When you're a small business owner, you're a one-person show. In addition to delivering a product or service, you're responsible for less-thrilling business operations like accounting.
Don't wait for tax reason to practice organized bookkeeping habits. Fortunately, there are a few smart strategies you can adopt now to keep track of your expenses and earnings all year-round.
1. Open a business-only bank account
To help differentiate your personal transactions from business ones, register for separate business-only checking and savings accounts. Depending on the company, your current bank may offer business accounts. Separating your business from personal expenses helps differentiate the two — not only your bookkeeping, but also mentally.
Additionally, you should apply for a business credit card. Credit card companies offer different types of rewards, so choose one with the most benefits that help your business.
2. Develop a system for earnings
Once you've learned how to create an invoice with all the right details and information, it's important to maintain a record of each one you send in one place.
Before I used accounting software, all of my invoices got lost on my hard drive. I relied on a single Microsoft Word template, which I revised hundreds of times based on the project, and sent as individual emails to clients. I never tracked which invoices I sent out or followed up on. As my income pipeline grew, this system crashed and burn.
Accounting software, like Wave and Quickbooks, can help you not only create invoices, but compile them. These services can also help calculate your overall yearly earnings and determine your business's bottom line.
3. Track your expenses
When I started freelance writing, I used a Google spreadsheet to document every story I wrote, along with how much I was paid. I'd eventually add the date I was paid and highlight any overdue payments red. Although this was a great way to start out, I needed to upgrade my system, because I didn't keep a record of my business expenses.
Don't stash all of your receipts in an envelope and let it sit until April 15 approaches. Instead, keep a constant digital record of your expenses.
For instance, Wave offers a mobile app, which allows you to take photos and scan receipts that are business expenses. Additionally, you're able to upload receipts on its desktop version, which comes in handy for receipts that are emailed to you, including those from Amazon and ridesharing apps.
4. Understand your tax obligations
As a solopreneur, you are obligated to withhold taxes from your overall earnings. However, how much money you withhold is based on two factors: the state you live in and what kind of business you have legally.
While many professionals can deduct “miscellaneous income" on a Schedule C (1048) form, it's wise to establish a legal business entity, especially as your business grows. Consult a tax professional to find out the best legal structure (sole proprietorship, LLC, or S-corp) for your business in your state.
As a freelance writer, I am currently a sole proprietor, which is the most straightforward type, based in Philadelphia. According to Business News Daily, the average small business owner in Pennsylvania pays $7,743.42 in local and state taxes combined. As a small business owner, I must mindful and responsible of this financial reality all year long.
Accounting doesn't have to be a pain if you practice the right bookkeeping habits. To reduce tax season frenzy, be sure to think ahead by separating your business expenses from personal ones, tracking your earnings, documenting your expenses and knowing how much money to withhold for income taxes.