Tag: Bookkeeping

There is a ton of information out there for self-employed business owners. With enough time and dedication, you could learn absolutely everything you need to know about running a business. But you’re self-employed. You do not have time to sift through everything there is to know. After working with business owners as a bookkeeper, accountant, and tax preparer in California for twenty years, I think I can save you some time. Here are the basic things you need to do if you are self-employed. (None of these recommendations or links are currently sponsored. Please see our legal disclaimer.)

1. Track your tasks

First, you’ll need to establish a system to keep track of what you need to do. This can be through pen and paper or with an app, but decide early how you will keep track of what you need to do. Develop a habit of tracking everything that comes up so the tasks can be scheduled and prioritized. Here are a few recommendations:

• Bullet Journal
• ClickUp
• Asana

The Bullet Journal method is fantastic for tracking long-term goals and big-picture vision. For day-to-day, I highly recommend using a digital task-tracking method, especially if you have recurring tasks. These should include your specific process for completing the tasks described next.

2. Separate your business and personal finances

As a sole-proprietor you as an individual and you as a business are indistinguishable, one and the same. However, keeping your business finances separate from your personal finances (money you take out of your business to pay for your rent/mortgage, groceries, gas, clothes, etc.) will go a long way in protecting your non-taxable business deductions. Also, if/when you ever apply for a business loan and the creditor requests your bank statements, you can maintain your personal privacy by having your personal transactions in a separate account.

Only run business transactions through your business account. These include depositing money received from customers, checks you write and debit transactions you authorize to pay vendors for expenses (supplies, advertising, software, etc.), and business loan payments. Do not pay for personal expenses out of your business account. Instead, transfer the funds you need for personal expenses from your business account to a separate, personal account on a bi-weekly or monthly basis. These transfers are considered to be an “Owner’s Draw” (an equity account) and should never exceed your net business income.

3. Maintain your bookkeeping

If your business completes fewer than 25 transactions a month (incoming and outgoing money), you might be able to get maintain your bookkeeping in Excel or even pen-and-paper with some office supply forms. If you have more transactions, I definitely recommend subscribing to an online bookkeeping software like QuickBooks Online or Xero. Desktop software can get you by for awhile, but unless you need it for something specific (like certified payroll in the contracting world), online software is the way to go. Some of those recurring tasks I mentioned above should include these bookkeeping tasks:

1. Complete weekly bookkeeping (bank deposit, invoicing, bill pay, filing).
2. Complete monthly bookkeeping (reconcile accounts, review financial reports).
3. Pay quarterly income tax estimates. Don’t wait to see what your tax bill is at the end of the year. Meet with your tax preparer, estimate your taxes for the year, and make a habit of setting aside a percentage of every dollar you bring in. Divide your total estimated tax by your total estimated gross income to get the percentage. Then, every two weeks transfer that percentage (of the money received during that period) to a tax savings account. You can learn more about this method at Profit First.
4. Collect W-9 forms for any independent contractors (sole-proprietors) you pay more than $600 during the year. I review this on a quarterly basis to save a lot of stress in January when I have to issue 1099-NEC forms (formerly 1099-MISC).
5. Prepare your records for annual income tax return preparation. At the end of each year, you’ll want to review both your Profit & Loss Detail Report and Balance Sheet Detail Report for the entire year to ensure consistency. These reports will show you every transaction entered in your bookkeeping system for the year. If bookkeeping is not your forte and you want to be sure things are right, you can always setup an appointment with us to take care of this for you at the end of the year.
6. Run payroll (if applicable). If you have employees, I cannot recommend paying for a full service payroll subscription highly enough. If you already have QuickBooks, their core payroll service is fine. I also highly recommend OnPay. After the setup, all you have to do with either service is enter the employee hours and click done. The payroll service will direct-deposit your employees pay, remit your payroll tax payments in full and file your payroll tax returns on time. It’s just not worth it to try to do all that yourself or even hire an employee to do it.
7. File and pay quarterly sales tax returns (if applicable). Again, if your situation is simple, you can probably take care of this on your own. If you sell tangible goods that are subject to sales tax, you will want to be sure to keep track of your taxable and non-taxable sales.

By the way, congratulations! If you’ve added these tasks to your online task tracking system, you now have an online, Standard Operating Procedure for your business where the tasks can eventually be assigned to other people if/when needed! This puts you way ahead of the curve when it comes to small business organization.

My final word on bookkeeping is to caution you against not claiming all your taxable business income and against deducting non-business expenses. The benefits to claiming all the income you make and only writing off the expenses relating to business far outweigh any benefit you might gain from not paying the resulting tax bil. There is a lot of misinformation out there (even from professionals) about “tax write-offs.” Check out my post on maximizing your take-home pay for more on that topic.

4. Keep your paperwork organized

If you haven’t noticed yet, daily business turns out paperwork of all sorts at an alarming rate. Keeping all these papers organized and, most importantly, retrievable, can be a daunting task if you don’t establish a system. In my experience you have two options. Both are perfectly legitimate and you can decide which to use based on your own preference.

Paper or Digital

If you prefer physical paper, I highly recommend the FreedomFiler system for keeping your paperwork organized. In fact, the digital system I’ve developed over the years is largely based on the logic and layout used by this paper system. At the end of each year, you’ll want to box up all your yearly files (described below) in Bankers Boxes and store them for 7-10 years.

