Archive for the ‘Taxes and Accounting’ Category

Remember to Record All Your Expenses

Just received this admonishment from my financial planner and it’s good wisdom to pass onto you:

Remember to record ALL your expenses!

That includes every mile to and from networking events, meetings with clients, and trips to the office supply (even if you didn’t purchase anything), printshop and any other vendors. Track every bit of meal, entertainment, travel and even retreat expenses (e.g., trips you take for the purpose of business planning, development, writing and visioning).

That roadtrip you went on so you could work on your business visioning, planning and strategizing? That day you took the laptop to your favorite cafe to work from for a few hours? All that mileage and those expenses count, too.

Even some of the purchases you make such as appliances that you share in the home that are also used for business can represent deductions (e.g., that television that you plug your laptop into and work from).

If in doubt, record it anyway and your accountant can let you know what, if anything, is not eligible.

It’s too easy to dismiss things and not bother recording them because we aren’t sure. Don’t worry about that. Just record them!

You and your accountant will sort through the details later.

It’s far easier to do that than it is to go back later to try and recapture and retrace things.

The tax savings from these deductions can be significant!

If you feel you haven’t fully tracked these things, go back to your bookkeeping, calendar and receipts to retrace your tracks and purchases so you can benefit come filing time (which is just around the corner).

I have resolved to be more meticulous in my mileage and travel expense tracking in 2013. How about you?

Dear Danielle: How Do I Pay Myself?

Dear Danielle:

I am always curious and have asked lots of people.  I am wondering just how you pay yourself.  Do you pay yourself sick/annual leave?  Aside from overhead costs, do you deduct taxes?  What kind of taxes do you face (i.e., self-employment, FICA, etc.)?  Your help is greatly appreciated. –SH

Seems like such a simple question, doesn’t it?

You don’t mention what your business formation is and that’s going to be very relevant to how you pay yourself and what your tax and reporting legal obligations are.

The very, very first and most important advice I can give you is that you need to get yourself—quick—to an accountant or bookkeeper.

And I don’t want to hear any whining about how that would cost you money.

Yeah. Business costs money and you are simply going to have to spend money on important professionals and advice if you want to be successful. Not doing so now could end up costing you far more later.

And given how you’ve asked the question, I can tell there are some significant gaps in your business knowledge that will do you great harm if you don’t get the right professional guidance and advice.

In the meantime, here is some general information when it comes to paying yourself in business (and, understand, this is for U.S. based business; you’ll have to bone up on your own country’s laws and taxing requirements if you reside and operate elsewhere)…

The first thing people need to understand is that they are either an employee or they are a business.

I see so many people who decide to “work from home” or “freelance on the side” or become an “independent contractor” who don’t realize this.

There is no third classification. If you are working for yourself, no matter what you call it, you are a business.

Even if you might have an actual job as an actual employee somewhere, whenever you are wearing the hat of “freelancer” or “independent contractor” or whatever you want to call it, you are operating a business during those times. You MUST understand this because there are legal implications and obligations.

So that’s the first thing to understand, and the reason I mention it is because the way you ask the question, I’m not sure you entirely understand that.

If someone doesn’t have this understanding, it’s pretty safe to bet that they haven’t done any official or intentional business formation.When that’s the case, they are by default running a sole proprietorship.

In a sole proprietorship, which is the simplest and most common business formation to operate, you simply take money when you want and how much you want. For bookkeeping purposes, these are recorded as “owner’s draws.”

The question about sick leave and vacation pay is moot in this circumstance. You simply pay yourself when you want and how much you want (well, that is, if the money is there, lol).

I would always advise you to keep separate accounts for your business. (In fact, there are some circumstances where you are required by law not to co-mingle your business and personal funds).

Either way, at some point, you will want to “pay” yourself from the monies you have earned in your business. All that is entailed is simply withdrawing funds like you would any other account.

So, for example, if you went to the ATM and took out $X dollars for your personal use, you would simply record that as an owner’s draw. Same thing if you transferred funds from your business bank account to your personal bank account or if you wrote a check for something for personal use. Anything that goes out of the biz accounts that is not related to the business is recorded as an owner’s draw.

