Category Archives: Accounting

US Small Business Owners – How and When to Pay Estimated Taxes

If you’re in direct sales, you won’t have an HR department taking Federal taxes out of your paycheck for you – you’re on your own! In most cases, you can’t put off paying taxes until the end of the year or you’ll get hit with an underpayment penalty. To keep business owners and the the self-employed from racking up a huge tax bill, and to keep the money flowing into the IRS coffers on a regular basis, the IRS and many states require you to pay estimated taxes on your profits four times a year.

Tax

Tax (Photo credit: 401(K) 2012)

The name “estimated tax” comes from the process you’ll need to go through four times per year in order to know how much to send in. It can be a little annoying but if you stay on top of your accounting, making sure to enter your expenses and income on a regular basis, most accounting programs will make it pretty simple for you. Because of the progressive tax system, you’ll owe less in the first quarter than in the fourth quarter even if you had the same profit in each quarter. If you would like to spread it out, you can always pay more than you currently owe – making estimated tax payments is just intended to make sure you don’t end up paying too much less, or you’ll get hit with an underpayment penalty.

When Are Federal Estimated Taxes Required?

Generally, if you plan to make at least a $1000 in tax for 2012 after subtracting any withholding or refundable tax credits, then you must make estimated payments. To avoid the underpayment penalty, the IRS must have at least 90% of the tax shown on your tax return at the end of the year or 100% of the tax shown on your 2011 tax return, whichever is smaller. If your adjusted gross income is $150,000 or more, then substitute 110% for the former 100% figure.

How to Pay Federal Estimated Taxes

  • 1. You’ll need to estimate your profit up to that point in the year. Most accounting programs such as Quickbooks can produce a profit statement for year-to-date. Remember, this is an estimate, so as long as you’re not off by much, this profit statement will be useful.
  • 2. Alternatively, you can use this IRS Worksheet on page 5 to figure out what you owe each quarter in taxes. If most cases, if your state has an income tax you will need to do estimated payments as well.
  • 3. Then, register with the Electronic Federal Tax Payment System or manually send it a check with a voucher. It’s very easy to set up but does take a week or so to complete your registration. Make your payment from your bank account. (You can even set up withdrawals up to 120 days in advance, if you’re the planning type.) If you’re a paper-and-pen sort of person, you can also send them a check, along with a voucher (which I do) on page 9 of the former link for the first quarter or page 11 for quarters 2, 3, and 4.
  • 4. Keep a record of the tax payments you make during the year. The last estimated tax payment of the year is due January 15th of the next year. When you file your taxes, you’ll apply all those payments against your tax owed, and you should be pretty close!

Avoiding the underpayment penalty

The main reason to send in estimated tax payments is to avoid the underpayment penalty, which the IRS assesses when you haven’t kept current in paying taxes. While most of us think of April 15th as the day to write the big check, you’re actually required to send in taxes on the money you earn as you earn it, which most people with wages or salaries will have done for them by having money withheld from their paycheck. The IRS won’t be amused if you send them a lump sum of your taxes owed for the entire year on April 15th, and as with many other situations, they’ll express their displeasure with whopping fines. There’s no need to panic, however, because you’ll only get hit with this penalty if you’ve seriously underpaid. The IRS is mainly interested in getting its money, and as long as your estimates were done in good faith, you’ll be fine. You can do a more thorough job at the end of the year and make up any shortfall with the last payment on January 15th.

Payment Dates

Each quarterly estimated tax payments is intended to cover the taxes on profit from that quarter. Here are the payment dates for your estimated tax payments for 2012:

  • 1st Quarter (January 1st-March 31st): Estimated taxes due April 17th 2012
  • 2nd Quarter (April 1st-May 31st): Estimated taxes due June 15th 2012
  • 3rd Quarter (June 1st-August 31st): Estimated taxes due September 15th 2013
  • 4th Quarter (September 1st-December 31st): Estimated taxes due January 15th for 2012

For 2013 the dates are as follows:

  • 1st Quarter (January 1st-March 31st): Estimated taxes due April 15th 2013
  • 2nd Quarter (April 1st-May 31st): Estimated taxes due June 17th 2013
  • 3rd Quarter (June 1st-August 31st): Estimated taxes due September 16th 2013
  • 4th Quarter (September 1st-December 31st): Estimated taxes due January 15th for 2014

For information on self-employed IRS tax tips visit TaxDebtHelp.com’s Blog by clicking here.

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Keeping Track of Papers for Tax Time

Come tax time, if you cannot find the paperwork, then it is hard to claim it.  You can, but if you get audited, they are going to want to see the paper to back up your claim.  For this reason, it is a good idea to keep organized through the year so when the tax season sneaks up, you are ready for it.