Digital filing typically prompts mixed feelings from those who consider going paperless. On the one hand, it grants a lot of freedom. On the other hand, it’s not as maintenance-free as you might think. Using an on-site hard drive to store files can free up a lot of room once used for storing files. However, most on-site file servers must be replaced within three years and require anti-virus maintenance among other professional maintenance.

Unless they’re in the tech industry, cloud-based digital file storage is normally the route I advise my client’s to take. Depending on the level of security needed for the documents, you could use SmartVault, Box.com, Dropbox, or even Google Drive. All these services provide web-based access to your files which will give you an immense amount of freedom, especially in considering where you prefer to work.

Accessibility, however, is limited to the standards maintained in the digital filing setup and maintenance. If you intend to store your files digitally, I cannot stress the next point strongly enough: Decide on a filing naming convention for your files and use it, without fail.

If you had paper files, you would probably setup file folders for each vendor and customer for each year. You would sort them in alphabetical order. You might even punch holes in the documents and secure them to the folders to keep your documents neat. Digital filing needs the same level of care.

I recommend writing and updating a text file in your root directory with the naming convention that should be used for each file. For example:

VENDOR/CUSTOMER NAME YYYY-MM-DD Document Title or Description

I’ve personally used this file naming convention for all my business files since 2012, and it has yet to let me down. This way, your files can line up nicely in any sub directory, and any orphaned or misplaced files can be found with a simple search (and moved if needed).

• SEQUOIA BUSINESS SOLUTIONS 2020-10-05 Inv 1000
• SEQUOIA BUSINESS SOLUTIONS 2020-11-05 Inv 1050
• SEQUOIA BUSINESS SOLUTIONS 2020-12-05 Inv 1100

The text file with your filing naming convention should also include acceptable abbreviations (e.g. Inv for Invoice, Stmt for Statement, PO for Purchase Order).

In addition to a solid file naming convention, you will also need a workhorse of a scanner. On that front, I can highly recommend the Fujitsu ScanSnap products.

Once you’ve decided whether to use paper or digital files, you should keep and organize the following documents:

Permanent Files

1. Legal name: Copy of your personal, social security card
2. The IRS letter which assigned you an EIN (Employer Identification Number). Side note: If you’re operating as a sole-proprietor, even if you don’t have employees, I recommend you get an EIN to protect your social security number. It doesn’t cost anything, and it will allow you to freely share your business tax ID number with customers, vendors, banks, etc.
3. Bank, credit card, loan account setup documents
4. Online merchant account setup documents (e.g. Paypal, Square, QuickBooks Payments, other credit card processor)
5. If applicable:
   1. IRS S-Election effective date
   2. California EDD (Employment Development Department) Employer Tax ID Number
   3. California Secretary of State ID
   4. CDTFA (California Department of Tax and Fee Administration) Sales Tax Resale License / Account No.
   5. DBA(s): Fictitious business name statement(s)
   6. Business vehicle records

Files Updated as Needed

1. Insurance policies, such as:
   1. General liability
   2. Workers’ compensation
   3. Fidelity or surety bonds/policies
2. Property and equipment lease/renewal documents
3. Vendor contracts/renewals for ongoing services (e.g. phone, internet, janitorial, bookkeeping)

Yearly Files

1. Income tax records (current year + 7-10 past years)
   1. Customer invoices
   2. Vendor bills
   3. Bank statements
   4. Financial reports
   5. Income tax returns
   6. Vehicle records (for any vehicles used for business)
   7. Bottom line: Keep the documents that will back you up in case of a tax audit.
2. Payroll records (current year + minimum 4 past years)
   1. Time sheets
   2. Payroll reports
   3. Check stubs
3. Work product documents (by customer or work order/job)
   1. Signed estimates, proposals, or contracts
   2. (Other documents are highly variable, depending on industry).
   3. Bottom line, keep the documents that will back you up in case of a claim against the business by a customer or vendor. If there’s any suspected fraud, these documents could back you up in a tax audit as well.

Employee Records

Current + anyone employed in the past 4 years

1. Resume, employee application
2. Employment contract
3. Form W-4
4. Two forms of ID (usually) and Form I-9
5. Direct deposit authorization
6. Status change records (change in pay, work duties, schedule, etc.)
7. Time off requests
8. Performance evaluations

5. Do the work you set out to do

Unless you’re a bookkeeper, this area is probably jam-packed with a hundred other tasks you need to do to serve your customers. Keeping up with this ever-expanding list can be overwhelming and result in only taking care of the squeakiest of squeaky wheels. If (when) that happens, take a deep breath and return to your task-tracking system. Listing what you have to do will ensure your priorities remain clear.

Also, in product-based industries, when your customers ask about lead times you can be 100% honest with them and establish clear expectations. For example, if you observe over time that you can process a maximum of 5 orders a day and your order list is nearing 100, your customer deserves to know you’re deliveries are four to six weeks out.

When you first started your business, you might have given the most thought to this one area: Doing the work your customers and clients pay you to deliver. If this area is maxing-out your ability to keep up with the first four areas discussed above, by all means let us know how we can help free up your time.