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.