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!