Image by Getty Images via @daylife

Envelopes/Folders – You can organize your direct sales paperwork in a variety of ways. For me, I have found that having a large brown envelope is a great way to do it.  I have one envelope per month for sales and have it organized as such – party summary (from my company’s backoffice) and receipts relating to the party attached.  I also write the order number on the receipt just in case they get disconnected.  As I do not have a lot of expenses beyond what I purchase from my direct sales company, I have just one envelope for expenses.  I could easily itemize these out by month or by type.

Electronic Files – Just like my paper files, I have a folder on my computer for all my electronic invoices.  I have them sorted out by type of invoice (party, supplies, long distance, credit card) and sort them into those folders and make sure each file is labeled by date.  A few clicks and I am able to find anything that I need.

Excel Spreadsheet – I do all my accounting via Excel spreadsheet as I find it easier than using software.  But, software definitely has its advantages such as being able to prepare a report for you at yearend to use for your taxes.  That said, if you are not comfortable with either option, a spreadsheet with a list of various expenses is a good idea to prepare for your tax accountant.  I recommend a few columns though:  Item, Purpose, Date, Amount less tax, Tax.  This will help your accountant classify the expenses and record them in the correct spot.

One of the best things you can do for yourself is keep on top of your paperwork and have it sorted out.  This creates less stress later on and you will likely find it helpful throughout the year.

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A Quick Tax Overview – Direct Sales

Recently someone on my company’s Facebook group asked if she had to claim her direct sales business even if she did not make over $600 and as a result, did not get a tax form.  There was some thought that if you made less than that the government considers your business a hobby and then you do not need to claim it.

But… in reality, there are many reasons why you may not have received over $600 in overrides in your direct sales business.

  • Joined later in the year
  • Didn’t have a direct sales team

    taxes

    taxes (Photo credit: 401K)

  • Had to take time off due to illness

That said, you still need to claim this income on your taxes and the main reason is that you will also get tax deductions.  You can claim things such as a portion of your utility bills, car maintenance and gas as well as expenses around you home.  You need to be careful though that you are only claiming those which are legitimate.  If you are not sure, you can check out the website of your tax agency or give them a call.

IRS – Small Business

Revenue Canada – Business

If you have kept track of all your revenue and expenses throughout the year, the tax process should be relatively easy and painless.  If you have not, you will need to sit down a few evenings and get it sorted out. You can pay your tax accountant to do this for you but it will only help to increase your bill.

Sort the papers into those which brought in money and those which you had to pay out money.

Find the utility statements and organize them in some method that makes sense.

Know when you started your business if you only started it in the current tax year that you are working on.

Disclaimer:  I am not a tax accountant.  Please consultant with your tax accountant for the advice that is relevant to where you live and your situation.

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Tax Season in Direct Sales – Everyone’s Favourite!

Did you sense the sarcasm in that title?  Personally, I do not mind doing taxes, but I have done my own ever since I started working and I also work in accounting so they are not the scariest thing to me.  But for many people, they are not comfortable with doing accounting or taxes for their direct sales business.  Hopefully this guide will give you some ideas to take the scare factor away.

Tax

Tax (Photo credit: 401K)

Revenues – You need to claim the funds that you made from your business.  This is the proceeds that you made on your sales.  For instance, if you made $100 on a sale but your cost was $75, then you need to claim that $25.  If you had a team, then you may have made commissions on them which will also need to be claimed.  Your company will issue you a tax receipt when the money they have paid to you is over $600, regardless of the mix between revenue from parties or team commissions.

Deductions – There are lots of deductions that you can take with a home based business.  Various expenses to keep your house running, costs associated with your mortgage, expenses associated with your vehicle and of course, those that are encountered in the course of your business. For many people, these deductions make the difference between owing money and paying in.  It is always best to consult your tax agency or tax accountant to find out what is and is not deductible and what you qualify for.  The deductions that I get may not be the same as the people on my direct sales team.

Expenses – Not only do you get deductions from your home and your car, you have legitimate business expenses.  Did you purchase postage to mail out catalogues?  How about paid for advertising in the form of business cards or a car decal?  Did you give away any product for raffles, hostess gifts or just to allow people to try the product?  All of these are valid expenses and ones that you need to keep track of for tax time.

 

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Placing an Order for a Customer – Accounting Ramifications

This question came to me from a reader.  I did answer her privately but I thought I would share with my readers as well. (This version of the question is not an exact replica; it is my version)

When you place a transaction for a customer – the order is just theirs and you use their credit card, how do you account for it?

Credit Card

There is a simple answer for this.  The only accounting you need to do is for the commission that you receive on the order.

It is not going on your credit card so you do not need to account for it there and it was not part of a direct sales party so you do not need to add it into sales anywhere.  The only thing you are going to know about is how much you received at the end of the day.  If you have a website, treat it the same way you treat any orders you get from there – you only record the commission.

