Keeping Good Records
Disclaimer: The following suggestions are based on personal experience. Please consult a tax professional for your own situation.
Call me crazy, but I like to do my own taxes. It forces me to be more organized than I might be otherwise with my finances. It also saves me the cost of hiring an accountant. Whether or not you hire someone to do your taxes, keeping detailed finance records will help you keep more of your money, pay less tax, and possibly reduce your risk of an audit. Keeping good records is just good business.
In this post I’ll show you how to be a DIY tax ninja so April 15th doesn’t scare the bejeezus out of you. Everyone’s tax situation is different, so I’m going to assume you’re a sole proprietor or single-owner LLC in the US.
Step 1: Setup Files And Get Organized
This is the hardest part for most people. The time to setup your files is well before you need them. A good time to do this for the upcoming tax year is either the week in between Christmas and New Year’s or right after New Year’s Day. Get a big accordion file folder and name it for the appropriate tax year, such as “2013 Tax Backup”. Inside it, setup individual file folders according to the following Schedule C categories:
- Advertising Expenses
- Car, Truck, Vehicle and Equipment Expenses
- Commissions, Fees and Memberships
- Employee Wages and Contract Labor
- Depreciation, Repairs and Utilities
- Business Insurance and Professional Services
- Interest
- Supplies
- Travel, Meals and Entertainment
- Other Expenses
Alternatively, you can also set these up as digital folders on your computer. Whatever you do, don’t use a shoebox. Instead keep an eye on your expenses throughout the course of the year as they accumulate. Scan your receipts as they come in or put paper copies in each category above. Then when it’s time to file your taxes the following year, viola! Everything is where you need it.
Step 2: Make Your Life Easier With Online Accounting Software
If the thought of keeping an organized filing system makes you queasy, you can also use an online accounting system, which is what I do. I use Outright, which was recently acquired by Go Daddy. Here’s how to make the most of this awesome product:
Use a single credit card or Paypal for all your business expenses. Both can be integrated into Outright so your expense records are always up to date. Sometimes you’ll have to tweak the categories, but overall it’s almost automatic. You can also create entries for mileage and any cash expenses throughout the year.
I use Freshbooks for invoicing, which is also easily integrated into Outright. Together they make getting organized for tax season a snap. I simply run a profit and loss report for the year based on my schedule C categories and shazam! Most of my work is done and I have almost all of the information I need to prepare my taxes at my fingertips.
Step 3: Collect Your 1099s
If you make more than $600 from any one client they will be required to send you a 1099 form. Most client 1099s will come to you by the end of January. Go through all of your invoices and see who should send you a form. Note that not every client will do this. Some forget or don’t know they need to do it. And then there are those clients who paid you less than $600 during the year. Whatever the case, it’s always in your best interest to report ALL your income to uncle Sam. That way you’re covered in case you get audited.
Step 4: Use TurboTax
Like it or not, Intuit’s TurboTax Home and Business owns the DIY tax preparation software space. It’s the gold standard for self-prepared tax returns. Designed for sole proprietors, self-employed individuals, consultants, 1099 contractors, and single-owner LLCs, it is a steal at $99 – plus you can write off the expense. I recommend the desktop version, which is available for both Mac and Windows.
Wrap-Up
Once you have done steps 1-3, plug everything into TurboTax and let it do its magic. These four steps should get you organized and confident that your finances are ship shape. Once you get into the habit of keeping good records you’ll yawn at tax time and go do something fun, like get more clients or maybe even enjoy a day off.
