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 expenses that there may be for your business and how to figure out which ones to use.
Equity
Equity can be any money you are putting into the business like an investment but it can also be money you are receiving from the business such as a payout.
Income
All sales are considered income. Any revenue that you get from sales whether it’s at a pop-up or a festival or you’re just selling from your home is all income.
Expenses
Anything that you use business money to buy is considered an expense. This all seems pretty straightforward however there are several types of expenses and you will need to categorize all of your expenses so on your taxes you can see which expenses were set aside for certain things. This is the accounting portion of taxes because really, once you have this all accounted for, you just plug it into turbo tax and essentially just press go.
Lucky for us, Quickbooks has these little ? marks next to most text that describes what different things mean but still, lets go over the common, out of the box expense categories and we'll use an old profit and loss statement to help understand what we're looking at.
Cost of Goods Sold
To start at the top we have the Cost of Goods Sold. This is the actual money I spent to make my product so it could be baking supplies such as flour, sugar, meringue powder and so on. I also lumped in here all the food coloring of the cookie cutters all the little tools that I used because I needed all of those things to make cookies.
Shipping
This is all the costs that went towards shipping and it covers the cost of the materials for shipping as well as the actual shipping fees.
You then see Gross Profit, this is just a section of a Profit and Loss Statement so there is another section for income that goes above it and that's where the $10,000 is coming from.
Other Expenses
Advertising and Marketing
This includes my website, ads from places like Facebook, Google, Yelp, Eventbrite
For me, it also includes business cards and the cards that I insert into all of my orders for my customers. The reason I consider them advertising and Marketing instead of office supplies is because that's the purpose I use them for.
Bank Charges and Fees
You can see is quite high because of reasons that I will not go into but it puts in perspective all the bad accounting choices you made for that year or quarter.
Charitable Contributions
You may laugh at this dollar amount but I ended up making a shoebox full of toys for a kid and I accidentally used my business card to pay the shipping fee so even though I paid for the toys themselves for my personal account. But normally I do about $500 of charitable contributions whether that’s a donation of a gift basket or some vouchers for a cookie decorating class and that’s the limit that I set for myself for the year. This helps me not only set a budget for donations, but it helps me learn to say NO when people ask for them. (BTW! stay tuned for the "Saying No" post that comes out next week.)
Insurance
Now I can go on about insurance in a completely different blog post but it is important to have business insurance for many reasons and that is an average cost of business insurance for me.
Meals and entertainment
This is very low for this particular year just because I did not have a lot of in-person meetings and I didn’t go to CookieCon. However understand that if you go have a client meeting or if you go to a business and have a business meeting and you end up ordering food or drinks for that meeting then that you can all write off as a meal and entertainment.
If you were to travel and go to something like Cookiecon you can expense that as travel and you would have a section here that would include your flight your hotel any other expenses you incurred on your trip.
While we're on the subject of traveling, for this particular year I forgot to track my mileage so that was on me but you can expense your mileage for deliveries or store trips. All QuickBooks apps have a mileage tracker that kind of works like tinder to help you categorize your miles. I recommend using it every time you make a delivery. You can also write off any oil changes or tire rotations that that you use for these deliveries because that is an expense that can be attributed to the business.
Office Supplies and Software
This is any type of notebooks, planner, paper materials that I might need a well as my QuickBooks subscription, my Canva Subscription and other physical and software items that I use for my home office.
Other Business Expenses
I can’t think of any off the top my head right now but if you have things that don’t fit in any of those categories you can usually use that category just make sure that when you’re reconciling your expenses that you put a memo as to what that was for and have the receipt for it.
Rent and Lease
You may not have this section but I have a storage unit that I pay for specifically for the business which is what this is for.
Taxes and Licenses
This covers any type of sales taxes or food safety licenses or certifications that I have to pay for and then I have some other miscellaneous expenses which are very low.
Receipt Tracking
So with all of these expenses comes receipt tracking. You should be keeping all of your receipts. For me personally, every time I’m out making a purchase someplace I take a picture of my receipt and I can add it to QuickBooks using the app. If it’s an online order, I typically make purchases from Amazon or using PayPal for all of my transactions when possible. I highly recommend doing this because then at the end of the year or at the end of the quarter (whenever you reconcile your receipts) it’s really easy to go into those applications and pull all the receipts and you can save them to keep your computer as I have them listed here that way you can easily upload them to QuickBooks if you don’t do it every time you make a purchase.
Is it the end of the world if you don’t have all of your receipts? I asked my sister who is an accountant this question the other day and she said no not really as long as it’s a common store that you would buy some thing from. But if it’s some thing that you’re receiving a reimbursement for or something that’s out of the ordinary then it’s good to have the receipts for that or a big transaction otherwise just keep track of them as best you can.
Even if you don't use QuickBooks, I highly recommend just taking a photo of the receipt because you can actually search for "receipt" in the photos on your phone.
Tagging
Lastly, QuickBooks has this wonderful feature called tagging. It works just like normal tags but I can tag purchases for certain things such as cookie cutters to see which purchases are just for those. So I do recommend tagging your expenses as you reconcile them.
In the end, taxes are just confusing and a pain but I do recommend taking a day at the end of each quarter and catching yourself up. This will save you a lot of time and hassle at the end of the year and you won't find yourself freaking out about a deadline you're not ready for.
As always I am available if you have any questions or comments and I hope this helps!
Happy 2021!
-A.