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How to categorize bank transactions

How to categorize bank transactions: first decide if a line is income, an expense or neither, then pick a category that matches a Schedule C line.

Published · 5 min read

To categorize a bank transaction is to write down what the money was for. Your bank statement says “STRIPE TRANSFER” or “AMAZON MKTPL”. A category says “Service income” or “Office expense”.

Most people think the hard part is to choose between two expense categories. It is not. The decision that matters most comes first: is this line income, an expense, or neither?

The short version

Words to know

Step 1: Income, expense or neither

These mistakes cost the most:

For more on draws, see how to record owner draws and contributions.

Step 2: Choose a category that matches the tax form

Schedule C has a numbered line for each common kind of expense. If your categories follow those lines, your year-end Profit and Loss is most of the way to a tax return. Some common lines on the 2025 form:

Line Name Usually holds
8 Advertising Ads, printing
10 Commissions and fees Payment processing fees
11 Contract labor Payments to contractors
17 Legal and professional services Accountant, lawyer
18 Office expense Supplies, postage
25 Utilities Business share of phone
27b Other expenses Software, bank fees, training

On the 2025 form, Other expenses moved to line 27b (Instructions for Schedule C). For other costs, use our Schedule C line finder. To decide if a cost counts at all, see what counts as a business expense.

Step 3: Split mixed lines

Publication 334 says that if an expense is partly for business and partly personal, you separate the personal part. The personal part is generally not deductible (Publication 334). Record the personal part as an owner draw.

An example

Maya is a freelance designer. (She is an example, not a real person.) Here is one week of her business account:

Bank line Amount What she records
STRIPE PAYOUT +$1,452.30 $1,500.00 income and $47.70 processing fees
ADOBE −$59.99 Software (Other expenses)
PAYMENT THANK YOU VISA −$812.44 Transfer to the card
VERIZON −$90.00 $45.00 Utilities, $45.00 owner draw
TRANSFER TO PERSONAL −$2,000.00 Owner draw
IRS USATAXPYMT −$1,800.00 Owner draw (her personal tax)

She records the Stripe payout at its full $1,500.00, with fees as an expense. A Form 1099-K shows the gross amount, not adjusted for fees (IRS), so her income then matches it.

More than $6,000 moved. Only $1,500.00 of income and $152.69 of expenses reach her Profit and Loss.

A Righto tip

In Righto, when you give the same kind of line the same category a second time, Righto offers a rule. You can also ask your own AI agent, such as Claude Code, to suggest a category for each line. Nothing is saved until you approve it. See how agents work with Righto.

Common questions

How many categories do I need? As few as give you useful reports. Ten to twenty is plenty for most freelancers.

Can I put everything in Other expenses? You can, but it hides what you spend. Schedule C asks you to list each other expense with a description anyway.

What if I chose the wrong category last month? Change it. A category change does not change your bank balance, so your reconciliation stays correct.

What to do now

  1. Open last month’s transactions.
  2. Find lines that are not income or expense: transfers, card payments, draws, tax payments and loans. Fix those first.
  3. Check that each expense category matches one Schedule C line.
  4. Split any mixed lines.
  5. Write down the choices that took you more than a few seconds.

Righto is free, easy to use and needs no account.

Sources

Righto gives general information, not tax or legal advice. Ask a tax professional about your business.