Tuesday, March 17, 2020

Expenses & Taxes: Where to Start

This post includes affiliate links, but only if you purchase memberships.

One of the major projects in my school's curriculum is that each student needs to complete their own business plan, complete with a marketing plan and financial projections. When I wrote mine, I had no idea what I was doing or what would be reasonable numbers in terms of money. Now that I've been self-employed for four years, I feel comfortable offering some advice.

Keep in mind that I'm currently a single, solo practitioner earning less than $20,000 a year -- I file the usual 1040 tax form along with a Schedule C form that details my business expenses. There are different rules and guidelines for S-Corps, Partnerships, LLCs, and the rest, which I cannot speak to at this time. I'm also not a tax preparer and this information should not be construed as legal or financial guidance.

First of all, get yourself a separate business checking account. This is where your starting capital (funds) can be deposited and then you can track additional income or expenses from there. Trying to do it all within your own personal checking account can get messy, especially when it comes time to file your taxes (or, Heaven forbid, if you get audited). I have a business checking account through my credit union and they charge me a $5 a month fee, but I earn a modest amount of interest and a $.25 credit a month for paperless statements.

As of 2019, self-employment income was taxed at about 15.3%. Take your total income and multiply it by 0.153 (or whatever percentage you need or prefer) -- the number you get, you should set aside for taxes, just in case. You should always check the current year's tax information incase that number changes; you can choose to set aside more, but for peace of mind incase you have to pay-in, don't do any less. (If you break even or get a refund, you'll have a little extra cash for the next year's tax savings and/or to give yourself a bonus.)

Gift certificate sales count as income during the calendar year in which they're bought. Set the money aside in a separate savings account and take out funds as they're redeemed. If you spend the money before they're redeemed, you're essentially robbing your future self of that cash. Also, Maine requires you to keep track of unclaimed gift certificates, should you need to refund or report the money as "unclaimed property." Learn more about reporting guidelines. (Also also? You don't have to sell gift certificates if you don't want to.)

How much you should pay yourself is up to you. There's no right or wrong answer for this because it's all super subjective.

Expense categories allow you to loosely group together the totals of your receipts and invoices for easier placement on your Schedule C form. You can preemptively work with your accountant and/or tax preparer to determine the best category for specific expenses, but here are a few general suggestions:

  • Cost of Service: sometimes known as Cost of Sales or Cost of Goods Sold (if you were a retailer or plan to sell retail), this is where your linen and lubricant expenses go. Bolsters, essential oils, hot stone supplies, and other small expenses of doing massages also go here. Expect to spend anywhere from ~$100 at the start up to $400+ in a year.
  • Advertising & Marketing Materials: for on-line ads, newspaper ads, business cards, brochures or rack cards -- things that you hand out with your name on them for the sake of drumming up business. I spent about $60 in 2019, but this is a low figure.
  • Bank & ATM Fee Expense: this is where I put that $5 a month fee from my credit union -- costing me $60 a year.
  • Equipment: ** this is ONLY for purchases of $100+ that constitute large objects that may lose value (depreciate) over time, such as a hydraulic lift, a new massage table, a UV-sanitizing hot towel cabinet, etc.
  • Insurance: your ABMP membership or other liability insurance should go here. That's usually about $200+ a year, unless you go for a cheaper provider (not recommended).
  • Legal & Professional Services: if you hire somebody else to do your book-keeping and to file your taxes, plan for about $100-250+ a year.
  • Licensing: your yearly fee for re-licensing with your state. It's $40 in Maine.
  • Merchant Fees: I use Square to process credit cards, so I track the fees they take out here. In 2019, I spent $240 out of the money I took in.
  • Office Supplies: pens, paper, lightbulbs, cleaning supplies, etc. This is super variable, so you could budget as little as $100, or up to $300 or more.
  • Rent or Lease Expense: if you're renting a space, it's going to be super variable according to your location, square footage, whether or not utilities are included, etc.
  • Software & Web Hosting: where I track my $12 a year fees to Google for each of my URLS, as well as my on-line scheduling service subscription, etc. I spent about $350 last year.
  • Utilities: if they're not included in your rent, put them here.
For other random expenses that don't fit into these categories, just make note of them so that your tax preparer can find the best spot for them, even if that ends up being in the "Other" category. Because the tax rules change all the time (even within the same year), no one can guarantee what specific expenses will be deductible and which ones won't be. Milage is always a sticky one with very specific rules, but you can try to track it manually or through a subscription to the MileIQ app (not an affiliate link). Charitable donations are generally not a deductible business expense, unless your business name appears in the charity's public marketing. Clothes also do not count unless you purchase something with your business name and logo printed or embroidered on it. For more general guidelines, check out "Can I Deduct That?: 100 Things You Can (or Maybe Can't) Take as Business Deductions" by Margo Bowman and Kelly Bowers (not an affiliate link).

Buying in bulk can help you save cash in the long run, but do what you can with what you have. I do not recommend taking out loans or lines of credit if you can help it.

As far as receipts and invoices go, keep the paper copies in an envelope and/or make digital copies to store on something like a thumb drive, Google Drive, Dropbox, etc. Check with your tax professional for recommendations of how long you need to keep them and your old tax returns in case of an audit.

Consider keeping an expense log -- either on-paper or in a digital spreadsheet -- and have one for each expense category. Here's an example you can use: http://bit.ly/bexpenselog

And here's a blank copy of the Google Sheets file I use to track all of my income and expenses over the year to get you started: http://bit.ly/bexpenses

Finally, these are the "due diligence" business questions my local preparer asked me when I filed my 2019 taxes:

  • How long have you been in business?
  • What evidence do you have to support your business? Business cards, business stationary, receipts/receipt book with company header, business license.
  • Do you have a separate business account? If not, how do you track your business activity?
  • Have you filed any sales tax returns, payroll tax returns?
  • Indicate which you have of the following: Accounting records, paid invoices/receipts, log books, computer records, milage log, car/truck expenses, ledgers, business bank statements.
  • Did you file 1099's for subcontractors?

This should be more than enough to get you started, but certainly if I missed anything or you have other questions, get in touch with me.

Happy Budgeting!