Amy Northard, CPA, Author at Amy Northard, CPA - The Accountant for Creatives

How much does my business need to make to report it to the IRS?

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How much does my business need to make to report to IRS?

There is a common misconception that I’ve seen on the internet that says if you make under $600 (contracting, freelancing, etc.) – you do not need to report it to the IRS.  This is false, there is no minimum amount that a taxpayer may exclude from gross income.  Independent contractors must report all income that they receive as taxable, even if it is less than $600, and even if the client does not issue a Form 1099-MISC.

Next time you see this rumor in a Facebook group or post, be sure to share this post. You don’t have to just take my word for it, here’s the official guide from the IRS: https://www.irs.gov/uac/reporting-miscellaneous-income

The IRS will never catch you. This is the typical response from someone who has never been audited.  I’m sure there are a lot of taxpayers who have skirted the law, and not reported all their income to the IRS.  If you get caught, you will be responsible for paying the tax, plus interest, and a penalty. You may also be subject to criminal prosecution – underreporting income is a crime and you’re signing a tax return on penalty of perjury. Failing to report income may also lead to the loss of deductions and credits which rely on taxable income limits (such as childcare and dependent credits).

Why is $600 the common amount for this myth?  Taxpayers often get this law confused with the law that states that as a business owner, you must issue a Form 1099-MISC to any independent contractors if:

  1. You made the payment to someone who is not your employee;
  2. You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
  3. You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
  4. You made payments to the payee of at least $600 during the year.

To report your miscellaneous income, you must use the Form 1040 (Schedule C) or Form 1040 (Schedule C-EZ).  Contact me if you need any assistance preparing your taxes or issuing 1099’s to your contractors.

How to Deduct a Home Office as an S-Corp

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A simple guide to Home Office Deductions

If you have a home office and recently transitioned your business to an S-Corp, you’ll want to understand the steps you need to take in order to continue to take the home office deduction available to you. Here are the steps you need to take to deduct your home office as an S-Corp.

  1. You must complete an accountable plan. This plan will outline which expenses will be eligible for reimbursement, and how they will be paid. You may download a sample accountable plan here.
  2. Calculate the percentage of your home that is used exclusively for business purposes. To calculate this percentage, divide the home office square footage by the total square footage of your home. So, if your home office was a 10×10 room, the square footage of would be 100. If your entire home was 1,500 square feet, you would divide 100 by 1,500. In this case, you would get to deduct 6.7% of your home office expenses by multiplying that percentage by eligible home expenses like mortgage interest or monthly rent, utilities, interest, repairs and depreciation.
  3. Calculate the total amount of eligible reimbursable expenses. Use the IRS Form 8829 to assist with this calculation. Multiply each amount by the percentage of business use calculated in the step 2 and enter the results on the expense form that you use for your accountable plan.
  4. As an employee of the S-Corp, you must prepare expense reports and submit them in to your company on a regular basis. Be sure to keep all receipts or other documentation associated with the expense.
  5. To reimburse yourself for the expense, cut a check from the business account and deposit it into your personal account. Attach a copy of the check/transaction to the expense form as documentation that these were paid.
  6. Enter the amount of the payment into your S-Corp’s records as a reimbursement for employee expenses. Assign each expense claimed to the appropriate expense account category so that these expenses may be deducted from the S-Corp’s income on its tax return.

Bonus for email subscribers: Download the S-Corp Accountable Plan Reimbursement Worksheet!

While this does take a little effort to get started, once you have your accountable plan and reimbursement process in place the rest of the process is easy! If you need a little assistance or reassurance with your calculations, feel free to contact me.

What happens if I can’t pay my taxes?

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I can't pay my taxes!

Don’t panic – believe me, you’re not the only or first person to own money to the IRS. Thankfully the IRS has a process in place to assist you in getting on track. The absolute worst thing to you can do is ignore the IRS because you don’t have the money on hand. Here’s the simple two step process:

  1. Contact your accountant and file your return by the deadline and pay as much as you can to avoid penalties and interest.
  2. Call the IRS to discuss your payment options at 1-800-829-1040. They offer customized payment plans for your individual needs.

The IRS will not waive interest charges which accrue on unpaid tax bills, so get those tax returns prepared as soon as possible.

Are you behind on your taxes? Contact me TODAY and we’ll get your returns filed and get you moving in the right direction.

