As funny as this observation is, it’s not that crazy to keep receipts for every expense you have. Sure, a $0.49 doughnut-proof-of-purchase isn’t a life-changing document, but what’s important is getting into the habit of saving your receipts, because holding onto them can save you thousands of dollars come tax time. This isn’t an exaggeration. According to The Wealthy Freelancer, “small businesses owners leave about $4,000-$10,000 on the table every year” by not tracking their expense. How is this possible? Let’s dive in.
PAY YOUR ACCOUNTANT LESS
Tax prep for SMBs isn’t cheap. Rates can easily run between $100 to $400 per hour for tax accountants. So the last thing you want to happen is to have them spending their billable hours tracking down the receipts you should have kept organized in the first place. It just doesn’t make sense to pay $200 for each hour your accountant spends looking for a $10 ream of paper expense back in June.
In order to be as efficient with their time as possible, having your receipts organized and handy is a no-brainer way to slash your tax prep bill. And no, the “shoebox method” doesn’t cut it; you’re still handing over a mess for your accountant to waste her time on.
These days, technology is your friend when it comes to saving receipts because everyone has a camera on their smartphone. Get into the habit of snapping a photo of your receipts as they come in, and instead of a stuffed shoebox at the end of the year, you’ll have a digital folder (ideally dated by the week or month), ready to be easily reviewed by your tax prep professional.
Deduct every last business expense
Fortune 500 companies probably don’t worry too much about expensing that $200 business dinner, but owners of SMBs sure do. Ever lose the receipt after one of those? That’s $200 you won’t legally be able to deduct from your tax bill because the proof is gone. Whoops. If you’re a freelancer, not keeping track of your business expenses such as travel, meals, or office supplies can hurt even more come April when you realize you can’t prove that, yes, they were indeed business expenses that should be deductible.
This is another big reason to get into the habit of keeping your receipts: not only to be able to deduct them from your tax bill, but to receive reimbursement from your clients when there are work expenses. Gas for travel, meals on the road, these costs add up quickly. The freelancers and SMBs we work with are regularly shocked when they see how much it all totals in a year once they actually start tracking every expense.
SAVE A TON IF/WHEN YOU’RE AUDITED
Did you know that the IRS may ask for receipts from up to six years ago? No small business owner expects to get audited, but if and when it does happen, having kept a good record of your receipts can mean the difference between paying out hundreds of dollars versus thousands of dollars. SMBs should always keep their major receipts on file for six full years, ideally digitally because the ink on receipts do fade over time. These include:
- Paid/unpaid invoices
- Medical expenses (especially for self-employed)
- Childcare expenses
- General office-related expenses (for big-ticket items)
- and work expenses that haven’t been reimbursed.
Not having these receipts can cost you big in two different ways: 1) the cost of preparing for the audit, and 2) the penalty after the audit. We’ve covered point one above, but keep in mind that if you hand over the IRS that messy “shoebox,” they’ll be the ones charging you by the hour to go through all your documents. And that’s not going to be cheap. Again, having your receipts already organized will save you money in case an audit happens.
And guess what? Having your receipts most likely means your taxes were done right, which means there won’t be a penalty after the IRS gets through with you. Is it any wonder why we think receipts really are worth their weight in gold?
Keeping your receipts equals keeping more of your money. Either keep them organized manually, or use software like BillyApp to manage them for you; but just get into the habit of saving them. You’ll be thankful you did when you see just how much you’ll save!
This post is written by Robert Woo and first appeared on Upwork.