Now, if you were using the customer’s credit card as part of a party order, then it is a different issue and the answer depends on how your direct sales company handles credit cards.  If your company accepts cards on your behalf you are going to treat it differently than if you have to process the card with a third party processor.

Regardless, points to you for being on top of things and getting your bookwork done.  Many people just ignore these types of things or will just fudge them in to make the books work whether they are done correctly or not.

Do you have other questions about how to account for something in your direct sales business or about any other aspect of your business?  Please use the contact button and let me know so that I can help you and share with my readers!

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This post sponsored by:  Amazon Promotional Code

 

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I’m in Receipt Hell! What do I do?

Image by Getty Images via @daylife

A lot of receipts and you don’t know what to do with them?  Find a few envelopes and we will get you square in no time!

You need to sort your receipts into different piles so you know what is what.  Here are a few suggestions – you may find you need different categories.

  • Supplies
  • Giveaways
  • Training
  • Meetings – Team members, Potential team members, customers, fundraisers
  • Utilities
  • Car Expenses

If you have a lot of receipts in a pile, then you likely want to create it an envelope for itself.  If you only have a few, then you can combine it.  You could also smaller envelopes for each category and then put them all into a larger envelope.

Label each envelope with whatever is inside it as well as the time frame.  If your receipts are all for one year, you can label it “Car Expenses – 2011” or “Giveaways/Training/Meetings – November 2011”, whatever method works for you.

Once everything is sorted and in its envelope, you need to put it somewhere so that you can input it into your accounting system.  If you do not input anything, but give it all to your accountant, then they may advise you how they would like the receipts sorted.

 

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Keeping up on your Direct Sales Accounting

While accounting is not high on most people’s lists of things to do for their direct sales business, it is still something that is important to do.  And if you do it on a regular basis, it is that much less painful at the end of the year when it has to be done.

Do What You Can – Depending on your company and your business, you may have a hard time keeping your books done up 100%.  But chances are there are things that you can keep up to date.  For instance, I update my credit card and banking records every month once my statements are generated.  This task only takes me about twenty minutes a month so they are easy to do.

Collect Data – Even if you cannot input anything for whatever reason, you can make sure that you have all the information you need.  If you tend to have receipts floating all over your house, gather them up and put them all in one spot.  Find an envelope and label it “Receipts to Input” and then leave it somewhere for you to enter when you have the time.

File – Filing seems to be one of the worst jobs when it comes to running your business, but it is important to do.  The more you pay attention to it, the less you have to do later and the less painful it is.  This is a great task to do when you are on hold somewhere or you are waiting for something and you do not have time to get into something which requires a lot of attention.

Remembering – Need another reason to do your accounting on a regular basis?  Have you ever sat down to work on the books and you look at a receipt and cannot remember what it was for?  And it was six months ago?  Chances are, you are going to give up on it and move on, and hope for a sudden brain flash later.  At least make notes when you encounter the item and input it later.

Regardless, if you only have a few minutes, you can get some basic accounting tasks done.  If you have more time, then you can get more done.  Try to schedule a few hours each month for your accounting and see how much better it goes.

PS – This is my first year doing this, in oohh.. 4 years of direct sales.  It is so much better!

 

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Tax Tips for Your Business Today

I've started so I'll finish

Image by get down via Flickr

Are you one of those who wait until March to gather all of your bank statement, credit card statements, receipts, invoices, and bill statements? Do you wait until your accountant has called you repeatedly asking if you are going to make your appointment this year? Well stop. Chances are you might be missing something very important by waiting until the last minute. Being rushed puts stress on the body. Stress puts the brain into high access mode and you are not thinking clearly. No one wants to forget an expense or other important piece of tax information. Here are some simple tips for your business that you can get started on today to save you the stress headache during the next tax season.

Set up a file system

Most people don’t like to keep a paper trail. I can certainly understand why. It takes time to set up a file system and it takes up space to keep papers. In the world of taxes, it is always better to be safe than sorry. If an audit should ever arise you will want to be armed with your papers as proof of your deductions.

To quickly get set up you will need a file box or a filing cabinet for larger businesses. The first section should be invoices. It is up to you whether you want to write PAID and the date on them. It is also up to you to decide whether you want a separate folder for each client. The second section should be bills/expenses. It is here you want to keep the internet or cell phone bill as well as credit card statements (with the expense highlighted). Again it is your choice if you want to put these all in one folder or separate them by company. The final section should be for your bank statements.  When a new one comes in you should highlight work income as deposits and business related deductions as expenses.

What about receipts?

Receipts can be a pain to keep track of but you need them as proof of payment. I carry an envelope in my purse and place my receipts in there. Every few weeks I empty the envelope.  Receipts generally get stapled to the appropriate bill when using a credit card, or filed with the appropriate bank statement.