What is a Virtual CFO?

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I think it’s safe to say that I’m a big fan of making sure entrepreneurs and small business owners understand the financial side of their business. I spend a lot of time on client education in my blog, on my YouTube channel, and via my Be Your Own CFO course. However, there is a point in every growing business where the owner must transition from working in the business – and start working on it. This means stepping away from reconciling accounts, tax projections, and updating spreadsheets, and begin focusing on growing what you love. The next natural progression for your business is to hire a Virtual Chief Financial Officer (Virtual CFO). Your Virtual CFO is a contract professional who is responsible for all of the financials of your business.

My goal as a Virtual CFO is to take the financial stress (and headache) away from the business owner.  I offer a very robust and affordable package which focuses on providing the business owner with the financial reports they need to make quick decisions in their blooming business.

How to work with a Virtual CFO

The first thing I do with any potential new client is hop on a quick 15 minute call to learn more about their business and see where I can be of assistance. Even though we live in a virtual world, I think it’s important to hop on a call or video chat to get a better sense of personality and start building the side of the work relationship that an email cannot convey. Here are a few of my tips on hiring a CPA.

Hint: Hire someone who you will enjoy working with – someone who understands and cares about the success of your business.

Once the call is over, I summarize the information we discussed and send it over for your review. If everything looks great, I’ll send over an engagement letter and will begin the on-boarding process. On-boarding includes gaining access to any required financial information.  Once you’re business financials are all caught up is when the real magic happens.  Every month your bookkeeping will be completed and a report will be prepared for your review. Each quarter, quarterly tax calculations and tax payment vouchers will also be prepared for you, and I’ll schedule a call to clarify any financial questions you have.  Tax time will also be a breeze – my team and I will prepare your return and provide you with advice for your financial future.

What to look for in a Virtual CFO

I may be a little biased, but I would recommend hiring someone who has CPA at the end of their name – for a few reasons:

  1. The Certified Public Accountants (CPA) designation is one of the most widely recognized and highly trusted professional designations in the business world.
  2. A CPA is licensed by a state, and must keep current with tax laws in order to maintain a license in that state.
  3. After they are licensed, CPAs also must comply with continuing education requirements in order to maintain their licenses; accountants and bookkeepers don’t have this requirement or restriction.
  4. CPAs must abide by the AICPA Code of Ethics and Professional Conduct and are at risk of loosing their license if they do not comply with these rules and regulations.

In addition to this qualification, I would recommend finding someone who is flexible, willing to adapt to your business needs,  and allows you to focus on building your business.  Your Virtual CFO will provide you with vast financial knowledge and expertise at a fraction of the cost to bring someone into your team full-time.

Why I LOVE paying taxes!

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3 Simple Ways to Lower Taxes

Ok, I may have embellished this title a little bit. But, the bottom line is – if you’re paying taxes, you’re making money! As a small business owner I can’t say I’m the happiest about the amount of money that goes to taxes, so I make every effort to lower my taxable income. Today, I’m going to share a few ways that you can lower your taxable income.

Expenses are not the answer.

Every so often a client will ask me if they should make a big purchase (buy a new camera, subscribe to a new online course, buy the new fancy tool) at the end of the year so that they don’t have to pay taxes. I always answer this question with one of my own – do you need this to succeed and grow your business, or are you trying to avoid paying taxes on your income?

Ultimately we became small business owners to sustain our lives doing what we love. This means making enough money to support ourselves, and have a little extra profit left over for growing our business and planning for our future.

Are you running a business or a hobby?

If you have not turned a profit in at least three of the prior five years, the IRS can categorize your business as a hobby. If the IRS considers your business a hobby, it would prevent you from claiming a loss related to the business. There are some exceptions to this rule, but I’m confident that if you’re reading this post you do not work your butt of all year just for your business to be considered a hobby. There are better ways to lower your taxable income without increasing your expenses at the end of the year.

3 Simple Ways To Lower Your Taxable Income

If you have “extra” money at the end of the year and want to do something with it besides rack up more expenses or pay the government taxes on the profits, here are my recommendations.

