based on that, I will order my categories differently just to help the tax person out, 'cause their job is hard enough. 8:18 I do like to err on the side of clarity for business health's sake, but then still have the reports be useful to the tax person, too. But the business needs comes first. 8:29 That's the part that can make categories a little trickier, 'cause putting your spending into buckets I would say is simple. The hard part is just making sure it's understandable to a tax pro or a financial professional. 8:42 And that's why I like to call myself a, an interpreter, 'cause I'm interpreting between what do you need to know as a business owner versus you as the tax pro or you as an accountant or you as a finance person. 8:55 They need that information in different ways, like in their language, in their accounting language or finance language. 9:01 And so these same numbers can look different on reports depending on who's looking at them and what they need. But I will still say, the end of the day, categories are simple. 9:12 [laughs] And if you wanna make it easier on yourself and simpler, just think about, "What is my goal here? Am I only getting my numbers together at the end of the year to file taxes?" 9:21 Make it easy on yourself and use the Schedule C categories. 9:24 If you're actually trying to check on your business throughout the year, see how it's going, figure out where the money's going, 'cause you got some goals, then you're going to want to, yes, still have the main categories from the Schedule C, those buckets, but then you can break those buckets down into smaller bucket, like subcategories, to get more specific to get the information you need. 9:46 So anyway, that is my little rant about categories and categorizing transactions and bookkeeping. So 9:57 hopefully you got something helpful out of this, at least just some clarity about why if you see me wince at someone talking about categories, then you'll know why. If you listened this far, thank you. I'm Anisha. 10:11 I'm a bookkeeping strategist for creative and often neurodivergent business owners, um, micro-business owners, uh, solopreneurs who wanna understand their numbers without taking over their whole life, wanna be able to pay themselves without it being too stressful. 10:28 If you're here, hopefully you'll come back and listen to the next one. Until next time.