That said, being in a sole proprietorship doesn’t mean you are exempt from paying employment taxes. It’s just that you pay and report them differently than you would if you were an employee, where actual paycheck processing is required by law.

In a sole proprietorship, you will pay what are called “self-employment taxes” and they are to be estimated and paid/reported at certain, specific intervals.

You’re going to want to set aside a percentage of funds every time you receive client monies so that you have enough when it becomes time to pay these taxes. A good rule of thumb to be safe is one third or half of every dollar coming in.

Here again is where an accountant or other kind of financial advisor can give you the best guidance based on your specific business.  (For more info on U.S. based self-employment tax reporting, start here)

While a sole proprietorship is the simplest/easiest business formation to operate, it also is the one that puts you at the greatest legal liability should a client sue you for any reason. All your personal income and assets are at risk in a sole proprietorship. This is why many folks opt to go into some kind of corporate business formation where personal assets are not at risk (or are, at least, at less risk).

There are many kinds of corporations which also involve varying levels of complexity: corporation, LLC, PLLC, S-Corp, and partnerships to name just a few. Consult with a business attorney to get the right guidance in selecting the formation that is best for you and your business circumstances.

This is where paying yourself becomes more complicated and where you will definitely want to seek the advice and guidance of some kind of accountant or financial advisor.

For example, in some corporate formations, you are required to pay yourself as an employee or as an owner/operator. When that’s the case, formal employment payment processing is required which entails a whole host of accounting, processing, reporting and taxing obligations you must abide by and be knowledgeable of.

There may be some minimal salary requirements you must pay yourself as an owner/operator. You may be required to pay out profits to partners and shareholders in dividends. Or you may need to know how to record reinvested profits back into the business. In other formations, while you report otherwise as a corporation, you may be allowed to elect to pay yourself in owner’s draw instead of with an actual employment check.

See how much knowledge is involved?

And if you do things incorrectly according to your particular business formation, it could cost you big time later.

This is why it’s always, always best to seek the services of the right qualified professional (not your colleagues) when it comes to these kind of matters. And if you do go with one of the corporate business formations and don’t have a thorough understanding of bookkeeping yourself, hire a bookkeper (one that also has paycheck processing knowledge for your state/locale) to handle that work for you. It’s just too important.

I do hope this helps you get going down the right paths though. :)

Dear Danielle: Why Can’t I Find Income Tax Info All in One Place?

Dear Danielle:

I submit final draft of my business plan to my mentor soon (I can’t thank you enough for the business plan template you have included in your packages). My question is for the financial aspect of the business plan: calculating the income taxes. There are so many websites out there and not one that offers suggestions of what a someone in our business could file. I mean, you have state, federal, etc. Is it just the same when you are taking an owner’s withdrawal vs. salary? I really want to check all of my resources before I pay an accountant for the same thing I can find myself. –MK

I love to see how you are doing your actual homework!

I can’t stress enough to new business owners the importance of not being penny wise and pound foolish.

What I mean by that is I think every business owner should do this homework to make sure they have a good grasp of these things. That way, when they do talk with an accountant and/or business attorney, the information makes more sense; they understand it at a more cellular level.

Even after doing your own homework, it is more than wise to still consult with an accountant and/or business attorney.

The reason you can’t find all this info spelled out for you is because it all depends.

Your business formation will be relevant. If you are in the U.S., besides federal obligations, different states and localities will have their own varying requirements.

Every person’s situation and circumstances are different. Therefore, there’s just no way around simply going to all the pertinent agencies in your own location, talking to them and getting the low-down on exactly what your particular tax, licensing and reporting obligations are.

And don’t expect one agency to know the particulars of another. It’s not their place, and relying on wrong info they might give can cost you. You need to talk with each one.

As far as figures go, you can figure on 15.3% right off the bat to Uncle Sam. Technically, it’s 12.4% for Social Security up to $106,800 and 2.9% for Medicare. After $106,800, you only have to pay for the Medicare portion of the self-employment taxes.

However, things can get more confusing depending on individual circumstances, like for example, if you have a job in addition to running a business.