  1. Contribute to your retirement. As a small business owner, you may consider contributing to a SEP IRA, solo 401k or a SIMPLE IRA.  All of these plans are great options for lowering your taxable income while saving for your (and your employees’) futures. Choose a SEP IRA if you are a small business owner who wishes to make a tax deductible contribution into an IRA for yourself and on behalf of your employees. Choose a SIMPLE IRA if you are a business owner with a workplace of 100 or less employees and will fund the bulk of their retirement. Choose a solo 401k if it’s just you.
  2. Contribute to a health savings account. This may not be the sexiest of options, but if you’ve ever experienced medical bills, you know how important it is to have an emergency fund dedicated solely to medical expenses. If you have a high-deductible medical plan, you may have the option to contribute to an HSA. The unused contributions can roll over indefinitely and grow tax-free.
  3. Further your education. The best business owners are lifelong learners. If you took time throughout the year to learn a new skill, you may be eligible for the Lifetime Learning Credit. This credit is worth a maximum of $2,000 per year, and helps pay for college and educational expenses that improve your job skills. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.
    Invest in your children’s education. Almost every state now offers a 529 plan. This plan is designed to help families pay for future expenses associated with college or other qualified post-secondary training. Although contributions are not deductible, earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college. In addition to the federal tax savings, over 30 states currently offer a full or partial tax deduction or credit for 529 plan contributions.

Quarterly Tax Payment Calculator

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Quarterly Tax Worksheet

Who needs to pay estimated taxes?

If you know that you will owe more than $1,000 to the IRS, you will want to make quarterly tax payments. Each state varies on their requirement for when you need to start paying in quarterly, so just look up your state’s department of revenue website and see what they require.

What happens if I don’t pay quarterly taxes?

If you don’t pay into quarterly taxes (and you are supposed to), you could end up owing the IRS an underpayment penalty in addition to the taxes that you owe. The penalty depends on how much you owe and the amount of time that you owed it to the IRS.

What are the due dates?
-Quarter 1 payment (January 1 to March 31) – April 18
-Quarter 2 payment(April 1 to May 31) – June 15
-Quarter 3 payment(June 1 to August 31) – September 15
-Quarter 4 payment(September 1 to December 31) – January 17

Heads up:  Be sure to check your state’s website for their due dates! They are not always the same as the federal due dates.

 

How to make quarterly tax payments?

Complete the Form 1040-ES (Estimated Tax for Individuals) and mail it to the IRS with a check.  You also have an option to pay online via the IRS payment portal.

How do I calculate quarterly tax payments?

DIY Option – I have prepared a free estimated quarterly tax worksheet which will guide you through the process of calculating your quarterly tax payments.  You can download the printable worksheet below.

The percentages used in the worksheet are estimations. If you know that you usually fall into a higher tax bracket, you’re welcome to increase the percentages.

Please note, the state section is only for those states who have income tax. Those of you who live in states like Florida and Texas won’t need to fill this part out.

Once you’ve calculated the amount you owe for the quarter, it’s time to make the payment. I’ve linked to the federal payment page below and most states have a similar process for paying online. Try Googling “your state + online estimated tax payment” to pay directly to your state.

Keep in mind, you aren’t actually filing any information at this time. You’re simply making a deposit towards your year-end balance. If you skip a payment, it’s not the end of the world. Try to catch up the next quarter or plan to pay the balance at tax time.

Tax Professional Option – The amount you owe will depend on several things like tax deductions, tax credits, marriage status, number of dependents and several other variables. If you want a precise calculation, contact me.

Should I hire a CPA?

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Should I hire a CPA?

Finding the right mix between being a Creative and handling the money side of it all can seem daunting. Give me just a few minutes to paint a different picture for you. Hiring an accountant can be a huge game-changer for your business.

I worked hard to put the initials C.P.A. after my name but in my heart, I can relate to all Creatives. Easily, I could have stayed in a firm and crunched numbers all day, but I used every free minute to figure out a way to get closer to my own creative bliss. Working with such passionate creative people is the perfect mix in a world of spreadsheets and numbers.

As a Creative, you have all you can handle just staying on top of your business and now you’re being told you have to add spreadsheets and tax law to the mix? Accountants, CPA’s in particular, are required to keep up with Federal and State tax laws by taking continuing education courses every year. It is a good thing to have someone who does know these things on your side.

