Basics of accounting and tax for your small business.
Getting Started Video
Start-up expenses and organization costs are regular business expenses that you can't deduct UNTIL you open for business. Watch the video below to understand how this works and learn the top 10 new business mistakes you will want to avoid.
EVERY SECTION BELOW HAS HELPFUL RESOURCES!
Before you decide when to record a payment received at the start of a new calendar year, you need to know your accounting method.
If you were in business last year, you can look at your prior year return. For a sole proprietor or LLC look at the top of Schedule C, line F. For an entity taxed as an S-Corp find the Form 1120S, top of Schedule B, Line 1.
If you were not in business last year, you will be selecting an accounting method year. The most common option is cash method accounting.
Under the cash method of accounting you record revenue when you get the money, either in your hand, your mailbox or in your bank. The date you had the opportunity to deposit it, or the date someone else deposited it, is the date you effectively received it.
The accrual method of accounting has you record income when you earn it. For clinicians this is the date of the session, when services were provided.
If you are using the cash method of accounting it is important to determine when you received the check. That is the year it will be revenue for you. The following examples all use cash method accounting. If you are using accrual, contact your accountant.
EXAMPLE 1: You receive a check dated 12/31/2019 and it was delivered to you by mail on 1/6/2020. It is 2020 revenue for you. You could not have put your hands on it in 2019, so it counts for 2020 revenue.
EXAMPLE 2: You had several sessions the last few days of 2019. Your Square deposit was made to your account on 1/2/2020. This counts as 2020 revenue because that is the date it was deposited by Square.
EXAMPLE 3: You took vacation around the holidays. You arrive to your office on 1/2/2020 and find a check dated 12/13/2019. You are certain that it was delivered to you before the end of 2019 but you were not in the office to retrieve it. Since you believe it arrived in 2019, it is 2019 revenue to you. That is when you had the ability to deposit it, even though you did not pick it up until 2020.
But what if you receive a 1099-MISC for 2019 that includes amounts you recorded as 2020 revenue?
The IRS knows that there are timing differences and differences in accounting methods that will cause many 1099-MISC forms to not match reported revenue. There is no way to match your accounting records to match every other company who you do business with. There are two options when this happens.
Option 1: If the difference is small or the total of all your 1099 forms received is less than your reported revenue, there should not be a problem.
Option 2: You can report the amount on the 1099 form on your tax return as your revenue and then record an adjustment for "2020 revenue included on the 2019 form 1099." That will alert the IRS to the fact that the difference was recorded as 2020 revenue.
Note that if the IRS does inquire, as long as you are properly reporting all your income in the correct period you will be able to show your taxes were accurately filed.
If you have further questions about accounting methods, come see us in the Facebook group: Simple Profit for Mental Health Clinicians.
An EIN is a type of taxpayer identification number (TIN). A social security number is another type of TIN. Businesses often get an EIN to avoid using the owners social security number. There is only one place to get an EIN and it is free and easy on the IRS site. Using a service will cost you and all they are doing is going and getting you a free one and charging you for it.
An accounting system is a process of tracking and categorizing financial transactions.
Every business needs an accounting system, whether it's a paid software service like QuickBooks or a simple spreadsheet.
If you use an accountant or tax preparer, speak with them before choosing an accounting system. They may have a recommendation, offer a discount or want to have remote access so it is best to at get their input.
Obtaining a separate bank account is one of the first tasks when starting a new business. It is important to keep business transactions separate from the owners personal transactions. This means you do not pay for your groceries and mortgage from the same account you pay your office supplies and office rent.
There are a few reasons. The business bank account is going to the be the support for your accounting records and thus your taxes. Segregating business from personal helps ensure you capture all allowable business deductions. Further, if your business is an established legal entity like an LLC or Corporation, there are several potential problems that can arise from commingling personal and business transactions. For more questions about this, speak to your accountant and attorney.
QuickBooks is a commonly used accounting system for small businesses. There are several options when considering QuickBooks.
QB Self-Employed. The least expensive is QB Self-Employed. This is a single entry accounting systems which means it cannot be upgraded to other versions later because it does not retain all the same data as a full, or double entry accounting system. You cannot obtain a Balance Sheet with this version but you can run a Profit and Loss statement, also known as an Income Statement. For many small business, this option works well.
QB Online: QuickBooks Online is a cloud based, double entry system that meets the needs of most small businesses. The Simple Start version will produce all needed accounting reports. You can easily upgrade to Essentials or Plus versions later if you need multiple users or additional features.
QB Desktop: QuickBooks Desktop version is a software that loads on your computer and is not cloud based. This avoids the monthly fee for the service and instead you can upgrade when needed by buying a new package.
QuickBooks often runs promotional pricing for their Self-Employed and Online products, but pay attention to the price you will pay once the promotion ends. This is the amount you want to ensure you can afford monthly.
If you do not like QuickBooks you can use a basic spreadsheet or other accounting systems such as Xero, FreshBooks, GoDaddy or Wave
Xero is the second most popular system used by accountants after QuickBooks.
FreshBooks, GoDaddy and Wave are not commonly used by accountants but are well liked by some business owners.
Like QuickBooks, other accounting software providers may run promotional pricing. Pay attention to the price you will pay once the promotion ends. This is the amount you will want to budget for. Wave is a free service.
A spreadsheet can work for a small business especially one with no employees and not too many transactions. If you want to use a spreadsheet create a template with revenue at the top and expense categories listed below. Make one column for each month and a total for the year in the far right column. It is more work to keep a spreadsheet updated but it keeps costs low.
Accounting systems are not designed to be compliant with HIPAA and keep Protected Health Information (PHI) safe. This is typically not a problem because most healthcare providers maintain paper records or Electronic Health Records (EHR) where PHI is safe.
Your accounting system does not need to contain client information. Use your EHR for client records and your accounting system to record bank transactions.
Although QuickBooks has a good reputation for accounting software, they do not have a good reputation for payroll service. Thankfully many other payroll service providers will interface with QuickBooks and other accounting software.
Commonly used and well liked payroll service providers include Gusto, Square Payroll, Sure and Patriot Payroll. ADP is also popular but can be pricey although you may be able to get a discount going through your accountant.
Open now! Sign up by January 15, 2020
I am a therapist in private practice and a Certified Public Accountant. I run the Facebook group and website Simple Profit to help clinicians understand the accounting and tax matters to run their businesses.