DIY Accounting for Self-Employed & LLC

Intro to Self-Employed Accounting Records

Money + Value = Business 

Accounting is tracking your business related money transactions and these money records represent your business on paper. 

You need to keep track of all the money you're paid and all the money you spend on costs related to earning that income.  The money received is often referred to as 'Business Revenue' and the costs you spend on 'Business Expenses.'  Revenue minus expenses equals 'Net Income,' which tells you how profitable you're over a period of time.

Accounting gives you information to grow your business. When you're selling your time, you can get away with doing calculations in your head, but as you grow you'll need to make increasingly more detailed and profitable plans and decisions. 

Watch the 'Accounting:  Video #1' for more on accounting simplified.

When you're self-employed, you can keep your 'accounting' using a simple spreadsheet, listing all income you received and all expenses you paid.

A  business expense is any cost you paid for the purpose of earning business income. 

 

You should keep a record of your accounting for taxes, but also for yourself if you want to earn more money and grow your business. To track business income and expenses in a spreadsheet, include the following details:

  1. WHO: Who paid you or who did you pay? 

  2. WHEN: The date of the transaction (as you grow your business this can get more complex)

  3. HOW: Did you pay buy credit card, cash or check? If you received money what payment process and account were used?

  4. WHY: This is very important for tax & legality. Document the 'purpose,' which for expenses should be to show it's business related. For income, you should have invoicing, sales receipts or other types of evidence of the exchange.

You can checkout using a spreadsheet to do this in 'Accounting: Video #2.' You can even get the spreadsheet template I show you in this video for free!

Making the numbers a priority and keeping good records is a great way to stay focused on growing your business

Whose self-employed?

Self-Employed is a tax category for all people who haven't formed a 'separate business' with a state  (such as a Corporation, Partnership or LLC).  The legal terminology for this type of business is called a Sole Proprietor

Sole-Proprietor/Self-Employed includes all of the following:

  • You started working for yourself, as yourself, just getting paid - yay! You may have filed a Doing-Business-As (DBA), in your personal name or another name made up for your business - or not.

  • A company issues you form 1099-Misc for your work. If you work for anyone or business and they don't withhold income taxes for you (like an employee), then you're considered self-employed! This type of worker/business is often call a 'Contractor' or 'Independent Contractor.'  
    • Note: there are rules and big penalties for incorrectly categorizing employees as contractors. There must be autonomy for a worker to qualify as 'Independent Contractor' position and not an employee.
  • You formed a 'Single Member LLC' business with a state. This is the one exception to the general rule for who is self-employed that I explained first.  The IRS doesn't have a form for the latest business type, Limited Liability Company (LLC) and with one owner, this business defaults to self-employed for taxes. 

The LLC is perfect for people who are self-employed selling their time, but really want to grow their work into a business.

This is because the LLC will keep things simple for their taxes. In fact, it keeps things the EXACT same for taxes. The additional steps that you need to take for the LLC actually help you treat your business like a real business, which can help you grow. I'll talk about one of the biggest differences between being self-employed and a LLC next. 

Accounting For single-owner LLCs & how it's different than being self-employed

As discussed above, when you're self-employed, your accounting records can be as simple as listing all the income you receive and expenses you paid.  

Alternatively, when you form a LLC, you created a separate business; a separate 'entity' from yourself.  To keep records for this and for it to actually 'exist' in court, you need to keep your money separate from the business. To do so:

  • Keep a separate bank account for the LLC and I recommend a separate credit card too (although not required)
  • Have all payments from customers and clients deposited into the business bank account
  • If you pay expenses out of your personal money - you need to reimburse yourself from the business and keep track of this
  • If you use the business account for personal expenses - you need to reimburse the business
  • The accounting records should reconcile the business bank account, which means check the recorded entries to the monthly statements
  • Keep track of 'owner contributions' to the business which means money you "invested" in the business by depositing in the bank account, asset purchases, liabilities owed and draws by the owner for "pay"

While you'll often want to upgrade to automated records when you become an LLC, I show you how to keep track in a spreadsheet in my Accounting Video #3 >>>>

Don't forget to get your copy of the spreadsheet!

There are some additional steps for maintaining your LLC, but I'll go over those in a new post!  

End-of-Year Income Taxes

Self-Employed End-of-Year Taxes

Self-Employed business taxes are filed with personal taxes every April 15th. The commonly confused $400 amount is for self-employment taxes, but all self-employed income is required to be reported (regardless of if you recieve a 1099 or not). You only pay self-employment (SE) tax if your net income is more than $400 and then this amount of SE tax is added to your income taxes.