Personally, I don’t worry about cut-offs and just keep setting the same amounts aside. Anything extra can go into the fund for future payments or turned over to savings. (And realistically, it’s not likely that you would even hit the $100,000 mark, if at all, until several years in business. Not that’s it’s not possible; it’s just that most people in our industry don’t know how to work with clients or run their businesses in a way that allows them to reach that potential.)

But 15.3% isn’t all that you want to set aside for taxes from your business income…

As far as your state goes, you want to find out if there is an income tax or not (some states have one while others don’t). How much is it? When do you need to pay it? Does your state require a business license? How much is that? How often must it be renewed? What are your reporting obligations?

Your city, even your county, may also have their own business licensing and tax requirements as well. You’ll need to find all of this out.

As you can see, there’s no one-size fits all answer. It all depends. And this is exactly why it is always in your best interests to work with an accountant and/or business attorney.

Even if you think you understand things or have covered all your bases. Because unless you are an accountant or attorney, you simply don’t always know what you don’t know.

And they can literally save your butt from making potentially costly errors, giving you the right advise based on your own particular set of circumstances and business formation and saving you all kinds of time, energy and money trying to figure all that stuff out on your own.

PS: No, an owner’s draw is not the same thing as a salary. Just one of the myriad bits of knowledge you must know about in order to do your own bookkeeping.

Dear Danielle: How Do I Keep Expenses Separate?

Dear Danielle:

It is that time of year… taxes!!! And I was wondering if there were any helpful tips or tricks that you could share for us newbies to help stay organized. What you do to keep track of your business expenses from your personal expenses? My tax accountant told me that it is very difficult to write off office expenses from home because you have to keep track of EVERYTHING. She also stated that being paid as an employee is better than being paid as an independent contractor for tax purposes. Is that true? I would love to hear your thoughts. –MB

Omigosh, you need a new accountant! The one you have doesn’t sound like she understands small business at all.

First of all, you aren’t an employee so you don’t have a choice about that, just like clients do not get to choose to pay employees as independent contractors. That’s called misclassification of employees and it’s against the law.

You are either an employee or you are a business. Independent contractor is not a third option. It’s just another name for someone who is in self-employment and self-employment is a business, just like any other.

The first thing I highly recommend is that you find an accountant who understands these things as well as the fact that you are a business owner, not an employee.

Of course, you have to be clear about that in your own mind as well.

In response to your accountant’s claim that it’s very difficult to write off office expenses from home: No, it’s really not.

EVERYONE in business has to keep track of everything; where your office is has nothing to do with anything (except for maybe the square footage of your office space).

Here is what I recommend: If you don’t have a dedicated room in your home for your office, at least have a  dedicated space, whether that is a desk in a corner or a tabletop in your den.

Wherever your space is, keep it off-limits to anyone and anything else. That becomes your dedicated business space that may not be used by anyone else or for anything else other than your business.

The square footage of that space is what you then get to use to calculate that business expense when you file taxes.

As far as keeping track of expenses, yes, of course, save your receipts. If a receipt isn’t clear about what it was for, you will need to make notes on them by hand.

Whatever you buy for the business is pretty much a business expense, as long as you don’t use it for anything else. Just keep that in mind and you’ll be good.

It’s only when you mix things for personal and business use that you have to start figuring out percentages and calculations and make things complicated so the way to keep things simple is to just not mix them. Get dedicated everything.

It is never a good idea to co-mingle business and personal funds, and, in fact, the law can dictate that you may not do that.

Therefore, plan on getting a dedicated checking and savings account with a debit and/or credit card that you use strictly for the business. (Depending on the bank and account, these can earn you rewards points that might come in handy as well.)

Each month, transfer funds over to the savings account to set aside for taxes. Your new accountant can advise you on the right percentage to set aside. That way, when it’s time to pay estimated self-employment taxes, you won’t be short and have to scramble. Personally, I feel you can’t go wrong setting aside 50% of everything you earn.

Also, if you haven’t already, I really recommend investing in a proper business accounting software like Quickbooks Pro.

Not only will it make entering and keeping track of things a breeze, but the reports you can pull up in analyzing your business and seeing how it’s doing will be invaluable. Your tax preparer will love you more, too.

I also want to be clear that when it comes to anything financial, legal and tax-related, you should never, ever rely on the advice, and especially not the opinions, of laypeople and colleagues, no matter how experienced they may be.

