Blog: Paper Doll, Tackling The Stacks And Piles
Organizing Your Tax Paperwork--Part 3: Get Your Business (Receipts) Off The Ground
For the self-employed, IRS Form Schedule C, Profit and Loss From Business, is used to report all of your revenue and expenses. It's fill-in-the-blank: "Hey, I earned this! Hey, I spent this!" As long as you don't turn it into a MadLib with crazy, non-deductibles, there's nothing to fear.
When you are the business, it's not all that hard to know what papers you need to save to keep the tax man happy. If a piece of paper relates to money that came in or money that went out, there's a tax category for it. If you know the categories and put in minimal time each day (seriously, making a Hot Pocket® takes longer), tax paperwork need not be stressful.
There are two separate elements to dealing with your business finances. First, you need a plan to deal with the paperwork--the receipts/proofs of purchases. Then, you need to decide how and when you'll cope with the collection and interpretation of the information from the paperwork. The IRS wants to know how much you spent in specific categories, so each little receipt or credit card statement line is worth money to you in terms of potential tax deductions. So, don't think of the tax paperwork as boring...think of it as bits of treasure.
At the most basic (but least efficient), you could throw every business receipt in a box until tax time, then sort by expense category, then put on your green eye shades and tally up the totals on your abacus or adding machine in order to enter the figures on your Schedule C. And if this were 1977, it would be fine and dandy, though still heavy on the end-of-year labor.
Modern marvels of software, from Quickbooks to the free, online program Outright, can help you keep track of your income and expense data with a minimal learning curve. If you don't want to learn how to work with new programs, you can create your own little program using a spreadsheet, with rows to record each transaction's date, purchase method (check #? cash? credit card?), revenue or expense information and amount. Then, make each column correspond to each category that has to be reported to the IRS, and just add up each column. You don't have to know even the teeniest bit about double-entry bookkeeping--it's more like playing Business Bingo!
Set a task bar alert or alarm for a specific time/day each week to record what you took in and spent (and in which categories), and maintain a folder for any of the following Schedule C categories that apply to your business. Keeping the paper categories separate will help you track expenses over time and ease any decisions you need to make, either for taxes or general finances. Doing the math on an ongoing basis keeps you aware of your business operations and eliminates the fear of tax time.
Gross Receipts and Sales--Not everyone will send you a 1099 for work you've done, so it's essential to keep track of your own income. The easiest method is to deposit all income into your business checking account (remember, don't commingle business and personal finances!) and then keep a copy of your written deposit slip or, if you're using one of the great new OCR ATMs, the photocopy deposit slip showing the actual checks and/or cash you deposited.
Returns and Allowances--Did someone return a product you sold? Did you give a refund because of a satisfaction-guarantee policy? Save written documentation so you don't end up paying taxes on revenue you didn't get to keep!
Advertising--Don't just think in terms of newspapers, magazines, radio and TV. Remember to include costs for business card and brochure printing, promotional items, phone directory ads, pay-per-click web fees, catalogs, event sponsorships, fees paid to public relations specialists and anything else that gets your company some attention!
Car & Truck Expenses--When you start using a vehicle for business, you decide whether you want to take actual expenses or mileage expenses. If the former, you'll maintain receipts for fuel, oil changes, repairs, tires, insurance, etc. If you go with mileage, you'll need to know the year's starting and ending odometer readings, and maintain a mileage notebook (or smartphone app) to keep track of all business-related miles driven. The number of business miles driven in a year is multiplied by that year's IRS mileage rate--for 2009, it's 55 cents/mile.
Even if you're using the mileage method, you get to count parking fees and tolls. You'll have to go through the toll attendant line to get a receipt, adding another 20 seconds to your day, but the money does add up. Request receipts for parking fees, and make a notation of where you were (if it's not obvious from the receipt), with whom and why. If you often need to park at meters, develop your own little record book that you can keep in the console or glove compartment.
Commissions & Fees--Do you pay for referrals? Do you have salespeople working on straight commission? Be sure to keep detailed records of whom you've paid, when and for what, so you won't have to depend on your memory next April.
Contract Labor--Did you hire a sub-contractor to help with a big job or you pay a teenager to distribute flyers for your company at a local event? Remember, for contractors whom you paid more than $600 for contract work, you'll need to provide a 1099-MISC to them and to the IRS.
Depreciation & Section 179 Expense Deduction--This is where you break down a huge purchase into the allowable deductible portion. Let's say you bought a piece of equipment for five zillion dollars. You can't deduct all 5 zillion in one calendar year, so you need to keep track of the allowed deductible portion, each year, until you've fully deducted it. Don't let the formal-sounding "Section 179" scare you--it's just a way to allow small businesses to purchase "tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business" and deduct expenses in the year of purchase, rather than amortizing it over time.
Employee Benefit Programs--If you pay for accident and health plans, group term-life insurance or dependent-care assistance programs for your employees, whether you pay annually or on any regular or irregular schedule, keep the paperwork that shows when you paid and for what.
Insurance (Non-Health)--Do you have business insurance, including policies for errors and omissions? Keep records of the premiums you paid.
