Category Archives: Taxes

Small Business Accounting Pitfalls

There are so many things to keep in mind when you own a small business. Details ranging from inventory to order fulfillment are just the baseline concerns. If you’re a brick and mortar business, your overhead includes a lease, utilities, and maybe additional employees. If you run an online business, your overhead includes the cost of parking your domain somewhere, maybe an email management system. Regardless of whatever kind of business you own, though, you will have to make sure your books are in order.

Keep it separated.

It’s true that you will spend money out-of-pocket to start your business. You’ll also most likely spend out-of-pocket to bolster up your business in the first few years. Until you start turning a profit, pretty much everything you have will go into the business.

In spite of what seems like an endless flow of your personal cash into supporting your business, though, you should still keep your personal finances and your business finances separate. Creating a separate business checking account is a good way to compartmentalize and organize your business. Not only is good accounting policy, it’s also a way to help you mentally compartmentalize and look at your business in a critical and objective way.

Anyone who starts a business has to have passion and drive. Without it, there’s little point to making all the necessary sacrifices. But the truth is, it’s just not enough to be passionate about your business idea. You have to be able to look at the business and make decisions as objectively as possible.

Keeping it as separate from your personal finances as possible is a solid first step towards helping yourself do this.

Pay attention to the kind of business credit you get.

Depending on the kind of business you started, you might need seed money to build inventory, or to float your overhead for the first few months — or longer. There are all kinds of options and all kinds of institutions that might be able to help you., from banks to credit unions to even crowd sourcing. Be sure you pick the one that’s right for you; and, if you can, at all costs, try to avoid seeding your business using a credit card. If you find yourself unable to pay it back, it could seriously hurt your chances to access other kinds of funding.

Keep it organized.

Disorganized record keeping is the death knell of small business. If you’re forward thinking enough, you already set how to organize and store your important records. But even if you didn’t think about that in the beginning, it’s not too late to start now. Take the time to go back through your records and organize them. Yes, it’s a pain. Yes, it takes time, which is a commodity that’s already in short supply. Yes, it means some headaches, depending on how long you’ve put off going through and organizing your records.

But it will be worth it. And, it’s also a good lesson for you that will have more good returns than bad.

Update your books on a regular basis… more than just monthly.

You are the heart and soul of your business. But your books are the blood and bones. Keeping your books up-to-date isn’t the sexiest way to spend an evening; but it will give you the confidence you need to make objective decisions.

It may seem like updating your books monthly would be enough, and it may well be enough for a well-established business. If you’re just starting out, however, the ebb and flow of your business isn’t all that stable. The more you put your eyes on your books, the better chances you have to succeed later. It’s not enough to keep your receipts. Add them in weekly, or even bi-weekly. Keep an eye on your receivables and sales. If your business has heavy overhead, it’s even more important that you update your books regularly.

Don’t confuse sales with profits.

You’ve made a few sales, satisfied a few clients, and gotten a few more. Good for you! But if you’re just starting out, be sure to remember that sales aren’t profits. You don’t get to call it profit until after you take out business expenses – if for no other reason than to take pressure off your personal pocketbook – and quarterly or annual taxes.

It’s good to be passionate and important to be excited about your business. But don’t start trying to roll around in profits before they actually start rolling in.

Don’t be afraid to consult a professional.

It’s okay to admit you’re over your head in certain aspects of your business. That doesn’t mean you have to throw in the towel. A smart business owner knows it’s important to sometimes find someone who knows a little more about some aspect of the business. Because in the end, owning a successful business is as much about learning and evolving as it is relying on common sense.

Last minute tax tips for small businesses

As the April 18th deadline for filing taxes looms on the horizon, you may be in the enviable position of having already filed your tax return. If you haven’t already filed, however, as a small business owner or entrepreneur you are probably working overtime to get it done. Depending on the kind and size of business you run, you might have a tax preparation professional do your taxes for you. But you may be just starting out and want to save the expense; if that’s the case – and even if it’s not – there are a few things to keep in mind.

1. Know what you owe

As a small business, you should probably be paying your taxes quarterly. These payments can be easy to forget, though, especially if you are a sole proprietor working in the creative economy or the gig economy.

