Do you know how to track your small business income? Bookkeeping is one of the most intimidating part of small business finances, but fear not! Keeping track of your self-employed income isn't as hard as it sounds. Click through to learn the most common tracking mistakes small business owners make and the best practices for tracking your income. #smallbusiness #bookkeepingtipsDid you know that your business speaks its own language? It’s a foreign language, but if you learn a few words you can get a whole bunch of juicy information out of your biz. What’s the language called? Your finances!

How you track your finances, especially your business income, can give you loads of helpful information about your business. The trick is to ensure you’re tracking your income correctly, which most small business owners aren’t doing.

Read on to learn business income tracking best practices and common tracking mistakes to avoid.

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Business Income Tracking Mistakes (2:59)

Let’s talk about common tracking mistakes. But first…

There are two reasons that we track our business income. The first is tracking for taxes. Which means we track so that we have our financial data ready for tax season.

The second reason we track is for information. You can use your finances to give you information about your business. You can ask burning questions about what products or services you should sell, what you should invest in, and how to spend your time. Your financial data gives you answers that you can trust and rely on. 

Let’s cover the four business income tracking mistakes that I see a lot of small business owners committing:

Mistake #1: Tracking Employee Income as Business Income

This boils down to not understanding the difference between business income (aka self-employment income) and employee income. Business income is any money that you receive for your business activities that do NOT have employee withholdings from it. If you aren’t receiving a paycheck that has federal, state, or social security taxes taken out, then it’s business income.

All self-employment income should be tracked separately from employee income. Accidently tracking the two together could result in being taxed on money you’ve already paid taxes on! That’s bad news bears. 

The easiest way to know if it’s business income or employee income is to check if there are payroll taxes taken out. If there aren’t payroll taxes taken out, it’s probably business income. Keep in mind, business income comes from many sources. It could be a 1099 contractor income, affiliate commission, ad revenue or selling your products and services.

Mistake #2: Labeling Everything as “Sales”

This when you give all your business income the same generic category. This is okay if you’re ONLY tracking for taxes. But if you’re already doing the work of tracking- why stop at just taxes?

If you’re also tracking for information, generic names won’t help you understand how you make money and how different income streams impact various areas of your business.

Examples of generic income categories are “sales”, “products”, or “services.” These categories are way too broad and when you look at your reports, you won’t know what you *actually* sold. 

Mistake #3: Waiting for a 1099 to Count Business Income

A 1099 is a document that whoever paid you will send you and the federal and state government to report how much money they paid you in non-employee compensation. A lot of people think that if they don’t receive a 1099 they don’t have to report their income and it means they were paid “under the table.” FALSE!

Technically anyone who pays you for business services is required to file a 1099 by January 31st for the previous tax year. It’s a system of checks and balances to ensure that self-employed people aren’t underreporting their income.

Just because you don’t receive a 1099 from somebody doesn’t mean you don’t have business income. People forget to send them out, don’t know that they’re supposed to send them out, or don’t know how to send them out. Regardless of why you didn’t receive a 1099, you’re still responsible for self-reporting your income.

Mistake #4: Tracking Your Net Deposit (After Fees) Instead of Your Gross Income

Before we get into this mistake, let’s go over the definitions of net deposit and gross income.

Gross Income: The total amount that you’re paid from your clients or customers.

Net Deposit: The amount deposited into your bank account after the expenses of processing the payment is deducted. 

Now back to the mistake: You’re using Square to process payments. Someone pays you $100. After you run their card through the Square app, Square deducts $2 as their fee for processing the payment.  The Square deposits $98  into your bank account.

The initial $100 that you were paid is your gross income, while the $98 that you received is your net deposit. When you file your taxes, you don’t report your net deposit, you report your gross income. You have to report your gross income. People commonly make the mistake of only reporting their net deposits. (check out this article that covers how to track your credit card processing fees)

It’s important to track correctly because once you start processing a certain amount, your processor will file a 1099-K reporting to the government how much you processed. That means if you only track your net deposits, the numbers in your tracking system will be different from the 1099-K. And that looks super sketchy to the government. 