Your accountant can help to hold you accountable and keep your financial records up-to-date. I know it is tough to make ourselves keep up with the mundane tasks like bookkeeping. I struggle with it myself. One way to stay up-to-date is to set up quarterly bookkeeping reviews with an accountant. Peace of mind is a good thing. As a bonus, you will be able to see where your income is throughout the year and respond quickly.

Accountants can help you determine what you’ll need to pay in for estimated taxes. This takes a heavy weight off your shoulders as the end of the year approaches. We can also can help you understand the financial ramifications of choosing to be a sole proprietorship, partnership, Limited Liability Company (LLC), and S-Corporation as well as walk you through the steps.

Having your own Creative business is a wonderful expression of yourself. There are times, though, that we make use of other’s talents in order to bring our visions to life. In other words, we pay other people for their services. On the business side, this means you have to determine if a 1099 or W-2 needs to be sent to the IRS and your state. Your accountant can assist you and even prepare these for you.

If you’re not sure where to begin with a bookkeeping system, that’s the perfect reason to make an appointment with an accountant. You may be really comfortable with a spreadsheet, but if you’re not into formulas and hand-entering everything, your accountant can also recommend programs that automatically pull in transactions so you just have to categorize them (Check out Freshbooks or Wave). It is really important to have a good system in place you can stick with throughout the year.

Bottom line is that hiring a good accountant can be a real benefit to your business. I promise that it will reduce stress and leave you with much more time to spend on your craft and generating income! Robert Frost once said, “Freedom lies in being bold.” Don’t let your finances run you. Be bold, find an accountant and take charge so you’re working towards your own personal freedom!

Interview with an CPA for Creative Entrepreneurs

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Interview with an Accountant for Creative Entrepreneurs

For this interview I partnered with Idealust, a business coaching resource to help photographers and other creative entrepreneurs grow and scale their small businesses.

Q: Creative people and solo-preneurs tend to be very good at the creative stuff, and less pro-active about the financial stuff. What advantages do creative entrepreneurs access when they hire an accountant? At what point are they losing more money than they’re saving by not hiring an accountant?

A: When a creative entrepreneur takes the plunge and hires an accountant, they can stop stressing about the accounting and tax side of their business and put more energy back into the part they love – the creative part. An accountant can remind creatives about tax deadlines, assist in the case of a stressful audit, and be a resource for you to ask questions to as you continue to learn more and more about accounting and tax.

There’s a point where you’re spending so much time researching and trying to understand tax laws, deductions and that’s the time to call in an expert. A question, like “How to deduct business mileage?” may take you several hours to research, and it may take your accountant a few minutes to email you an explanation.

Q: As a CPA you see a side of things that creatives would love to ignore: the realities of financial decisions. What are the most common financial mistakes or omissions you see creatives making?

A: In my work with Creatives, I find that it is a common mistake to not plan for the tax due from the income their business generated during the year. By working with your accountant throughout the year and not just when your tax return is due, a plan can be made so taxes are paid in periodically or money is saved in anticipation of the taxes being due.

Q: Are there best-practices that you see creatives commonly neglecting or ignoring concerning tax time?

A: It’s easy, even for me, to want to put off the bookkeeping and focus on income-generating activities. The problem is that this makes tax time incredibly stressful because not only will you likely have a large payment due, you also have to set aside a huge chunk of time to organize a year’s worth of income and expenses. By setting aside an hour each week, or a couple hours a month, to get your bookkeeping squared away, you can see how your business is performing throughout the year and you won’t have an overwhelming amount of work to do at the end of the year.

Q: A lot of creatives do what they love on a part-time basis. Are there exemptions or write-offs they could be taking advantage of that they might never have considered?

A: There are a couple deductions some creatives forget to take or are nervous to take in fear they will cause an audit. The first is “car and truck expense.” This can be calculated by adding up all auto expenses and deducting a percentage of the total amount or it can be simply calculated by tracking all business miles you drive. It takes discipline to track each business trip and the business purpose, but with the help of smart phone apps, some of the hassle has been lessened.

The other deduction is for the home office. I hear time and again that the creative entrepreneur would rather just not take the deduction because they’re nervous it will cause an audit. With more and more people working for themselves and working from home, this deduction does not raise eyebrows with the IRS like it has been rumored to in the past. It requires a little work in tracking home utilities, repairs, and other home expenses, but it will be worth it if you’re able to lower your taxable income.