If you did make your final quarterly payment on January 15th, make sure you take that into account when you file. Take the time to deduct any levies or account for any late fees and penalties the IRS may impose if you happened to miss a payment.

2. Accelerate or defer.

Many sole proprietors use cash basis accounting – which means they report income when payments are received. Depending on the kind of business you have, you might consider scheduling your billing so clients can pay early in the new year for work you completed late in the previous year.

The advantage to this is that you’re getting income early in the year.

However, if you had a successful year you could accelerate your deductible expenses. There are a few things you can do to help relieve your tax burden if you plan ahead, such as:

  1. making extra charitable donations,
  2. renewing professional journals and licenses before the year ends, or
  3. replacing old business equipment.

If you are in the position to, you might also consider

  1. prepaying your state income tax,
  2. selling an investment property at a loss, or
  3. selling securities at a loss.

If you’re a small business owner or entrepreneur, there’s nothing you can do about taxes. They are as much a part of your business as your customers or client base. The trick to making it all less odious, though, is to be proactive. Think ahead early in the year so the end of the year doesn’t hit you any harder than it needs to.

Timely Tax Tips for Freelance Workers

There is a cost to the freedom you get being a freelance worker. While you can probably fudge on office-appropriate attire and set your own start time (Sleeping late can be a viable option!), there is one thing you can’t avoid if you hope to be successful.

Taxes.

When able to, a lot of freelancers prefer to hire an accountant. There are a lot of things to keep track of; and while tax law for freelancers really is a lot of common sense if you think about it, the problem is that there is really a lot to keep in mind. As a freelancer, you are your own employer. In addition to the usual responsibilities of a working adult — the electric bill, the water bill, the gas bill, and your rent or mortgage – you are also responsible for your obligations as your own employer. This means paying into Social Security and Medicare, and perhaps setting up a retirement account.

We’ve already talked about the self-employment tax . It’s important to keep in mind that because you are both and employer and an employee, that you are responsible for the Employer and Employee portions of Social Security and Medicare, 15.3% of earnings. It’s true that you can offset earnings with deductions; but you need to be as careful about what you pay as you are about what you don’t pay.

Here are a few things to keep in mind that will help you stay organized.

  1. Don’t trust your 1099.

If you earn $600 or more from a client, that client should send you a 1099-MISC. It’s very important that you compare. Look at Box 7 on your 1099-MISC and compare that number to the number you have in your records. If your client claims they paid you more than your records state, go through the steps to verify and get a new 1099.  Remember: the tax burden is on you, not your clients. The IRS won’t annoy them with phone calls and letters. They will annoy you.

  1. Get a separate bank account.

Yes, you work for yourself. It’s your money and if you’re making less than $600 total, you may not need a separate business account. If freelancing is your primary source of income, however, you really should consider getting a separate account. This will save you headaches when looking up transactions. If you use accounting software like QuickBooks, having a separate account will make it easier to download information to plug into your books. It also makes it easier to track business expenses for deductions.

  1. Pay attention to Estimated Tax.

As a freelancer, you will probably have to pay taxes quarterly instead of just once a year. You’re also an employer, remember?

If you’ve been freelancing for more than a year, you can get a good idea of what you should plan on paying by using one of several easy to use calculators on line such as:

http://www.bankrate.com/calculators/tax-planning/self-employed-business-tax-calculator.aspx

or

http://quickbooks.intuit.com/r/free-self-employment-tax-calculator-quickbooks/

It’s not always easy being your own boss. But it’s not impossible. And if you are the kind of person who enjoys the autonomy, then the additional responsibility is part and parcel. The trick is to be as careful with your books as you are with the work you do, and to be smart about it.

Protect yourself from identity theft

As if you don’t have enough to worry about as an entrepreneur this tax season, there is one more thing you need to be very aware of: identify theft.

If you are a sole proprietor, everything about your business is tied back to you. Your livelihood not only depends on your good work habits, but on safeguarding your information — your clients’ information and your own. And as we slide into the middle of FY2016 tax season, you should also do what you can do to ensure your private information isn’t stolen and used to steal your tax return right out from underneath you.

