Happy 2021 Cookie Lovers!
Hopefully things did not fare too badly for you in 2020. I am very lucky to say that the majority of the year has been positive both on the work side, the business side and the personal side. But as today is the start of the new year, one of the major things that impact several people especially those that run their own personal businesses, is TAXES.
So let’s talk about them. If you’re a relatively new business you might have never done taxes for a business before, or if you did them last year you might’ve stumbled through them hoping that you did them correctly. (At least that’s what I did my first year). But after three years of running my business, I think I have it mostly down so I wanted to share some of my wisdom on business entities, Sales Tax, Accounting Apps, and how to use them, so you can easily file your taxes. I've put quick links above if you only want to read a particular section.
Now please understand, this is not the way everybody does their taxes and I am not a tax professional. This is just the way that I have understood things to be able to do my taxes adequately for my business.
Types of Businesses
To begin, it's important to understand the type of business you want to be. It will set how you need to prepare your taxes and how the government will classify you. There are several types of business entities including, Sole Proprietorship (Sole Prop), Limited Liability Corporation (LLC), S- Corp, and C-Corp. It's very rare to have a small business be an S or C-corp so we won't focus on those. Instead lets look at Sole Props and LLCs.
Sole Proprietorship
Many small businesses start out as Sole Props including my own. In this case, you would file your business taxes with your personal taxes. Your business taxes would also most likely be under your social security number instead of an EIN or business tax ID number.
Limited Liability Corporation
A LLC has 3 smaller classifications: Single Member, Partnership and Corporation. They are the easiest to operate as you get to choose how you want to file your taxes, personally or as a corporation. As I don't own or use a partnership LLC I won't go in detail on that one.
Single Member LLC
Single Member LLCs work similarly to Sole Props however with an LLC I recommend applying for an EIN Number which is like a social security number for your business.
While it's not mandatory to have an EIN number for a Single Member LLC, it makes a difference when it comes to financial liability. For example, if you use your social security number to file your business taxes and your business goes bankrupt, you AND your business will go bankrupt. However, if you had an EIN number and your business went bankrupt, it would NOT affect you from a tax perspective.
Also! EIN numbers are free on the irs.gov website.
LLC Filing as a Corporation
An LLC can also be considered a corporation instead of like a sole prop. What's important about this is you will NOT file it on your personal taxes. You instead will have to file separate business taxes.
This is what I do, and this is why: Say you start a business when you're single and you get married. Maybe it doesn't work out. If your business is a part of your personal social and taxes, your spouse has the right to consider that joint income and could potentially keep half or all the business. I got married in 2019 and my husband and I now file our personal taxes jointly. Because my mom watches so many dateline and forensic files stories, she put in my head that if my husband (whom I love) divorced me, I didn't want him to take my business. (Again, I don't think he'd EVER do that but ya never know lol)
Just know that you are taxed at a different tax rate than your personal taxes.
Sales Tax
Now that we understand business entities, lets briefly talk about sales tax. Depending on where you are operating your business, you may or may not need to charge sales tax. You may also need a license to charge sales tax. In Denver county, in the state of Colorado, I do have a sales tax license and it’s important to understand that if you make below $15 a year in sales tax then you only need to pay your sales tax one time a year. If you make more than that, you have to pay it quarterly even if you did not do any business that month and that’s very important.
If you do not file your sales tax properly, The government will just assign some random number that they think that you did sales for and you will owe that much until you fix your sales tax form. What I mean by that is you may have done $1000 in sales for the quarter, but if you fail to submit your actual sales tax statement, they may charge you for $20,000 worth of sales which would be a ridiculous amount.
Also, with a sales tax license, you do not need to pay sales tax on the materials used to bake your product. So for example, at Sam's and Costco, I am sales tax exempt because I charge customers sales tax.
Accounting Apps
QuickBooks is probably the best accounting software that there is at the moment. But if you’re going to use it, there’s a couple things that you should be aware of. If you are a single member LLC or a sole proprietor ship, there is a QuickBooks self-employed application that you can use for your accounting. This is SEPARATE from QuickBooks online or QuickBooks Desktop. For some reason the company that made them decided to keep them all separate and I have no reason why. It’s kind of a pain in the butt. I have not used the desktop version but I have use the self-employed and currently use the QuickBooks online. Just to make sure I'm clear, they are separate apps that require separate logins so just keep that in mind and I believe that the base version of both of them cost the same amount.
Pros and Cons
They both help you with your taxes and because they’re both intuit Applications, they work great with TurboTax which makes your taxes actually very very simple.
You can link your bank accounts to QuickBooks and it’ll pull up all of your transactions which makes attaching receipts and categorizing all of your transactions pretty easy
I really don’t like QuickBooks sales portion of the application. Instead I prefer to use Square and honestly you don’t necessarily need to hook up square to QuickBooks. You can but there’s really no point. If all of your money that you get from Square goes into your checking account then when you link your bank accounts to QuickBooks it’ll automatically think that. What square is good for is looking at all of the individual transactions that you’ve done to help you calculate your sales tax
Using Quickbooks
So then how do I categorize things in QuickBooks? It's actually fairly easy. You can either link your bank information and it will import all your transactions for you and you just categorize them. Or you can do it manually but it may be a lot of work. I’m not going to go step-by-step in terms of how to click on things because there’s tutorials out there for that. But what I am going to talk about is the difference between the different categories of income and e