Imagine this: You login to QuickBooks and see a mountain of transaction to put into categories.
It’s going okay until you find the purchase to that conference in October — is it travel? Education? Professional Fees?
Your mind spirals and it feels like this decision will make or break your finances.
Overwhelmed, you close the browser – you’ll deal with it later.
Why are categories so confusing??
There’s two reasons for this.
Firstly, QuickBooks is trying to please everyone (and that’s always a good idea…).
Freelancers, solo business owners, up-and-coming shops with a few employees, manufacturing companies that have dozens of contractors, and multimillion corporations with offices around the globe all use QuickBooks.
Each of these businesses has vastly different needs, and QuickBooks has to have categories in their standard list to work for each of these scenarios.
So as a small creative business, you’re having to sort through what actually pertains to you and what doesn’t.
Secondly, you are your own worst enemy. It can feel like making one wrong categorizing decision will bring the wrath of the IRS down on you. So it feels easier not to do it because at least it’s not wrong.
Why is it important to categorize correctly?
Yes, the dreaded April 15th hoopla is to blame for your category woes. Some QuickBooks categories are tax deductible and some are not.
For instance, travel expenses are tax deductible, so you want to make sure any purchases in the Travel category in QuickBooks are, in fact, travel, otherwise you may be including non-deductible expenses in a tax deductible category.
Secondly, correctly categorizing transactions gives you accurate data.
This allows you to make decisions about your business finances with the best information possible.
For instance, if you sometimes put your contract software in Dues & Subscriptions and sometimes in Office Supplies & Software, then when you look back at your reports, there's no consistency in amounts and you won't be able to accurately judge how certain categories affect your financial growth.
Why are online businesses different?
Online creative businesses run very differently than brick n’ mortar businesses.
The mainstays for an online business are unique in the business world, and the standard categories haven’t caught up yet.
For instance, what the heck are you supposed to do with all those online subscriptions? Are they Dues & Subscriptions? Office Supplies & Software?
Customize, customize, customize
So if QuickBooks is built to work with all sizes of businesses and the categories haven’t caught up to online business needs, what should you do? Customize.
While some categories in QuickBooks relate to taxes, not all of them do.
Remember those subscription purchases? I create a new category called Cloud Services and put all my monthly services into this category. The Subscriptions & Dues category is better served for fees to membership or professional organizations as well as content subscriptions (think magazines).
You know your business best and shouldn’t shy away from customizing your categories to meet your needs.
The first step is to figure out which categories relate to tax deductible expenses and which ones don’t.
The official list is on the Schedule C – you can find a copy of this year’s form on the IRS website (I promise that’s not as scary as it sounds). This shows you exactly what categories are deductible.
Once you have that list, you can make sure you know which categories in QuickBooks are important to keep and use. From there you can add categories (like Cloud Services) to your own QuickBooks account based on your business.
If that sounds like too much hassle or you’re still lost, then it’s time to get help.
Set up a consult with a bookkeeper or accountant or find resources to guide you.
One such resource is the Creative’s Guide to QuickBooks Categories. In this mini-course, a series of video trainings will guide you through every single category in QuickBooks Online, so when you need to categorize your books, you know what categories are essential and which ones you’ll never need to use.
Morgaine Trine is the heel-toting, red lipstick-wearing, ancient historian, Boss Bookkeeper and Profit Strategist, who helps business owners create profitable businesses.
Morgaine (pronouced Morgan) partners with emerging leaders and empire builders in the online business landscape who want to create long-term wealth and sustainable businesses. Honestly Bookkeeping clients value the honest, rooted, and heck yes attitude Morgaine brings to each interaction.
Honestly Bookkeeping came about because Morgaine wanted to travel and made that dream a reality. As she journeys around the world living her "why," Morgaine helps other creatives bring their financial dreams to life so they can live their "why" as well.
Join the #travelingbookkeeper family on Instagram for the latest accounting tips and travel pics.