The first thing to consider, if you haven’t already, is getting an Employee Identification Number (EIN). As a sole proprietor, you’re not legally required to get an EIN. But in addition to protecting your personal assets in the event your business hits a few bumps, having an EIN can also help protect your identity. With an EIN, you will not have to use your social security number for any business-related tax forms or credit or loan applications.

The best part about it is this: it doesn’t cost you anything.

Here are a few other tips to keep in mind:

Watch what you throw away.

The easiest and most common method thieves use to steal someone’s identity is simply going through their garbage. Be very careful about what you throw away. Just because you tie up your garbage bag and have a secure lid on your can or dumpster doesn’t mean you are being as careful as you could be. It wouldn’t hurt to invest in a paper shredder to ensure that any documents with potentially useful information for identity thieves are unusable.

(Here’s a little side tip if you also garden: depending on how much paper you shred and what kind of paper it is you can add shredded paper to compost.)

Watch where you handle financial matters

One of the big draws about being a freelancer or owning your own business is that, depending on what you do, you can literally take your business anywhere. We’ve all seen the gig economy articles with pictures of satisfied looking semi-professionally dressed people sipping a latte in some generic coffee shop while working on a laptop.

And there’s nothing wrong with that. But when it comes to doing your taxes, it’s a good idea to avoid public Wi-Fi hotspots for filing digitally. You should also avoid publicly accessible hotspots at hotels and fast food restaurants, even if it’s a secure spot that requires a password. Your best bet for filing digitally is to file from home or your business office, using a hardline connection or a secured connection where you control access.

Also, if you’re using a tax app on your smart phone that requires you to take a picture of your W-2, be sure to delete the photo after you’ve sent it.

Beware phone and email scams.

The IRS always sends documentation if there is an issue with your tax return. If you haven’t received any documentation, but are receiving phone calls and emails claiming you owe the IRS an excess of back taxes, be extremely cautious. They will sometimes give you fictitious but very real sounding badge or employee numbers. Sometimes they even know the last four digits of your social security number. If you receive a phone call from someone claiming to represent the IRS, immediately hang up and contact the IRS. If you receive an email, you can forward the IRS the email, but if possible, you should not open it as it may be part of a different phishing scam to install malware on your computer.

If you don’t prepare your own taxes, make sure you find someone trustworthy.

If your tax preparer asks you to sign a blank return, run – don’t walk – the other direction.

There are other ways to protect yourself

If you decide that protecting your identity is also a worthwhile financial investment, there are several programs available.

  • LegalShield © has a service called IDShield ©. They offer this in addition to other legal services for small businesses.
  • AAA also has two identity theft services they provide for members: ProtectMyID Essential and ProtectMyID Deluxe.

Self Care: The Self-Employment Tax

If you work for yourself, it doesn’t take you long to figure out that the American Dream has a few strings attached. One aspect of self-employment that people hardly ever talk about is the self-employment tax. Yes, you already pay income taxes, and depending on how you structure your business, you may be paying them quarterly.

But what about FICA? It’s not the government’s job to make sure that you, as a self-employed individual, are paying the proper amount into Social Security and Medicare.

That’s part of your job.

This is what we mean by the self-employment tax. According to the IRS , the self-employment tax “is a tax consisting of Social Security and Medicare taxes primarily who work for themselves.”

The first thing to remember that unless you make more than $400 in a year, you’re not required to pay the any self-employment taxes.  You’ll notice that the threshold for requiring to pay is lower than the amount required for a client to provide you a 1099.


You’ll also notice that there are two options for figuring your earnings to base your tax payment on: one for farmers and one for other kinds of self-employed individuals (the nonfarm optional method). The nonfarm optional method can be used if net profits are less than $5,457 and also less than 72.189% of gross nonfarm income, but you had net earnings from self-employment of at least $400 in two of the prior three years.

Please keep in mind, however, that the nonfarm income optional method can only be used five times by a self-employed individual.

