Get Answers to Your Biggest Accounting QuestionsWe collected your biggest accounting questions from the Maker Mentors community and hosted an exclusive Q&A with Stefani Whylie, the Founder of Simple Keep. Simple Keep specializes in providing affordable, easy bookkeeping to startups and small business. Are you trying to figure out the accounting for your small creative business? Read this post. Simple Keep is offering a special discount for the Maker Mentors community. You can save 25% on your accounting on SimpleKeep.co. Just send a quick email to email@example.com and mention Maker Mentors to redeem this discount.
1. How do we figure out how much to put aside for tax time? (Income tax) I’ve just been putting away 30% of each project payment into a separate savings account, but don’t really know if this is right. And will this cover federal and state?It’s sometimes hard to plan for taxes, especially if you’re business income fluctuates. Here’s what I suggest:
- Option 1: Use a quick-and-dirty calculation. If you estimated that this year’s income will be roughly the same as last year’s, figure out what your effective tax rate was (total tax divided by total income), and use that as your tax rate. You’ll need to do this calculation for both federal and state taxes. Here is a simple calculator you can use to figure out your effective tax rate.
- Option 2: Ask a tax pro to do the calculations for you. It’s sometimes hard to plan for all income variables and your total income along with types of income may fluctuate from one year to the next. If that’s the case, it may make sense for you to have a tax professional run these calculations for you.
2. Do I need a business checking account if I am a sole proprietorship? I have an Ally bank account for my business, but it is technically a personal account. I like it because I can earn interest on anything in my checking or savings.The important thing is that you’re keeping your business finances separate from your personal, so go you! While keeping your business finances in a different account is a good start, I’d strongly think about changing it over to a business account. Consider the following:
- If you are audited, an auditor could potentially try to argue that you are commingling personal and business finances, which would make some of your transactions seem questionable and could cause the auditor to audit even more areas or more years than they were initially planning. This is especially true in hobby cases, where the IRS will try to argue that your business isn’t really a business, but a hobby.
- Your bank will take you more seriously if you ever need to apply for a business loan or line of credit.
- If your business were ever sued (and let’s hope that never happens), you wouldn’t want them to come after you personally. If you’re keeping business funds in a personal bank account, a decent attorney could argue that you should be personally liable since you operate your business as an extension of yourself.
3. I’m opening an online store and I live in New York. Do I have to have a certificate of sales tax before I start selling on it?Congrats! Most people don’t even think of sales tax when they on into business, so it’s great that it’s on your radar. NYS is notorious for sales and use compliance issues, so getting a certificate before you start selling would be a good idea. Whether you need a certificate depends on what you’ll be selling, but since you’re most likely selling physical goods, then chances are you’ll need to collect sales tax. Here’s a decent list showing items that are subject to sales tax along with a list of exemptions. If it turns out that you’re selling something that is subject to sales tax (say, furniture), go here to register. Protip: Don’t forget that shipping, handling, and delivery charges are taxable if the actual product it’s associated with is taxable, so be sure to setup your online shop to charge sales tax on shipping as well.
4. What are the most important tax saving tips for freelancers?
- I always tell freelances to setup a retirement account if they can afford to. Most freelancers don’t start planning for retirement until way later, at which point they’re trying to play catch-up, and that’s hard. It’s not that difficult or expensive to set up a SIMPLE or SEP IRA account. Unlike regular IRAs where the contribution limit is $5,500 (in 2015 and 2016), you can contribute up to 25% of your income, but not more than %53,000. The great thing is that not only are you saving for retirement, but the contributions are deductible.
- Keep separate bank accounts for business and personal finances. Thought, not a direct tax saving tip, but it’s worth mentioning because it is helpful for planning and can also make tax time less of a headache. If you ensure all of your business transactions are going to the same account, the chances are less that you’ll forget about a deduction.
- Most freelances we work with started working from home before actually getting an office. If this is you, don’t forget to take the home office deduction.
- Ensure you’re using the right entity. Maybe this means switching from a sole proprietorship to an S corporation, or vice versa. The choice will depend on your particular situation, but having the right entity can save you a lot of money on your taxes. For example, S corporations aren’t subject to the additional 15.3% self-employment tax that sole proprietors are, so it pays to do the research.
- Talk to someone in the beginning – even if it’s only a 30-minute consultation. This can save you so much money in the long run. We just onboarded a new client today that started a company in January 2015, and the founder neglected to make a very important tax election because he didn’t know about it. This will likely cost him upwards of $250,000 when he files his tax return. All of this could have been easily avoided if he got help in the beginning.
5. What are 3 common mistakes to avoid when doing your own accounting?
- Using only one category for business meals and entertainment. While business meals are usually only deductible at 50%, most meals provided for the benefit of your employees are generally 100% deductible. Here are some examples of meals that are fully deductible:
- Meals provided at a company picnic or party
- Office coffee and snacks
- Food and beverages provided to the public for promotional purposes (e.g., putting together an event or presentation where you provide food or beverages for attendees)
- Meals provided at your office to more than half of the employees so they can work through lunch, after-hours, weekends, or holidays.
- Mixing business and personal transactions. I know, I keep mentioning this, but I see this so often, even though it’s easy to fix.
- Not understanding depreciation. We see business owners deduct the cost of assets (computers, furniture, software) that cost more than $500 and depreciate a $40 keyboard over 3 years. We mostly follow a rule of thumb: expense anything that costs $500 or less, but depreciate any larger purchases over a few years.
6. How important are physical receipts? (They’re so annoying!) What do you recommend to keep the paper organized?Evernote and a Fujitsu ScanSnap scanner or camera phone is such a good combination. The scanner sits on my desk, and I scan or take photos or receipts and other documents, then store then in Evernote. We have a few larger scanners around the office, but we get more use out of the ScanSnaps. If we’re ever needed the receipts, we simply search for it, and, without fail, Evernote finds it for us.
7. Where do I start? I have a feeling my shoebox receipts isn’t going to but it long term.Xero! Small learning curve, but it’s so easy once you get the hang of it and it grows with you as your business grows. It pulls in your transactions automatically, so as long as you’re using a separate bank account for business and personal it’s manageable. Another option is signing up for a service like SimpleKeep to handle your bookkeeping and taxes for you. It’s priced much lower than a traditional accountant, so it may not be as out of reach as you may think. It’s nice to have your very own finance team.
Simple Keep is offering a special discount for the Maker Mentors community. You can save 25% on your accounting on SimpleKeep.co. Just send a quick email to firstname.lastname@example.org and mention Maker Mentors to redeem this discount.