Always, always go to the source and seek the guidance of those who are educated, licensed and qualified to be giving the information (ahem, accountant and attorney).

In your case, you did the smart thing by consulting with an accountant; you just need to find one a little more knowledgeable, current and supportive of the small home-based business owner.

Dear Danielle: Should I Get a Tax ID?

Dear Danielle:

I’m a sole proprietor Virtual Assistant. Should I get a tax ID number? –AK

I’m not sure how it works in other countries, but if you’re in the U.S., and especially since you are a sole proprietor, yes, you should absolutely go ahead and get an EIN (Employer Identification Number) from the IRS.

Used to be , the IRS only wanted businesses to get an EIN if they planned to have employees or operated as a corporation or partnership.

It frowned upon the practice of getting one if that wasn’t the case.

However, with identity theft so rampant, they’ve changed their position on this.

Sole proprietors can now quickly and easily get an EIN to be used as a general purpose business identification number so they don’t have to give out their Social Security number (SSN) to anyone.

Dear Danielle: Do I Need to Charge Sales Tax on My Services?

Dear Danielle:

Do I need to charge sales tax on my services? –AM

This is a tax and legal question, not a question for your colleagues.

When it comes to tax and legal questions, you need to talk to the proper professionals.

No matter how well intentioned or experienced, your colleagues’ advice may or many not be accurate, especially since the laws and requirements in every country, state and locality are going to vary and not necessarily be the same as those where you operate.

Your reliance on inaccurate information could then put you in noncompliance and cause you problems, maybe even get you into hot water.

What you want to do instead is ask the appropriate governing agencies in your state and locality.

That might be your state’s Department of Revenue (or equivalent) and your city or county tax and licensing departments.

Whatever those agencies are, they will be the place to get the most accurate information on the matter.

Invest in the Tools You Need for Business

Don’t be afraid to get the tools you need in your business.

They are an investment, not an expense, and will help you grow your business faster while building in efficiency and automation right from the get-go.

And before I start hearing from the folks who somehow think going into business shouldn’t cost them anything, let me say that I understand not everyone opens their business adequately funded.

When that is the case, my advice is to take that same drive and determination that set you to open your business in the first place, and use it to get the things you NEED in your business for it to succeed, come hell or high water.

Now, when it comes to subscription-based tools, those things that are billed on a monthly basis, I highly recommend opting to pay annually instead.

There is usually a great savings when you go this route, and if you are on a tight budget and often don’t know when your next dollar is coming in, you won’t have to worry about having enough money in your account each month to cover the installment.

The problem that many poorly-funded new business owners have is that this can mean a significant initial outlay of funds that they often just don’t have all at once.

But here’s a little trick you can do to make it easier and spread the cost out over a period of time:  Stagger your annual subscription purchases over several months.

In the first month, pay the annual subscription cost for one, maybe two, services.

Pay for another annual subscription the following month.

And so on each subsequent month until all your annual business tools and subscriptions are paid for.

The cool thing about doing this is not only will you be saving a ton of money while alleviating your monthly budgeting woes, but then when those bills come around again the following year, they won’t all be due at the same time.

If you’re wondering what month is best to start doing this, I recommend May because it’s after the first of the year reporting crunches of January and April.

December is also a good month to stuff in as many last-minute business expenses as you can before the new year so you can get even more tax write-offs.

Dear Danielle: What Is the Best Salary Structure to Offer Potential Employees

Dear Danielle:

I am very new to the Virtual Assistant business world. I have a question about hiring employees. I am a sole proprieter and would like to hire virtual recruiters, administrative assistants and sales/promotional/marketing staff. What is the best salary structure to offer potential employees? So many people are burned by work-at-home scams, I want to be able to offer a reasonable salary to potential virtual staff without insulting them with minimum wage or hiring them as independent contractors. What do other Virtual Assistant business owners do? —CT


What you need to do is talk to an accountant and bookkeeper.

Employers are governed by both federal and state laws. You will have employee, payroll and tax withholding and reporting obligations you are required to meet so it’s imperative that you get the correction information on this from your own local (city, county, state) agencies as well as the IRS.

Talking to an accountant will get you started in the right direction.