When determining your income, make sure to clearly delineate between what you’re paid as a self-employed individual and any money you earn as the result of investing in something else – especially if the business you end up investing in is in a similar line to what you do. You also need to be aware of the IRS and court rulings regarding monies paid out as retirement. Retirement is just taxable income (depending if from a tax-deferred vehicle) not self-employment, and no FICA or medicare is taken out, just income tax based on your tax bracket.

Even if you’re not bringing in a lot of money yet as a self-employed trailblazer, you may want to consider going ahead and paying some self-employment tax voluntarily. Although you may not be legally required to pay, there is an advantage. You will be able to earn Social Security credits, which translate into higher benefit when you retire.

To LLC or not to LLC: that is the question

Being an artist or working in a creative industry as a freelancer isn’t always easy. Unless you’re fortunate enough to find steady clients and gigs, you feel like your professional life is forever going in a circle of feast and famine.  And, if you have worked as an artist of a creative freelancer, you know that being talented at what you do isn’t enough. That myth of the carefree artist with his head in the clouds and no notion of how the business world works is simply that – a myth. Being a great artist goes hand-in-hand with being a savvy businessperson, because as much as you love your art, you need to eat and keep the lights on, too.

One thing every entrepreneur thinks about eventually is whether to operate as a Sole Proprietorship or to form a Limited Liability Corporation (LLC).

In most cases, you’re probably going to start with and stay with a Sole Proprietorship. This is the easiest business to start because there isn’t much set up required. Although you may be required to get a business license, there isn’t any paperwork you need file unless you choose to “Do Business As” (DBA) a name besides your own. You may also want to consider going ahead and applying for an EIN (Employer Identification Number. While it’s not necessary for a Sole Proprietorship, it will help protect your social security number. It also legitimizes that what you are doing is more than a hobby. You report your earnings annually and you are responsible for paying self-employment taxes as well as covering contributions to Social Security and Medicare.

If you’re fine with all of that, and you’re careful with your accounting practices, then you will probably want to form a Sole Proprietorship.

Keep in mind though, that if your business should ever be sued, then you are personally liable for everything. And if you should lose, your house, your property, and other assets will be at risk.

Forming an LLC takes some legwork, preparation, and money. After you chose a name and make sure it’s not already being used, it’s time to file articles of corporation. Depending on the state you live in, expect to pay between $100 and $800. In Kentucky if you forgo the ease of having someone else do the heavy lifting for you, it will only cost you a $49 fee paid to the State Treasurer to file your articles of corporation.

Some states also require an operating agreement that outlines how your business is run; Kentucky, however, does not. You’ll then need to get an EIN (Employer Identification Number), which is free and can be obtained online at the IRS website. Keep in mind though, that you can only register for one EIN at a time. At this point, you can separate your personal and business assets. This is the main advantage for forming an LLC as an artist or freelancer.

Finally, you’ll need to register for state tax and unemployment insurance. Even if you happen to be your only “employee” you will still need to do these things in order to be in compliance of state law.

Depending on the nature of your work, forming an LLC might be overkill. Many artists and members in what is termed the “creative class” keep it simple. And, unless the kind of work you do expands to the point that you need to bring in extra help, you will want to seriously consider keeping your work life as least complicated as possible.

If you’re reading this and your business or business concept doesn’t fall under the umbrella of the “gig economy” or you don’t identify as part of “the creative class,” keep in mind that every entrepreneur has to make the decision at some point whether to operate as a Sole Proprietorship or as an LLC.

Help your accountant, help yourself: a few tips for home-based entrepreneurs

 

A 2013 article from Small Business Trends stated that 69% of entrepreneurs in the United States start their businesses at home. This makes perfect sense. Many new businesses are in part or entirely operated online. As people buy more and more goods and services online, there’s less need to take the expensive risk of investing in a brick and mortar business. Moreover, if you know what you’re doing, you can help yourself – and your accountant – come tax season.

Although it takes additional time and a few extra steps, you can really help yourself by understanding the upside of claiming a deduction.

First if all, you know need to know what you can and can’t deduct. It’s a good idea to check with the IRS regularly to see if these things change, but here are a few things you can deduct.