These are the things you need to pack up and take to your accountant at tax time. The better organized you are, the easier it is for everyone.

At the end of the year you can shred what you don’t need and the rest gets filed with your copy of the tax return.

Set up a form of recordkeeping immediately.

Do not wait until we are half way through the year to pick up a copy of Quickbooks , Quicken Home & Business, or any other accounting software you decide to use.  Unless of course your business is new. In that case, start right away. Having a accounting program at your fingertips will serve as a backup copy to your paper trail and do all of your calculations for you. With accounting programs you can bill clients by sending them invoices, reconcile your bank and credit card statements, place expenses in the appropriate categories and prepare financial statements. With a software program all of your needed numbers are available with the click of a mouse.

Starting these few simple tasks today can put your business on the right track to avoiding any disaster that could occur later. Start with 10 minutes a day preparing your files, and then moving on to sorting the papers. Once those tasks are set up you only need to spend minutes a day entering the bills, invoices, checks, deposits, etc. as they cross your desk.

Chrystal Mahan resides in Michigan. Mahan is a current college student working on a (double major) Bachelors in Accounting and Business, with plans to continue forward with a Masters.

She has 20 years of experience in the Accounting industry and over 10 in the field of Tax.

Mahan has been writing short stories since the age of nine and professionally since 2005. Mahan owns her own freelance business and writing appears on various blogs and websites.

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Keeping Track of your Accounting Paperwork

Replacement filing cabinet

Image via Wikipedia

Unfortunately, any type of business generates paper and you have to organize it in some way that you can find it again if needed.  You may need to find it due to warranty issues, to see what a customer ordered last, or heaven forbid, you get audited and you have to show the paperwork to the auditors.   Here are some suggestions on how to organize it all.  If this doesn’t sound like a good system to you, use it to figure out your own method – we don’t all work the same!

For me, as I do not put through a lot of parties and orders each month, I find an envelope system works well.  I picked up a box of about 200 9 ½ by 12 envelopes at Costco for about 10 bucks and I have barely used any.

Sales:

I take all the sales slips from each party and staple them together.  I mark the top one with the order number and the date I submitted the order to my company and put them in a folder labeled for the appropriate month.  In an effort to save paper, I save the order from my company in a PDF format to my computer with the order number.  You could easily print the page down and staple it to the front.

Expenses:

I have another folder for expenses throughout the year.  Again, I keep PDF copies on the computer for as many items as I can (for instance, utility bills as I get them all electronically).  For receipts for other things, such as trade shows or supplies bought at the store, I keep them in an envelope labeled “Expenses”.  I make sure to photocopy all the ones that are on thermal paper as they tend to fade which will not help you in the future.

If the expense envelope gets too full, or if you have a lot of expenses through the year, you could easily sub-divide it.  Select the divisions that make the most sense to you.

Banking:

Another folder you should create is for banking.  I would recommend taking your bank statement and attaching any receipts behind it that are not already accounted for in your sales or expense folders.   You may not have anything left but bank charges and interest.  Make sure to account for those in your bookkeeping and put these in their own envelope.  If you use a credit card, it should be in an envelope separate from your bank account simply due to the amount of paper generated.

Whichever folders or envelopes you create, start new ones on January 1.

 

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Paid Accounting Software

Screen shot of homebank

Image via Wikipedia

There are many options when it comes to paid accounting software that you can use with your direct sales business.  If you are looking and do not know where to turn, ask other consultants what they use.  There is some software targeted to direct sellers but that does not mean it is going to be the best option for you.

An advantage to a paid program is that it tends to have more features as well as better support. While the help line is not there to help you figure out how to record a purchase, they can assist you if your software is acting up or not doing what you want.

One of the biggest issues with paid software is that if you do not like the program you are stuck using it or else you are out the money you spent.  A program that has a free trial before you have to pay for it is a great way to try a program without committing to it.

Chances are you will not need a program with lots of bells and whistles depending on what you are doing with your direct sales business.  One of the biggest things to consider when you are shopping for your accounting software is what you will need it for.  If you are not sure, peruse this list and see what you need.

Business Size – How much business are you doing?  Several thousand a year?  Are you up into the 6 or 7 digits, before decimals?

Payroll – Do you have people working for you that get an hourly wage or per project?   This does not include people on your downline who you make commission off of.  This would not include any contractors you may hire that get a flat fee such as website designers.  These are people that you pay a wage to and where you would need to deduct things such as income tax and other required deductions.

Compatibility – Do you need your accounting software to be able to connect to things such as your email program or a scheduling program?   This may not be needed for a business such as direct sales, but it can be nice to have them connect so you can easily pull up stats about Suzy’s last party from your accounting software and import it into your organization program.  One such program is Sage ACT! which can be connected to your email program and with some of the different accounting programs.

For a more in depth explanation, please see my article on “How to Choose Accounting Software

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