Q: What kind of tax savings are your clients commonly missing out on by not maximizing retirement savings?

A: There are several retirement savings options available to self-employed creatives. SEP IRAs, SIMPLE IRAs and individual 401(k)s all allow you to skip the tax on contributions made now, and pay the tax later, when you’re ready to use it in retirement. Depending on the size of the contribution, this can be a sizeable tax savings. ROTH IRA plans don’t get a tax break when you make a contribution now, but instead, you are able to let your money grow and use it in retirement, tax free! Either way, if you aren’t putting any money away, you’re missing out on the opportunity for tax savings.

What kind of tax savings or other benefits can creative entrepreneurs realize by incorporating? At what point should they be considering incorporation?
 
If a creative entrepreneur is considering becoming a Limited Liability Corporation and they are the only member, they would be considered a “single-member LLC” and would be treated, for tax purposes, exactly the same as a sole proprietor. If making the switch to an LLC, there is a benefit of limited liability protection. This means creditors can’t come after personal assets of the owner to pay the business’s debts.

When considering becoming an S Corporation, there are several factors to look at. As an S Corporation, tax savings occur when the business is producing enough income to pay the shareholder employees a reasonable salary, pay expenses, and have enough left over for distributions. While the salary is subject to payroll taxes, the distributions are not.

Q: Are there other ways creatives could be more proactive in their finances?

A: Take time to learn about the business side of your business. It’s the less glamorous side of being a business owner, but the better armed you are with information, the better you’ll be at making decisions for your business. For example, thinking about hiring someone? Knowing the difference between an employee and a contractor can have a huge impact on how you report their earnings and whether or not you are required to withhold employment taxes. While it can be necessary to hand work off to others (bookkeeping to a bookkeeper, etc.) you still want to knowledgeable enough to question the person if something looks odd.

Q: How much should creatives be setting aside in anticipation of tax time?

A: While everyone’s situation is different, I generally recommend setting aside (or paying as a quarterly estimated payment) about 30-35% of net income (income less expenses).

Q: Are there online tools, apps, or resources to which you point clients to help them better track and manage their finances?

There are so many great resources out there for creative entrepreneurs. A few of my favorites are:

  • TripLog is a mileage tracking app available for Android and iPhone that will automatically start tracking your trip when you are moving 5 mph or faster. Thanks to this feature, forgetting to track a trip to meet a client, or a trip to Staples to pick up supplies doesn’t happen anymore.
  • Freshbooks, a cloud accounting program, is a very simple program that pulls in your bank transactions. Their app allows you to take pictures of receipts so you never forget or lose one and you can categorize it instantly or while you’re waiting at the dentist office.
  • Xero is another option for cloud accounting and their app, similar to Freshbooks’ app, allows you to manage your business finances outside of the office.

Q: A client just asked you what 3 things she could be doing right now that would make the biggest difference to her at the end of the year, what do you tell her?

A:

  1. Keep your bookkeeping up to date, or hire someone to do it for you. The power from knowing how your business is doing throughout the year, rather than just at the end of the year can be huge.
  2. Make a plan for your money. This includes saving money for taxes, money for retirement, money for expenses, and money for yourself. Finding the right balance will take time but you will learn what works best through experience and a little chat with your accountant.
  3. Instead of putting receipts in a big pile, organize them by month so at the end of the year, if you or your accountant needs more information about a specific expense, you won’t spend hours searching through a mountain of receipts. I put mine in document-sized envelopes labeled with the month but you could also snap pictures and save them in Evernote (another great tool for creatives).

Self-Employment Taxes Explained and Simplified

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A simple guide to Self-Employment Taxes

Self-employment taxes are one of the unglamorous, and let’s be honest, annoying parts of owning your own business. But I have good news for you! Once you get a system in place for taking care of them, it’s one less thing you need to worry about. I’ll explain some basics about the tax as well as how you can make sure you always have money in the bank to pay them.

Let’s get started by talking about what self-employment taxes actually are. The tax is made up of two parts – part 1: Social Security tax (12.4%) and part 2: Medicare tax (2.9%). For 2017, the Social Security tax is on the first $127,200 of earnings (self-employment earnings and employee earnings combined). Keep in mind though, there’s income tax (which varies from person to person) on top of this self-employment tax and there isn’t an employer withholding it for you! Go here for an easy-to-read table if you want to estimate the income tax.