The cost of a home office

In order for this deduction to pass any potential audit, you need to make sure the space you call your home office is a separate space or separated and dedicated space in your home. It doesn’t have to be its own room, but it can’t be a multipurpose space, either. For example, many people use an empty additional bedroom as a home office. Others have a separate studio or redesigned barn they use for a home office. If you are using a corner of your basement, that’s fine, too. Your home office doesn’t have to have four walls and a door.

But you can’t set up computer desk in the corner of a guest bedroom or nursery and call it your home office. The key here is that it must be a regular and exclusive space you use to run your business.

You must also be able to show that your office is the principle place of your business. Even if you meet clients other places, you need to be able to show that you do the majority of your work in your home office.

Keep in mind that the IRS only allows up to 300 square feet. But they do allow for $5 for every square foot up to 300.

Technology and technology purposes

It’ll be a hard sell to convince anyone that if you have one computer that you are only using it for business purposes. If you do that, though, you can deduct the cost of depreciation.

If you decide to purchase a dedicated business computer, you can write the cost of it off. After that, you can write off the cost of depreciation. You can even deduct based on the percentage of use. TurboTax is very helpful with this.

You can also write off the cost of a dedicated phone, whether it’s a cell or landline.

It’s worth the hassle

When you’re starting a new business, whether you operate it out of your home or not, every penny counts. Staying on top of and taking advantage of tax laws can help turn a slow first year into a much better second year.

The most important thing to keep in mind is that keeping track of all your expenses, and keeping all of your business receipts will make it easier in your end of year accounting and tax preparation. You will save yourself and your accounant time, money, and headache down the road.

GrinchtoGlee

From Grinch to Glee – Make year end easier with these bookkeeping tips

It’s not that your heart is two-sizes too small like the Grinch, but rather that your head might explode from all the year-end bookkeeping tasks on your list. While these to-dos could certainly put your holiday spirit in short supply, we know how and Who can help.

It’s essential that your data is accurate, complete and organized for tax time and the year ahead. But where do you begin?

Like the Whos in Whoville helped Grinch, we offer tips to keep you and your books on the nice list.

  • Evaluate your financial standing

Review profit and loss, your balance sheet and general ledger. Make sure they aren’t mangled up in tangled up knots by checking that all transactions have been recorded and posted to the proper income, expense, asset or liabiity accounts. Also check the accuracy of your accounts receivable and accounts payable, and write off uncollectible debt so as not to overstate your income (especially if accrual based), and overpay the You-Know-Whos.

  • Complete bank reconciliations

Make sure your checking, savings and credit card accounts have been reconciled. Loan interest should be separated from the principal and accurately logged. And a decidedly, non-grinchy trick: reconciling monthly makes it easier to catch errors.

  • Review Personal Expenses

You shouldn’t, wouldn’t, oughtn’t, mustn’t mix your personal and business expenses (although for the Sole Proprietor it’s often a necessity), so look at your expenses closely and if that’s the case find receipts and/or cancelled checks and log the expenses in your books. Then watch your heart grow because you avoided paying extra taxes.

  • Review Subcontractor Services

If you’ve hired any Whos who are Sole Proprietor’s or LLC’s, for contract services totaling more than $600 during the year, you’ll be required to send them a 1099 Misc form. It’s a best practice to send each new subcontractor or vendor a W9 at the time of hire to ensure you have complete address information and either their Social Security Number or Federal ID Number information on file.

  • Take Inventory

Review your inventory during the last month of the tax year and make necessary adjustments to align the inventory account of floofloovers and whowonkas to match the items in stock.  Your inventory value should show the cost price or price paid rather that the selling price for your items.

  • Create a Filing System

It may sound overly simple and antiquated, but we know an organized system for easily accessing the documents you need, when you need them come tax time will make you happy as a Who.

As you celebrate the close of 2016, it’s also time to look to the year ahead. If one of your goals is to have more flexibility and time to achieve your personal and business goals, consider the advantages of having a Bookkeeper. Not only an excellent resource to simplify your financials and ensure accuracy, a Bookkeeper can also be a personal advocate, a partner as loyal as Max, and someone to help you make your Holidays mean a little bit more for years to come.