Interest--This category includes expenses paid for business mortgages and loans, as well as business credit cards. Here's yet another great reason for completely separating your business and personal expenses. If you place business expenses on a business credit card (one on which you make no personal charges), interest is deductible. If, however, you charge all of your business expenses on a card you also use for household expenses, the interest is commingled and the IRS will cast a big old frowny face on your deductions. Keep those finances separate!
Legal & Professional Services--Did you hire an attorney or CPA, or pay for a logo design or web site creation? Keep copies of charges and proof of payment.
Office Expenses--This category is for all the cool Sharpies® and Post-Its®, as well as postage. If it's a necessary expense for your administrivia, for writing with (pens, pencils, cool markers), writing upon (copy paper, stationery, notepads), sticking things together (staples and staplers, tape, glue) or tearing them apart (staple removers), make sure receipts go straight to your wallet and that they get removed when your data entry alarm goes off.
Pension & Profit Sharing Plans--Did you contribute to a pension, profit-sharing or annuity plan for employees? Maintain monthly records. (However, you'll put contributions for your own retirement directly on your 1040.)
Rent/Lease of vehicles/machinery/equipment and/or property--This applies to property or space other than your home office. If you rented office space, get your landlord to provide either a monthly receipt for payments or an annual summary in writing.
Repairs & Maintenance--This is where you keep receipts for "incidental" repairs, not for remodeling or anything that adds so much to the value of your space that you'll have to amortize it over time.
Supplies--Keep receipts for anything you purchased for use in order to do the work of your business, per se, rather than the administrivia or paperwork.
Taxes & Licenses--Do you pay for an annual business license for your city and/or county? Whether it's a flat fee only, or a fee plus a tax as a percentage of your gross revenues, you'll want to maintain a record of what you paid. This category also includes state and local taxes you paid, including business-related property and payroll taxes. If you collected taxes from customers, the amount you collected (and were paid) will go under your income category, but will be offset here. Don't forget licenses required by your state and/or profession or trade.
Travel, Meals & Entertainment--This is a huge category; entire books are written on this topic. The basics, however, are that travel expenses (other than food and entertainment) are fully deductible as long as they're business-related, but meals and entertainment are generally deductible at only 50%. So, if you fly to a conference and stay overnight for a week, your airfare and hotel will be deductible (as will be tips to housekeeping, dry cleaning, late hotel check-out fees, rental cars and airport shuttles, and various incidentals you wouldn't have to pay if you were snuggling on the couch at home). However, that $200 dinner you bought for yourself and your big client? Only $100 is deductible (and only half the dinner tip, too). I guess the IRS figures you have to eat, wherever you are.
Utilities--This is where you need to keep track of utilities related solely to your business. (If you have a home office, expenses like electricity will have been factored on Form 8829.) Also note that many digital tax preparation services, like TurboTax, tend to refer to "Communications" as a separate category, although they assign the totals to the Utilities section. Be sure, whichever method you use, not to include these items twice. Remember to take note of what you spent for extra landlines (beyond your primary home line), voicemail and other phone services, cellular service, internet service, data packages for mobile devices and any other communications-related expenses.
Wages--If you have actual employees, rather than contract labor, keep very careful track of payroll wages (plus FICA, Medicare and FUTA) for entry in this category. If you use a payroll company, they should provide you with summary data for each payroll period, as well as an annual total.
Other--While we professional organizers tend to avoid unlabeled categories, this is a good place to put items for which the typical solo professional might be saying, "But hey, where's the category for...?" Although Schedule C doesn't make a separate category, there's no reason you can't create separate files for each major "miscellaneous" category you need, including: continuing education expenses (conferences and seminars, ongoing or one-time-only classes, educational resources), business gifts, outsourced business services (printing, photocopying, binding, virtual assistants), etc.
There are a few other types of expense paperwork a typical self-employed person will need. If you qualify for the home office deduction, you'll need to have a handle on both office-specific expenses and household-wide expenses (like rent/mortgage, utilities, etc.) for a percentage equivalent to the percentage of space in your home that the office encompasses. This is yet another reason why Paper Doll encourages you to maintain an organized Family File system. For more information, check out the categories on Form 8829 (Expenses for Business Use Of Your Home) and the detailed instructions.
Did you know that self-employed people can deduct up to 100% of their health insurance premiums? Don't just think, "Oh, I just paid my insurance premium. It was X. I'll multiply that by 12." Rates tend to go up annually, and also tend to increase when you age out of a particular age-group category, so you may have paid two or three different monthly premium amounts in any given year. Check your statements!
So, set a reminder alarm or start each business day by entering the previous day's income and expenses by category. You'll have greater mastery over your business finances, and you'll be amazed at how quickly you will finish your taxes.
posted on: 2/23/2010 10:30:00 AM by Julie Bestry
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Paper Doll, Tackling The Stacks And Piles
by Julie Bestry
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Julie Bestry, President of Best Results Organizing in Chattanooga, TN, is a Certified Professional Organizer®, speaker and author. Julie helps overwhelmed individuals and businesses save time and money, reduce stress and increase productivity through new organizational skills and systems.
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