Now that you know how to calculate the self-employment tax, let’s talk about who has to pay it. If your net self-employment income is $400 or more, you will be required to pay the tax. If you fall below that amount for the year, you won’t be assessed the tax.

If you’re looking for a way to save tax, my best advice is to make sure you are taking all of the business deductions you’re entitled to. Some of these commonly missed deductions are: home office, health insurance, mileage and education. Each of these could be a whole article on their own, so I’ll save those details for another day. Just don’t dismiss them because you don’t feel like tracking or you’re afraid of an audit. If the expenses are truly a business expense and you have documentation, you should never fear an audit!

Here’s where I share how to make sure you’ve always got money in the bank to pay both your self-employment and income taxes. Create a separate savings account to set aside your taxes in. Usually moving 30% of your net income (income less expenses) out of your day-to-day checking account is enough to cover the taxes you’ll be assessed. To get a more exact number to save, you’ll want to talk to your accountant so they can take into account several other factors.

Federal and State estimated tax payments that will cover your self-employment tax and income tax can be made quarterly. These payments are optional and only required if the tax due on your Federal return will be more than $1,000 . Each state has their own rules on this, so check with the state’s department of revenue. The Federal estimated payments can be made online at EFTPS.gov and are due on the following dates:

Quarter 1 – April 15
Quarter 2 – June 15
Quarter 3 – September 15
Quarter 4 – January 15

The due dates may change slightly from year-to-year depending on if they fall on a Sunday or holiday.

Now that you have the tools to plan for your self-employment tax and income tax, hopefully you can rest a little easier tonight!

Bookkeeping and Taxes for Creative Entrepreneurs

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Bookkeeping and Taxes for Creative Entrepreneurs

The three things we’ll be going over today are creating a usable bookkeeping system, what some commonly forgotten tax deductions are, and an easy tax time checklist so you can make sure you’ve got everything you need or your accountant needs for your taxes.

Creating a useable bookkeeping system

Let’s start by going through the steps of creating a usable bookkeeping system. The term “usable” is really key here because if you aren’t using the system on a regular basis, it gets overwhelming and very easy to put off month after month.

I can speak from personal experience here. Just last year, I kept putting my own bookkeeping to the side to work with my clients on theirs. Every month bookkeeping felt like a daunting task because my expenses were spread out in PayPal, a personal checking account, a business checking account and my personal credit card. I knew I needed to simplify my process and stop using personal accounts for business expenses. I got that taken care of and then I started using Quickbooks for my bookkeeping instead of the manual process I was using before. I just keep up the Quickbooks Online window as one of the millions of tabs on my browser and click over to it every couple of days to see if any transactions need to be categorized. By doing this, all I have to do at the end of the month is reconcile my accounts and I’m good to go.

The first step of the process is to open a separate business bank account, then organize your receipts, choose a program to record your transactions, reconcile your accounts monthly and then time to analyze and celebrate!

Open a separate business bank account

If you don’t already have separate bank accounts for your business transactions, this is the first thing you need to do to create a usable bookkeeping system. It makes bookkeeping easier because you aren’t filtering through your day-to-day personal expenses trying to mark what’s business and what’s personal. You already know!

If your business is any structure other than a sole proprietorship, you must have separate accounts. To hold onto the protection that a Limited Liability Company or S-corporation offers, you must treat your business as a separate entity and avoid mixing business and personal expenses.

In addition to opening a business checking account, you may want to open a separate business savings account. I use this account to hold onto money for my quarterly taxes. This way it’s out of sight, out of mind and ready when I need to make a quarterly payment.

Organize receipts

The next step is to organize your receipts. There are so many ways you can do this, so if one method isn’t working for you, switch it up.

Just make sure you follow these two rules:

  • The first rule: keep a copy of the receipt as a paper copy or a scanned electronic copy and remember: bank statements don’t count as a receipt.
  • The second rule: keep receipts for at least 3 years. But, keep in mind that if there are substantial errors on your tax return, the IRS could audit you up to 6 years after you file your return.