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Best Practice #1: Deposit Biz Income Into a Biz Account (14:08)

Let’s move on to talking about best practices for tracking your business income. Follow these and you’ll automatically avoid all of the mistakes we just covered!

The first best practice is to deposit business income into a business account. This means two things. One- you need a separate business checking account. If you don’t have one already, you’ll open a business checking account for your business income. 

Two- this account is for business income ONLY. There shouldn’t be any employee income, gift money, or personal reimbursements deposited into the account. Create a separation between your personal money and your business income.

Be sure to set up any direct deposits for business income into your business checking account. That’s going to be Stripe, Square, Shopify, PayPal and any other way you receive money electronically. 

Transfer business income received from Venmo and Paypal into your business account ONLY. If they don’t funnel directly into your business account, you’ll lose track of income. For PayPal and Venmo, always transfer your balance out at the end of the day so you don’t accidentally use your balance for personal expenses. That’s when tracking hell ensues! 

Best Practice #2: Break Out Your Income Stream (19:01)

We’re circling back to that mistake that we talked about earlier: using generic labels like “sales” or “products” to categorize your income. Getting specific with categorizing your income streams helps you track your financial data and changes. At a glance, you’ll know which aspects of your business are making money.

How do you break out your income categories?

The first step is to list all of your products and services. That includes:

  • Services you offer on an hourly basis
  • Services you offer on a package basis
  • Physical products
  • Digital products
  • Affiliate revenue
  • Ad revenue

Get as detailed as possible with this list.

Next, group similar products and services together. As you do this, you’ll notice there are natural grouping for your income streams. You may also have income streams that are all on their own, like ad revenue. That’s fine too. 

The next step is to give each grouping a name that makes sense to you. You’re the one reading your reports, so the names should work for you!

Now, there’s one last step: Ask yourself, Are there any additional details I want to know about how I make money? These additional details are your subcategories. For example, one of your income categories is Digital Products. But you sell e-books, online courses, and printables. You could set these up your subcategories. The structure would look like this:

  • Digital Products
    • E-books
    • Online courses
    • Printables

Best Practice #3: Track Your Gross Income (24:20)

When tracking your gross income, it’s not so much knowing that you should do it… It’s deciding HOW you’ll do it. And being proactive about implementing that method into your bookkeeping routine

Options for tracking gross income

There are two options. The first is to manually split out that information in your bookkeeping method or program. For example, if you use a spreadsheet, you’ll input your gross income, credit card processing fee, and net deposit. If you use a bookkeeping program, you’ll use the Split Expense feature. 

If you use a digital accounting program, the second option is to install integration that’ll do the work for you. I’ve talked about Quickbooks Online before and all the integrations that you can use to streamline your bookkeeping processes, which I think you’ll find useful!

Lastly, your merchant processing fees are a tax deduction! That is something you can write off. If you have other questions about tax deductions, check out this epic guide to tax deductions

Best Practice #4: Handle Refunds Correctly (28:08)

There are lots of business owners out there who have their tracking skills down and are super confident in their bookkeeping. Until they have to handle a refund…then they’re wondering what the hell to do with the payment!

Handling refunds correctly is pretty simple.

Refunds are categorized back into the original income category used. If someone buys an ebook and you categorize it as Digital Products, if they want a refund, you categorize the refund as Digital Product. This way, your income and the refund will balance each other out to zero- which accurately represents what you earned. 

It sounds too good to be true, but it actually is that easy!

There you have it! You just learned how to track your business income correctly. But wait! The fun doesn’t stop here. I’ve created a free Biz Finance Survival Guide for you. It will help you whip your business finances into shape and give you guidance so you don’t get lost in confusing business finance land.

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Do you know how to track your small business income? Bookkeeping is one of the most intimidating part of small business finances, but fear not! Keeping track of your self-employed income isn't as hard as it sounds. Click through to learn the most common tracking mistakes small business owners make and the best practices for tracking your income. #smallbusiness #bookkeepingtips