Basic Accounting II

This article was originally published in The NAJIT Observer in February 2012.

Now that you have an idea of how to attach value to your time and activity, it is time to figure out how to best use banking and government tools to determine your taxes. No, this is not an accounting course. Relax and enjoy.

In my first venture in the NAJIT blog I discussed earning an income – how to determine the value of our time and sweat. But we all know that after we earn it, we have to pay our share to the government. In my country, its IRS counterpart is affectionately called “The Lion.”

I believe in paying income tax, but I don’t want to pay more than my fair share, and it’s up to me to make the best use of the tools available to me for calculating what is due when reporting my income.

It is very important to learn as much as possible about income tax return forms and/or use a competent accountant. Your accountant should understand that you are a business, your allowable deductions based on the type of business you are (sole proprietorship, LLC, P.A., etc.), and the impact your state’s laws will also have on the final return.

I am a freelancer in the State of Florida, and not incorporated – sole proprietorship works for me. Every year I have to fill out Schedule C, I have to submit an expense report to my accountant so he can help ensure that I pay the right amount of income tax and that I have used all my allowances. There is one aspect of the IRS return I don’t quite agree with: I am supposed to pay quarterly taxes based on a projected income. Yeah, right.

My Expense Report is divided into accounts:

_ Travel/Entertainment – gas, meals, hotel expenses, etc.
_ Marketing – gifts to clients, business cards, website related expenses (not ISP charges)
_ Office Expenses – ISP charges, equipment, supplies
_ Utilities – a portion of one’s house total for the year or one’s office actual annual electric bill, cell phone, fax, business dedicated line
_ Healthcare – dental, pharmacy, consultations, medical insurance
_ Education – conference registrations, seminars, books
_ Mail – stamps, envelopes
_ Salary – the check you write to yourself every month (or so we’d like)
_ Rent – I work from home, but according to the IRS, because I have a room dedicated as office space, I am allowed a deduction based on its square footage. Check your situation with your accountant or you can read the instruction on the IRS.gov website.

There are accounting programs available to help you set up your company’s accounting, such as QuickBooks by Intuit, but an MS Excel spreadsheet will work just as well. Make sure to identify the account (Marketing), history (business cards), total ($$$), month (Jan2012) if you are not using a program that automatically prompts you for that information. Most banks nowadays allow you to append information to your statement line items before you download your monthly statement directly into your accounting program. That is a tool we should all make use of.

Your accountant may point out to you that you need to pay yourself a salary, set up a Social Security account for compulsory deductions, etc. These are very easy to do and have helped me navigate the uncertainties of our business much better. Before, I would deposit all my income in my personal account. Now I have an account just for my business and I write myself a check every month, which I deposit in my personal account. My annual subscriptions, professional purchases, membership fees, etc. are also paid from that account. And I try to leave the estimated Social Security deductions and IRS return amount in my business account – from which I will write my IRS return check.

Some of you may think that since your account is not a joint account it is permissible to commingle funds. Well, not really. My accountant explained to me that transactions that are not business related should not appear in your business account statement. Your grocery bill, non-business restaurant expenses and Aunt Sally’s birthday check (incoming, but not a business-related income) are examples of inappropriate entries into a business account.

If you are like me and lack the required discipline to create and send invoices timely, there is a not-so-new type of device available that may assist those not comfortable with payment collection facilities such as PayPal. I am referring to mobile payment devices that can be attached to your phone for processing credit card and electronic check payments. That is a way of processing payments quickly, they go straight into your bank account and you eliminate the need for invoices: you can electronic issue receipts that are sent directly to your clients. The devices allow for different forms of input (manual entry or swipe) and the charges vary accordingly. You may want to check Corduro (www.corduro.com), Square Up (www.squareup.com), PaymentMax (http://www.paymentmax.com/), and Intuit’s GoPayment (http://payments.intuit.com/products/basic-payment-solutions/mobile-credit-card-processing.jsp). It is also a good way of avoiding the Payment-in-the-mail Syndrome that is affecting some of our clients.