There are many options for your business entity. The right option is the one that is best for you, the business owner. It is important to get legal and tax advice, but first know the options and what questions to ask.BUSINESS FORMATION BLOG
An Employer Identification Number (EIN) is a type of Taxpayer Identification Number (TIN). A social security number is another type of TIN. Business owners get an EIN to avoid using the owners social security number, and it is sometimes required by the IRS or banks. There is only one place to get an EIN and it is free and easy on the IRS site. Don't get scammed paying for an EIN.
Keeping business transactions separate from personal transactions is critical to having good books and records for your business. If you have an LLC, entity taxed as an S-Corp or a C-Corp you want your business to own the accounts. Your bank will expect business to be conducted through a business account. You may also want to consider opening a business savings and a business credit card.
It can be difficult to figure out what business expenses you can deduct for your business. Watch the video and download the free list of business deductions below.Watch the Deduction Video
There are three methods of accounting: accrual, cash and modified/other. Most small businesses use cash method accounting. If you are unsure which to choose, it is likely best to choose the cash method because it is the simplest to understand and easiest to do the bookkeeping. Here are the basic differences.
With cash method your revenue is recorded when you receive it in your hand, your mailbox or in your bank account. Once you possess it, you record revenue and that is the year in which you owe tax on the revenue. It does not matter when it was sent to you or the date on the check, it is revenue to you when you receive it.
You record expenses when you pay them, with a few exceptions. If you are making a current purchase or paying a current bill that is an expenses when you pay it. You cannot prepay years worth of rent, for example and record all of it at the time you pay. If you are prepaying several years worth of expenses let your accountant know in order to get the proper expense recorded in the proper period. Generally each year will have no more than 12 months worth of monthly expenses.
Accrual method is more complex and usually requires an accountant to manage. With the accrual method, revenue is recorded when you earn it. If you do not collect the payment at the time of service, you record both the revenue and a receivable, to show that you are owed the money. Once you collect the payment, you are no longer owed the money and so your receivable goes down.
Expenses are recorded when you incur them, regardless of when you pay them. If you do not make the payment at the same time you incur the expense, you record a liability to show you owe someone. When you pay them the liability goes down and so does your cash, but the expense has already been recorded.
You provide a service to a client or customer on April 30th. Your client pays you on June 15th. Using the accrual method you record the revenue on April 30th. Under the cash method you record the revenue on June 15th.
You decide to attend a conference that will occur on November 1st, and you pay in advance on May 10th. Using the accrual method your expense is not recorded when it's paid, it is an expense to you in November. Under the cash method, you record the expense when you pay it in May.
If you have been in business a while, you can look at your prior year tax return to see what method was checked.
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 12/31/2020 and it was delivered to you by mail on 1/6/2021. It is 2021 revenue for you. You could not have put your hands on it in 2020, so it counts for 2021 revenue.
EXAMPLE 2: You had several appointments the last few days of 2020. Your Square deposit was made to your account on 1/2/2021. This counts as 2021 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 1/2/2021 and find a check dated 12/13/2020. You are certain that it was delivered to you before the end of 2020 but you were not in the office to retrieve it. Since you believe it arrived in 2020, it is 2020 revenue to you. That is when you had the ability to deposit it, even though you did not pick it up until 2021.
But what if you receive a 1099-MISC for 2020 that includes amounts you recorded as 2021 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 "2021 revenue included on the 2020 form 1099." That will alert the IRS to the fact that the difference was recorded as 2021 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.
The IRS knows that there are timing differences and differences in accounting methods that will cause many 1099-MISC or 1099-NEC forms do not match reported revenue. There is no way to match your accounting records to 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. Accurately report your total revenue and the IRS will see that is higher than all your 1099's.
Option 2: You can report the amount on the 1099 form on your tax return as your revenue and then record an adjustment as an expense item to reverse it, with the description: "2021 revenue included on the 2020 form 1099." That will alert the IRS to the fact that the difference was recorded as 2021 revenue. Then make sure you report that revenue on your 2021 taxes.
Either way, 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.
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.
Simple Profit has a package available for purchase that has a basic and advanced spreadsheet as well as training videos included. Check out the Simple Profit Spreadsheets or see the link below on this page.
Simple Profit also offers a course to help you learn how to do your own bookkeeping with an accounting system like QuickBooks. Visit the Business Courses page for more information.
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.
See the Simple Profit blog for Hiring Employees.
Simple Profit has resources to help you learn how accounting works and how to do your own bookkeeping, as well as learn how to set up a cash management system and analyze business results. Click on the links below for more information:
Jennie offers 1-1 coaching as well as courses to help you learn about accounting, taxes and financial analysis:
If you aren't ready for accounting software and want to use a spreadsheet, click below:
Learn to estimate your taxes with the mini-course below?
How you pay yourself as a business owner depends on your form of business. Watch the videos below to understand your options.
This blog post explains what to look for in a tax professional. While you can learn to do your own bookkeeping and pay your own estimated taxes, it's wise to use a professional tax preparer for year end taxes.Read the Blog
The IRS and states who collect income tax expect self employed individuals to pay estimated tax periodically during the year. To learn more about estimated taxes, click below:
After completing the steps above you may need further assistance. The resources below provide you will additional help and support to track income and expenses, do your own bookkeeping, create a cash management plan, budget, analyze business result and pay estimated taxes. Contact Jennie at [email protected] if you have any questions or what to discuss which options are best for you.
If you are not ready for accounting software, this spreadsheet package may be an option for you. It includes a basic spreadsheet and an advanced option that allows you to download and categorize transactions from your bank. Plus access to training videos for 6 months.Learn more about the Spreadsheets
These three courses are for the small business owner who wants to gain confidence around the areas of accounting, bookkeeping, cash management, cash planning, financial analysis and using spreadsheets.Learn more about business courses
Self-employed business owners often need to pay estimated tax to the IRS. Learn how to estimate and pay taxes which are usually due four times per year in April, June, September and January; in 2020 they are due July, September and January.Learn more about the Mini Course
Speak with Jennie Schottmiller, CPA about your business plans, needs, accounting and tax topics or any related topic you need help with. Jennie bridges the gap between what you need to know and what your accountant typically tells you.Learn more about coaching services
Jennie is a Licensed Marriage & Family Therapist in private practice and a Certified Public Accountant. She offers educational courses and coaching to help small business owners understand accounting and tax matters.