 Self-employment tax comes out to 15.3% but it's actually a bit lower that this because: 

  1. You get deduction for 1/2 of employment taxes for the income tax calculation, AND
  2. Self-employment taxes are only calculated on 92.35% of the income from your business.

Don't get overwhelmed, DIY tax software or tax preparers take care of all of this for you,  automatically. 

Self-employed taxes really aren't that complicated and you certainly don't want to be distracted from your business by them or your concern of them. Like all expenses; when you plan your business properly, all expenses can be paid and you can thrive. 

In worksheet 3 of the Business Spreadsheet Template, you can categorize all of your business expenses by the IRS categories. The worksheet will total these amounts for you.  All of your business expenses, as we covered in worksheet 1 of the spreadsheet, are deductible. 

When can I form S Corp? Can it save me taxes? I highly recommend not to form an S Corp until you have plenty of money to a point when you have no problems spending thousands to pay professionals (like $5,000). That's when the investment will be worth the tax savings.

 
 

You're considered "self-employed" for taxes, when you work for yourself.  When you're self-employed, your business income and expenses are reported with your personal tax form 1040 on a Schedule C; this keeps things cheap and simple.  Separate business taxes are far more complicated than being self-employed. 

Self-employed means you didn't form a separate business entity with the state, like a corporation, partnership or non-profit. There's one exception to this rule for LLCs. LLCs are the easiest business to be formed and the IRS never made a tax form for this business. When you are the sole owner of a LLC, you're taxed the exact same as a self-employed business.

Adjustments For Part-Personal Write-offs: Home Office, Mileage, Meals, & Travel

Where things get more complicated, is for expenses that are part-personal and part-business. These are things like the home office deduction, driving your personal car for business, meals and entertainment and using your personal phone and laptop for work. Video #3 covers these write-offs.

 
 

DIY Quarterly Tax Estimates for Self-Employed & LLCs

Do I really have to pay Quarterly Taxes?

Yes, everyone needs to see if they have a quarterly tax payment due.  There's benefit to this though because it's the only way to pay your taxes as you earn, when you're self-employed.  How does it sound to have no surprise or payment due come tax time? 

I created a spreadsheet template for you to calculate your quarterly taxes in just a few minutes.  

The Estimated Tax Quarters And Their Due Dates:

  • 1st Quarter: Jan-March due April 15th
  • 2nd Quarter: April & May due June 15th
  • 3rd Quarter: June-Aug due Sept 15th
  • 4th Quarter: Sept-Dec due Jan 15th

The spreadsheet will tell you:

  1. If payment is required or not;
  2. Minimum payment amount (if required); &
  3. The amount to pay-as-you-earn to avoid owing tax at the end of the year.

As shown in the screenshot of the spreadsheet below:

 
 
 

 line-by-line through the calculation for quarterly estimated taxes

 

Quarterly Tax Estimate Step #1

You'll need some information from last year's return, so it will be helpful to keep it handy. I know it can be a dreaded document to look at but remember once you get through this, it will become a very quick and easy task. You'll also no longer be plagued by the unknown...

 
 
 

Quarterly Tax Estimate Step #2

Next you'll enter the money you've earned and any deductions you have, so far for the year.  There's two methods for this part of the calculation and the spreadsheet accounts for both of them.

 
 

Quarterly Tax Estimate Step #3

Step #3 will do your calculation. This section calculates everything for you! and will estimate if you have a payment required, the minimum payment amount to avoid a penalty and 

 

Quarterly Tax Estimate Step #4 (Optional State Taxes)

Most state calculations start with your federal taxable income, which is calculated in step #3. Then, there are adjustments (to increase or decrease) this amount based on state rules.

 
 

Quarterly Estimated Taxes: How To Make Payment Online & By Mail

Lastly, the worksheet has an area to track all of your payments. It also covers how to make payments online, using the federal tax payment system, or by mail.

Quarterly Estimated Business Taxes! Simplified. Woohoo

Do I Really Need to File Quarterly Taxes? What If I Didn't Make That Much Money?

The only way to know for sure is to run the calculation. I recommend getting a handle on this, right from the start! 

I received the following, fantastic question from a member of my community, which I answer in the first video below...