Spring Cleaning For Your Finances

OK, now breathe! That’s it, take a deep breath in and slowly release it… tax day is over, spring is in the air and summer is just around the corner. LIFE IS GOOD!

That is until you take a good look at the mess around your computer… the strewn trash piles along with the old financial records and leftover coffee cups and who knows how long that box of chow mein noodles has been siting there… right?!

But remember, it’s SPRING and what better time than to get started on a bit of spring cleaning? I’m not just talking about cleaning up from your deadline with the IRS or cleaning out the closets and under your bed, I’m talking about your financial spring cleaning.

Now, don’t get me wrong, spring cleaning your house goes a long way in helping you spring clean your finances too. By organizing your home, you are much more likely to know what you need to buy and may prevent you from purchasing something that you don’t need, simply because you misplaced it. Listed below are a few other ways that you can spring clean your finances:

  • Check Your Credit Score – Is there any incorrect or misleading information about you that could hurt your score? What can you do to improve your score?
  • Organize and/or Shred Old Financial Documents – Clean up your files and shred any old or no longer needed information.
  • Re-balance and Diversify Your Investment and Retirement Accounts – How are your investments doing? Are you on tract with your retirement goals?
  • Review Your Insurance Coverage – has there been any life event changes? Do you need any additional coverage or is any coverage obsolete?
  • Review Your Expenses and shop for better rates – Can you pay less if you switching to a different company? Are you using what you paid for like that gym membership?
  • Set up Automatic Bill Pay – Late fees undermine your financial goals, therefore put regular payments on automatic bill pay so this doesn’t happen.
  • Save without Thinking – How is your emergency fund? Are you saving enough each month?
  • Revisit Your Budget – Once you have reviewed your finances ensure that the new numbers are worked into your budget.
  • Record Your Financial Passwords and Store Records in a Safe Place – Or better yet, use a trusted online password storage system and be sure to use a different password for each of your financial sites changing the password on a quarterly bases.

Knowing where you stand with your finances will better enable you to make wise and prudent money choices and as a result, you will be better prepared for your next tax deadline in 2017.

THE SQUEAKY NAGGING VOICE OF MARCH MADNESS

Spring is in the air… We have altered our clocks to give us that extra hour of day light, our lawns are in need of a manicure and that age old tradition of college basketball teams battling it out for the ultimate title is underway.

There is also one more sign that winter has morphed into spring. It starts out as a small annoying tickle in the back of our brain as we become glued to our tablets and newspapers for the latest basketball scores and bracket updates. Then it quickly develops into a squeaky nagging voice, shaking us into reality at about the same time the newest NCAA Champions have been crowned. Finally we are hearing the same words over and over and over… “taxes”, “taxes”, “taxes”, “TAXES”!!!!

Yes, spring also welcomes in the Tax Man and by April 1st we will all be filled with a new type of madness, running around in circles; hastily gathering any tax documentation and tossing them into the only handy box we can find… the same one filled with the pictures and receipts from last summer’s trip to Walt Disney World in Florida. All the while praying that we didn’t forget anything important that will prevent us from meeting that April 15th deadline!

We all know this picture and every year we keep saying the same thing, “Next year, I am going to do it differently!” Well folks, it’s now next year and we are a month away from the inevitable tax deadline. So let’s make 2015 the year to make a difference in how we handle our financial obligation.

The trick is to work a little each day so that you don’t feel overwhelmed. Break your tax process into smaller chunks and spend 20 to 30 minutes a day to get it done. Listed below, is a sample of how you can split up your tax project into a more manageable set of tasks:

  1. Choose a qualified tax preparer
  2. Set up an appointment
  3. Organize your tax documentation
  4. Get your receipts in order
  5. Check out your tax deductions
  6. Don’t forget your charitable contributions
  7. Grab your tax file from last year
  8. Check for changes in tax laws (knowledge is important)
  9. Write out your personal information (any changes over the last year)

By following the steps above, not only will you feel better because you are in control of your time but your stress will also be alleviated, which lowers your blood pressure for an overall healthier you.