Congratulations on starting your own business! Whether you’re an independent contractor or a new start-up, you have a lot on your plate as you establish yourself and your business, but one thing you need to consider, if you haven’t already, is tracking your small business expenses.
We know small business accounting and bookkeeping may not be what you dreamed of when you decided to go into business for yourself, and you may even be overwhelmed by the idea of it. You’ve probably heard horror stories of shoe boxes filled with receipts and IRS audits. However, tracking your expenses can actually be very simple and only require a few minutes of your time each week. In return, you’ll save yourself ample time, money, and stress at tax time. To make it easy, we’ll share some of our best practices.
Many independent contractors and single service providers, such as in-home day care providers or independent landscapers, may not see the reason behind separating their business and personal bank accounts. After all, you’re the only one in the business, and it’s easier than having to transfer money from your business to your personal account to pay yourself, right?
Having a combined business and personal bank account makes you more likely to be flagged for an IRS audit, and, it’s so much harder to track and log your expenses and maintain financial statements.
Was the Office Depot purchase on your statement for school supplies for your kids or your supplies for your home office? Or, did you combine it all into one purchase? Was the Starbucks purchase for you and your spouse, or did you meet a prospective client and treat him or her to coffee?
See how confusing it gets?
With a business bank account and a business-only credit card, you know that every purchase made and every transaction is solely related to your business, making your financial and tax reporting easier and more accurate.
Having receipts for your business purposes helps you keep accurate records for your taxes, speed up your bookkeeping, and lend credence to your tax reporting. Any payment you make for your business, whether it’s a service, such as paying someone to design your business logo to simply buying coffee for a client should have a receipt with it.
There are several perfectly effective ways to save your receipts, though the shoe box method mentioned earlier is absolutely not one of them, (your small business accountant will thank you for it). Whether you choose to keep physical records or digital, find one method that works for you and stick with it.
If you only have a few receipts each month and prefer a low-tech option, labeled envelopes for each week or month is fine. Some even like to use a binder and clear 9-pocket sheets used for trading cards to hold receipts and use dividers to separate months.
Instead of dealing with paper receipts, there are plenty of apps, like Expensify, that let you take a picture with your phone and instantly categorize them. This can save you time when itemizing your deductions and keeping records.
This is where many small business owners and independent contractors lose their way, but recording where your money is going saves time on your taxes, but more importantly, tells you where your money is going and helps you create an accurate balance sheet.
If you’re just starting out, you may be thinking you may need expensive bookkeeping software, but you can create a simple spreadsheet using Excel or Google Sheets. You can find templates online or through Office 365 software if you use it, but all you really need are these columns:
Block out time each week to log your expenses and file your receipts so you don’t get behind.
If you’re just starting out with your new business, we’re here to help! We’ll work with you to ensure you’re taking the right steps to protect your business and can help you sort through the complex tax codes to give you clarity.