"I am in the beginning, planning stages of my business and I have no idea how to estimate sales! I'm selling products (garments) and cannot predict for my first year of business what my income will be, do I need to file quarterly taxes for my first year of business?" Rachel Walters, who you can find at: rachel-walters.com

The short answer is to only record income for the actual sales you've had during the current quarter. So, if it's 3rd quarter and you haven't had a sale, estimated income is 0, or whatever your actual sales have been. The IRS has an alternative method for calculating your estimated taxes for people who don't earn income evenly throughout the year, which affects most small business owners. The alternative is simple however, just record what you've earned in the calculation. 

How Is Your Relationship With Money?

Running your taxes each quarter, is a fantastic way to stay on top of and KNOW your $$$$. This builds a relationship between you and your money. I'll be honest with you, most people I meet and learn from who are successful; knew their money like the back of their hand and they always attribute that to their success. 

Remember, MONEY IS JUST A TOOL. 

It's the tool of our economic system that allows us to work for ourselves, create a business and earn more than we could imagine at a job. So don't bring dread and avoidance to your money. MASTER YO' MONEY. And I'm here to help you do just that!

Avoiding The Penalty For NOT Paying Quarterly Taxes (The Requirements to File Follow the Penalty)

One thing I want to address before we go further is the basics of the penalty calculation, which is what determines if you need to file each quarter; if you'll be charge a penalty, than you must file, but if you won't be than you don't need to file.

  1. First, you get to subtract all true business expenses from the income you receive during the year. Expenses that are part personal and part business, leave out of this calculation (home office deduction, mileage, meals & entertainment).
  2. Second, as long as you pay in full the taxes in total that you paid last year, there's no penalty. Look at Form 1040 Line 44 for last year.
  3. Third, you receive a standard deduction and personal and dependency deductions, so if your total income is less than these amounts; you don't need to worry about estimated taxes!
    • Single Person: Standard Deduction $6,300 + Personal Exemption $4,050 = $10,350
    • Married + 2 Kids: Standard Deduction $12,600 + Personal Exemption $8,100 + Dependency Deductions $8,100 = $28,800
  4. Fourth, as long as you owe less than $1,000 in tax, you don't have a penalty. 

If your income is below the total of your deductions, you most likely don't need to worry about a penalty for estimated taxes ("most likely"! :) )

What Are Quarterly Taxes? When Are They Do? And How Do I Follow The Rules & Pay Them?!?

In the video, I answer the three questions above. You can skip the intro and get started at 2:19.

Forming a Business Versus the Tax Classification & the Easiest Option

Forming a Business Versus the Tax Classification & the Easiest Option

Most people are not aware that forming a business has multiple steps and options. You have the option to:

  1. work as yourself, or
  2. create a separate business entity that acts as it's own separate person. The benefit with this option, is by making the business separate it provides limited liability which means you get to keep your retirement plan, house, cars, and other assets regardless of what happens to the business. 

Forming a separate business entity can only be done through the state and is most often done in the state that your business operates. State entity businesses are the corporation, partnership, LLC.

However, there is a second step that is choosing or following the required tax classification, which can be different from the state entity. Tax entity classifications are sole-proprietorship, partnership, corporation and S-corporation. The tax entity affects how owners and owner workers are paid and how their investment in the business is calculated.

 

Business Write-Offs for Driving Your Car

Business Write-Offs for Driving Your Car

Do you keep track of your business miles?

Make tax time easy and keep a Mileage Log in a notebook in your car!

Watch this video and you'll understand this valuable WRITE-OFF!

Personal Tax Overview Infographic

Personal Tax Overview Infographic

Tax Calculation & Business Write-Offs Explained:

This infographic shows the personal tax calculation. Examining it can help your understanding of the individual tax calculations and various tax write-offs. 

Tax Write-Offs For The Self-Employed

Tax Write-Offs For The Self-Employed

In this talk, I'll cover all the categories of tax write-offs. I follow the Schedule C Net Profit (or Loss) from a Business Part II Business Expenses.

For many of the write-offs, there are more in-depth videos about how to calculate the write-off, which are referred to throughout out the course. This content is from our online video Self-Employed Tax Course. For everything you need to know about self-employed taxes, CLICK HERE to check out our course!

 

Check Out Our DIY Accounting Guide!

Check Out Our DIY Accounting Guide!

We know your passion isn't accounting, which is why we made this DIY Accounting Guide with How To enter sections for Quickbooks for Mac. Accounting is the language of business and we will teach you accounting painlessly. Download the pdf copy today! Order the book for a handheld version! 

 

 

Installment Sale: Receiving Payment Over Two Or More Tax Years

Installment Sale: Receiving Payment Over Two Or More Tax Years

Selling your property, have a gain and receiving payment over two or more years? In this talk, I'll cover what an installment sale is and how it's reported.