Not understanding bookkeeping, taxes and other administrative tasks can be very off-putting for people thinking about starting their own business. But in reality, these tasks are not that hard to do if you’re organized and get a little professional help.
Now, I’m not a CPA, and the closest I’ve come to taking accounting is being a professor’s assistant in an online graduate program course. However, I must do something right as I’ve been on my own for over four years and my business tax payments remain on target. So here I’m going to share what I do, as it might work for you or give you ideas on how you can keep on top of your business finances.
I keep it simple by having just two tools in my accounting toolbox: QuickBooks and Electronic Federal Tax Payment System (EFTPS). Substitute QuickBooks with your favorite accounting application to make this process work for you. I tend to pick up new software fast, but not so with QuickBooks. Regardless, it takes care of all of my invoicing, expensing and tax needs. But we won’t go into that. My way is just one way; check the comments on this post to see a bunch of great ways to handle your taxes.
There are two things you need to do:
- Track income and expenses.
- Pay quarterly taxes (otherwise known as 1040-ES).
Track Income and Expenses
How do you invoice customers and track payment? What about tracking things you buy for your business? Applications like QuickBooks make it easy to create reports to see your income and expenses by quarter, year, fiscal year or customized period.
Keep all of your receipts for expenses related to your business. Don’t worry about organizing them. Grab a cheap expandable folder and throw them in there. Write or label it, “Business receipts.” For electronic receipts, create a folder in your email account with the same name. Or if you’re an organized freak like me, scan your receipts and save them in a folder.
Remember that anything related to web working counts as an expense, including your home office space (but verify this with your accountant) and family printer, along with its toner or cartridge replacements. Any time you take the car to buy supplies or to attend an event where you meet with folks on business, track the car’s mileage. Tax law allows you to deduct a set amount for mileage (again, check with an accountant as this varies per year). Paying for parking at the event also counts. Magazines and books related to your profession make the cut as expenses. Add the cell phone, landline phone and any other communications services. Record all purchases in your accounting software on a regular basis so you can deduct the expenses when quarterly tax time rolls around.
Pay Quarterly Taxes
It definitely helps to have a good accountant you can go to, especially for advice on state laws. Or you can brave it and do the research yourself (but I’ll wish you luck decoding bureaucrat-speak). My family has relied on an accountant since before I went into business for myself. They can find deductions you might not think about. A good accountant is worth way more than what you pay them.
Unless you’re a full-time employee with a company that already does the deductions for you, you need to pay federal taxes (1040-ES) on a quarterly basis. EFTPS Online makes it very easy for American web workers to pay online or over the phone. The service costs nothing, stays open 24/7 and accepts payments in advance.
Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
As a sole freelance web worker, I pay 1040-ES on a quarterly basis. The due dates for the quarterly payments are as follows, along with the periods they cover:
- April 15: Jan. 1 – March 31
- June 15: April 1 – May 31
- Sept. 15: June 1 – Aug. 31
- Jan. 15: Sept. 1 – Dec. 31 of the previous year
For those payment days falling on a weekend or holiday, the payment is due the following Monday.
EFTPS lets you set up an account with your taxpayer identification number, which is either your social security number (SSN) or employer identification number (EIN). You also provide your bank account information so you pay your taxes directly without writing a check. I’ve been doing this for years without problems.
So how do you know how much to pay? My method is simple, but it may not apply or work for you. For me, I base the amount owed on my household’s tax bracket. Here’s an example for someone who falls in the 20 percent bracket.
- Figure out earnings for the quarter. From Jan. 1 – March 31, you bring in an income of $10,000.
- Figure out the expenses for the same quarter: $500.
- Take the income and subtract the expenses for the final number of $9500.
- Multiply the final number by the bracket. Here it’s 9500 x .2 (20 percent) = $1900.
$1,900 is what Mr. Example owes for the quarter on April 15. I use this formula and it has yet to fail me. Your tax bracket may change, as it has for me. Just change the percent part of the formula as needed. The IRS web site also provides illustrated examples using its worksheet.
Take advantage of your accountant’s time and find out your tax bracket percentage and what deductions to consider for the next tax year. For example, if your family plans to take a summer trip (lucky you! May I come?), find a way to do business while on the trip so you can deduct parts of it.
How do you manage your taxes?