This is a guest post by Brigitte A. Thompson of Datamaster Accounting Services, LLC
Are you looking for ways to save money on your taxes?
Our country is struggling to rise out of a recession that has left many people unemployed. Some of the recently laid off employees are making the decision to become entrepreneurs.
Being self-employed offers flexibility and control over which projects are accepted and how the work is completed. Business owners can set their own hours, decide what rate of pay is acceptable and make all the decisions. However, small business owners need to create a recordkeeping system to keep track of business transactions and pay tax on their net income.
The income taxes you pay are based on your net profit. This profit is determined by totaling your gross profit (actual money received) and reducing it by your expenses (all cash/check/ credit card deductions). The more deductions you have, the lower your net profit, the lower your income tax liability becomes.
It is important to establish a system of recordkeeping that works for you. Some things need to be recorded daily, while others can be done weekly or monthly. It is imperative that you get into the habit of saving and recording everything related to your business. All money you earn from your business must be recorded as income. You will be able to reduce the taxable portion of this income by deductible business expenses.
Organization is necessary to operate any business. Some people find it helpful to create a simple filing system using folders and lined paper. Transactions can be recorded on sheets of 8 ½” by 11” paper attached to the front of each folder with supporting documentation filed inside. Folders can be labeled by category including one for recording income and another for expenses. This information can be kept manually by handwritten record or you can transfer the data into a computer spreadsheet.
Microsoft Excel® provides an easy to use program which can help you organize your records. The computerized ability to do mathematical equations can help reduce errors in compiling the numbers. If you would like to go a step further, Intuit® offers some user friendly accounting programs such as QuickBooks® which can generate financial statements and budgets using the data you record.
Any system that works for you is acceptable, as long as the pertinent information is retained. Maintaining good records can help you manage your cash flow wisely and prepare you in the event of an audit.
Start a Separate Business Account
It is a good idea to obtain a separate checking account to be used for your business. The IRS requires business owners to differentiate between business and personal income and expenses. Although, currently, they do not require businesses to maintain a separate checking account, they do require a clear paper trail. Utilizing one bank account for personal transactions and another for business transactions makes it easier for you to create this documented trail. All of the money earned by your business should be deposited into this account and all of your business expenses should be written from this account.
These tips can help you get started with the recordkeeping required as a self-employed taxpayer, but there is a lot more to learn. The Internal Revenue Service (IRS) has created a section on their web site to help, http://www.irs.gov/businesses/small/selfemployed/index.html.
Brigitte A. Thompson is the founder and President of Datamaster Accounting Services, LLC in Vermont. She has been active in the field of accounting since 1986 and is a member of the American Institute of Professional Bookkeepers and the Vermont Tax Practitioners Association.
Brigitte is the author of several recordkeeping books for business owners, contributing author and freelance writer whose articles have appeared nationally in print and online publications.