20 Business Expense Categories for a Service Business, and What Goes in Each
Updated: 5 days ago
Most service businesses need about twenty expense categories. Fewer, and everything ends up in "miscellaneous". More, and you spend the month deciding between two that mean the same thing.
The list below follows the lines of the IRS form most sole proprietors file, Schedule C, so that what you sort during the year is already in the shape your preparer needs.
Copy it, cross out what you do not use, and you have a chart of accounts.
This is the working list. For how categories fit into your books as a whole, see our guide to business expense categories.
A category chosen once should not need choosing again. Example data.
The short version
About twenty categories is enough for most service businesses.
Base them on Schedule C, so tax time needs no re-sorting.
Owner pay, tax payments and transfers are not expenses. Keep them separate.
If a category has had nothing in it for a year, remove it.
The twenty
Category | What goes in it |
|---|---|
1. Advertising and marketing | Ads, website hosting, business cards, listings, email marketing tools |
2. Software and subscriptions | Booking, invoicing, design and storage tools you pay for monthly or yearly |
3. Supplies | What you use up in doing the work: products, materials, small tools |
4. Office expenses | Paper, ink, postage, small items for the desk |
5. Rent or lease | Studio, booth, office, or equipment you rent |
6. Utilities | Electricity, water and heating for a business premises |
7. Phone and internet | The business share of your phone and connection |
8. Insurance | Liability, professional and property cover for the business |
9. Professional fees | Your accountant, bookkeeper, attorney |
10. Contract labor | People you pay who are not employees |
11. Payment and bank fees | Card processing, bank charges, platform fees |
12. Education and training | Courses, certifications and books that maintain your skills |
13. Travel | Flights, hotels and transport for business trips away from home |
14. Meals | Business meals, kept apart because the deduction is limited |
15. Vehicle | Business mileage or the business share of car costs |
16. Licenses and permits | Professional licenses, registrations, business taxes |
17. Equipment | Larger purchases that last more than a year: a computer, a chair, a camera |
18. Repairs and maintenance | Fixing what you already own |
19. Interest | Interest on business loans and business credit cards |
20. Home office | The business share of home costs, if you qualify |
Three things that are not expenses
These leave the business account and so they look like expenses. They are not, and sorting them as expenses is the most common reason a profit figure is wrong.
What you pay yourself. If you are a sole proprietor, money you take out is a draw from profit, not a cost of the business.
Tax payments. Estimated tax is paid out of profit. It does not reduce it.
Transfers. Moving money between your own accounts is neither income nor expense.
Give each of the three its own category outside the expense list. Then your expenses add up to what the business cost to run, and nothing else.
Four categories worth keeping apart
It is tempting to merge these. Each has a reason to stay separate.
Meals. The deduction for business meals is generally limited, so your preparer needs the total on its own.
Equipment. Larger purchases can be treated differently from everyday costs, and a list of them is useful by itself.
Contract labor. You may have forms to file for people you paid, and you will need each person's total.
Vehicle. The IRS expects records that show business use, so mixing it with travel makes those harder to produce.
Twenty clear lines read faster than sixty vague ones. Example data.
What about "miscellaneous"?
Have one, and keep it small. A useful test: if it holds more than about 5% of your expenses, something in it has earned its own category. Look inside, find what repeats, and give it a name.
Five rules for a clean list
Name categories by what was bought, not who was paid. "Software", not the name of the app.
One purchase, one category, every time. Decide once where the booking tool goes and never revisit it.
Split a mixed purchase. A single receipt with supplies and a personal item is two lines.
Add a category only when something repeats. One odd purchase does not need a home of its own.
Review the list once a year. Remove what stayed empty.
By kind of business
If you are a | You will lean on | You may not need |
|---|---|---|
Stylist or esthetician | Supplies, rent or lease, licenses, education | Travel, contract labor |
Coach or consultant | Software, marketing, professional fees, travel | Supplies, repairs |
Designer or writer | Software, equipment, contract labor | Vehicle, utilities |
Cleaner or organizer | Supplies, vehicle, insurance | Rent, education |
Once the categories exist, sorting is the short part. Our post on the monthly bookkeeping minimum shows what an hour a month covers, and if you work from home, the home-based business checklist goes into that last category.
Start with the whole picture, free
La Soglia, the free membership of the Money Mastery System, holds everything you own and owe in one place, personal and business together, with no bank connection and no card. Sorting transactions into categories, with suggestions that remember your past choices, is part of the paid membership.
Bring it to the Collective
Not sure where something goes? The Money Mastery Collective has a discussion feed open on the free membership. Ask how other owners in your line of work sort it.
Questions we hear
How many expense categories should a small business have?
About twenty is enough for most service businesses. Too few hides detail, and too many slows down sorting.
Is paying myself a business expense?
Not for a sole proprietor. What you take out is a draw from profit, and it belongs in its own category outside expenses.
What category is software?
Give it its own category, such as software and subscriptions, so you can see the yearly total.
Should I have a miscellaneous category?
Yes, a small one. If it grows past about 5% of expenses, look inside and name what repeats.
References
The categories follow the expense lines of IRS Schedule C. See the Instructions for Schedule C (Form 1040) for what each line covers, including the limit on business meals and the rules for vehicles and a home office.
Related guides: How to do your own bookkeeping, step by step · Home based business bookkeeping: a one-page checklist · Where does my money go? A simple money tracker.
Start free with La Soglia
La Soglia is the free membership of the Money Mastery System. It gives you the Net Worth Tracker, where everything you own and everything you owe sits in one place, and the Money Mastery Collective. There is no card to enter and no bank connection.
Keep in touch
Donna shares a short version of posts like this one on Instagram and LinkedIn. Follow along there, or find everything in one place on our links page.
A note on what this is
This article is educational. The Money Mastery System is an educational tool, not financial software, and nothing here is legal, tax, investment or financial advice. Which expenses are deductible, and how, depends on your business and the tax rules for the year. For guidance on your own circumstances, please speak with a qualified professional who knows them.
Comments