For my paper receipts, I’ve labeled 12 envelopes with the months and I use those to stash receipts instead of letting them collect in my purse or get lost in my office. For electronic receipts, I save them to a folder in my email that I’ve labeled “receipts.” With this method, when I’m doing my bookkeeping, I always have two places to check for expenses: either my paper files or my emailed receipts. If you don’t like paper hanging around, you can always scan your receipts and then toss them. Just be careful that you have this information backed up and not stored in one place.

Choose a program to record transactions

Now that you’ve got an organizational system in place for your receipts, it’s time to choose an accounting program. If you don’t have a lot of transactions, you can usually get by using a spreadsheet to record your income and expenses. The downside to this is that it can be a lot of manual work and if it takes too much of your time, you won’t want to do it and then it will be something that gets procrastinated month after month.

If you’ve got more transactions than you’d like to manually type into a spreadsheet, I recommend you check out a cloud accounting program. There are so many to choose from. These are just a few of the ones my clients like to use. Most have a monthly fee and allow you to use their program for a trial period before paying so you can get a feel for what you like.

The nice thing about the cloud accounting programs is that they automatically pull the transactions that show up in your bank account, PayPal account, or several other types of accounts into the program. Then, all you have to do is assign categories to the transactions. Most programs also have a feature where they recognize expenses and assign the transaction a category for you. Then, all you have to do is review it to make sure it’s correct.

If a category you need isn’t listed in their pre-populated list of expense categories, you can always add what you need. Don’t be afraid to make up expense categories.

Reconcile accounts monthly

Now we’re at the second to last step, which is reconciling your accounts monthly.

Think of reconciling like balancing a checkbook. You’re making sure everything that’s showing up in your accounting program is matching what’s on your bank statement. If something doesn’t match, that’s a red flag to you that something was entered incorrectly, a transaction was entered twice, or maybe accidentally left out.

You’ll do this process for any business accounts you have linked to your accounting program.

Analyze and celebrate!

Now that you’ve completed bookkeeping in your new system for a month, it’s time to analyze and celebrate!

As part of your analysis, review your profit and loss statement. This will show you if you’ve made money or not. If you have, congratulations! Now you need to set aside some of that profit for taxes. I usually recommend 25-30% to cover Federal and State quarterly taxes.

This is also a good time to compare your current numbers to your budgeted numbers. Are you on track for your budgeted income?

The last and most fun item on this slide is to pay yourself. The amount and frequency you pay yourself will be different for everyone. Just keep in mind that if you’re a sole proprietor or single-member LLC, any income left after expenses are taxed, not just the money you transfer to your personal bank account.

Now, I just want to take a minute to talk to those people who already have a bookkeeping system in place and they’re ready to outsource. I think this is a great option for people who have done their own bookkeeping for a while and feel like they have a pretty good handle on what the numbers mean. They’ve reached a point where their time can be better spent working on other things within their business, but they still feel comfortable with the numbers side of their business.

Start by asking your friends and colleagues for recommendations. If you aren’t finding anything with that route, a lot of the online accounting programs have accountant networks. You can usually search by location and find someone nearby. When interviewing them to see if they would be a good fit for you, make sure they have some experience in your industry or at least with similar business structures.

Commonly forgotten tax deductions

Now that we’ve gone through the steps of creating a usable bookkeeping system, I’d like to go over three commonly forgotten tax deductions.

They are:

Tax Time Checklist

  • Profit and loss statement (also called income statement)
  • Any assets purchased or sold during the year
  • Auto expense information (mileage or actual expenses)
  • Home office deduction information
  • Receipts for all deductions (paper or electronic)

The first is a profit and loss statement. This can also be called an income statement. This shows the total income for the year, any refunds you issued and all your expenses.

You’ll also need to have a list of any assets your purchased or sold during the year. When you are trying to figure out what qualifies as an asset, remember that they are generally high-cost purchases that will last more than a year. Some examples are a computer, a printer or a camera. Low cost items or items that aren’t expected to last more than a year, like office supplies are considered expenses. On this list of assets, include the date purchased, the name of the asset and the amount your purchased it for. If you sold an asset, list the date it was sold and the amount you sold it for.

If you drove your car for business purposes, include auto expense information. What’s included just depends on which method you choose.

If your business has a profit for the year and you had a home office, include the appropriate home office information based on which method you choose.

The last note is to make sure you have receipts for all the deductions you’re claiming. There’s no need to send the receipts or even copies of the receipts to your accountant unless they ask for them, just make sure you have them available.

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