10 Business Expense Categories You Need To Consider

Creating a budget is tough—especially for a small business. With so many things to spend your money on, it’s hard to know where to spend the most or how to track your expenses. 

Luckily, classifying your business expenses isn’t too complicated. Splitting your purchases into recognizable groups helps you understand the real costs of doing business. And when used properly, this helps you make more informed financial decisions. Plus, it’s helpful when tax season rolls around. 

Here’s our guide to expense categories to help you understand the cost of running your business. 

Why Do You Need To Divide Your Expenses By Categories?

Dividing your expenses into different categories shows you exactly where your money goes. By breaking down your costs into small business expense categories, you can:

• See How Money is Spent. Tracking your spending helps you see what the different aspects of your business really cost. But when you have hundreds of line items, it’s hard to see the big picture. With the right expense categories in place, you can sort expenses to identify where you spend the most money. 
• Make Data-driven Decisions. People naturally make better decisions when well-informed, and business decisions are no different. Expense categories let you assign a number to an area of spending. These numbers can lead to more efficient business expenditures, saving you money. 
• Improve Your Budgeting. Seeing trends in your spending can help you better plan for your next budget cycle. It can be helpful to structure business purchases by how often they occur. Some expenses may come up monthly, while others occur quarterly or annually.  
• Find Areas to Save. If you notice you’ve overspent on anything, you can target these areas for cost reductions. Similarly, you may also find areas of your business that could use a budget increase to improve operations.  

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10 Expense Categories to Track Your Spending

The first step to organizing your expenses is choosing the best categories for your business purposes. Here are 10 business expense categories to consider:

1. Advertising 

Consider categorizing these expenses to help track your ad spending. Advertising expenses may include the cost-per-click charges from social media or ad placement charges from print media.

Advertising isn’t cheap, but the cost may be tax deductible. Accurate reporting is essential to take advantage of this potential tax break. 

2. Employee Costs

If your business employs people, this category is essential. Employee costs include more than the wages or salaries you pay. Employee benefits like health insurance, sick leave, taxes, and vacation pay all fit into this expense category. Subcontracted work can also go here, depending on the work performed or how you choose to track expenses.

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3. Bank fees

Most bank accounts come with monthly fees to operate. There may be fees related to your business credit card or interest on business loans, too. Tracking all of these expenses helps you know if you’re overspending on bank fees. Luckily, some of these costs may be tax deductible, which is another benefit to recording them. 

4. Rent and Building Expenses 

For many businesses, rent is among the most significant monthly expenditures. Other occupancy expenses may include insurance, repairs, and general maintenance. Rent is usually tax deductible.  

If you own the building your business occupies, the interest on your mortgage may be tax deductible and is worth categorizing. Plus, if you’ve had any work done on your building, the costs of construction are another expense that could be added here. 

5. Utilities

Utilities like water, electricity, and internet connectivity are crucial for day-to-day business operations. Including them as an expense category lets you monitor fluctuations in these costs. Tracking your utility expenses can help save you money by revealing which services cost the most.  

Some businesses might add these to the building expenses category. Whether or not you do this depends on how many categories you want to have. Choose what works best for your categorization. 

6. Office Supplies 

If your business has an office space or warehouse, office supplies are a potential expense category to keep track of. Knowing exactly how often your business orders these items helps you plan for future purchases. Seeing these costs upfront may also motivate you to source better deals from competitive suppliers.

7. Business Insurance

Depending on your business’s size, insurance costs can increase quickly. Business-related insurance costs may include liability insurance, disability insurance, worker’s compensation insurance, and even car insurance. Track these expenses so you know how much this costs you annually.

8. Website Expenses

Operating a website has several related costs. These costs may include domain fees, web hosting, and cloud storage. It’s likely a non-negotiable for your business, but some hosting platforms offer better rates. Decide how much you’re willing to pay and if a simple site is better.

9. Software Subscriptions 

A website isn’t the only subscription you’ll have. Which software you subscribe to depends on the type of business you run. But you’ll likely have other tools with recurring costs. How many you have indicates if you need an entire category devoted to them.

For designers, that might be apps like Photoshop or Figma. For people in retail, you might have inventory management software or a point-of-sales system to pay for. 

10. Legal Expenses

Like many service businesses, lawyers rarely come cheap. But legal expenses include more than litigation. This category can include work from a CPA or even financial planners. Tracking your business’s legal expenses can identify areas where cost reductions are possible.  

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What Are Tax-Deductible Business Expenses?

Tax-deductible expenses are costs you can write off from your taxes. Tax write-offs lower the amount you owe to the government each year. 

Common tax-deductible business expenses include licensing costs, loan interest, depreciating assets, and wages. If you use your home as your office, you may also qualify for a home office deduction. Other small business tax deductions may come from your charitable donations, retirement contributions, and even travel expenses. 

You may be surprised to find out how many tax-deductible business expenses exist. The IRS business expense category list may include many expenses your business incurs regularly. 

The IRS may recommend separating the cost of goods sold (COGS) and capital expenditures from more usual expenses, like office supplies. This is because you may be unable to deduct these expenses in the same year they’re incurred. Finding a current IRS publication is the best way to find recognized deductions.

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How To Categorize Your Expenses

Categorizing your business expenses may take a little work, but the benefits of organizing your costs are worth the effort. Follow these steps to get started with your small business expense categories:

• Determine Your Expenses. The first step to categorizing your costs is listing each of your expenditures. Try to list all of your expenses for the quarter or even the year. Seeing your business costs itemized can help visualize how they should be grouped together. 
• Review Your Financial Accounts. While some costs, like rent, occur on schedule, others, like travel expenses, might not happen regularly. You may need to look at several months of financial statements to see these costs. A thorough review of each of your financial accounts can reveal exactly what you’ve spent and when.
• Categorize Each Expense. Now that you’ve reviewed your accounts, you need to assign each expense to its own category. 

5 Tips To Assign Your Expense Categories

So, you’ve looked over your expenditures and reviewed your accounts. Now what? With these five tips, you’ll be well on your way to assigning expense categories for your business:

1. Don’t Overdo It. It’s easy to overthink the process, but in some cases, less is more. Stick to as few categories as possible to avoid confusion. 
2. Be Specific. Complicating your expense categories creates more work than necessary. But not being specific enough can keep you from reaching your budget goals. Feel free to tweak your categories over time to find the right number for you,
3. Group Similar Expenses. Group like items together in a single category. Supplies like paper and ink for the printer or tape, staples, and glue can go under an umbrella term like office supplies. 
4. Set Aside Hard-to-categorize Expenses. If you’re unsure how to categorize a specific item, set it aside to be assigned later. By the time you get back to it, you may have already come up with a way to classify it. Having an “other” or “misc” category can also help you with any pesky charges that are hard to group. 
5. Update it Frequently. Remember, your categories are fluid. Updating your expense categories may lead to a more refined understanding of your costs. 

Collecting Payments Has Never Been Easier

Tracking expenses is only one part of your company’s financial health. With the right software, you can easily track every payment to see where your money’s going. Getting paid should be simple, too. In fact, it should be the most efficient part of doing business. Joist has made it incredibly simple to issue your invoices and get paid fast! You can even collect down payments onsite. Sign up with Joist now.