When you start your own business, there’s a long checklist of things you have to do in the beginning stages. Business plan written? Check. Advertising to customers? Check. Inventory in stock? Check. Accounting method selected? Wait, stop right there.
Accounting is one of the most important aspects of your business. With good accounting, you’ll be able to track the revenue and expenses of your business. Accounting helps you assess how your business is doing, and it simplifies filing your income taxes each year. In other words, accounting for your business isn’t just an option — it’s a necessity.
But what if you don’t know the first thing about accounting? Luckily, you don’t have to have a degree in accounting hanging on your office wall to get the basics. Even new business owners that don’t have the money to hire a dedicated accountant or bookkeeper can keep up with the books using the latest accounting software.
But before you start shopping for software options, there’s one critical decision you need to make for your business: will you use cash-basis or accrual accounting?
Unsure of what these terms mean? Then you’re in the right place. In this article, we’re going to look at the two major methods of accounting. We’ll dive into the benefits and drawbacks of each, the factors to consider before making your selection, and even a few software recommendations based on the method that you’ve chosen. Read on to find out more about these two methods and which is the right choice for your business.
What Is Cash-Basis Accounting?
The first accounting method we’re going to discuss is cash-basis accounting, also known simply as cash accounting. With cash-basis accounting, transactions are recorded when revenue has been received and expenses have been paid. Cash-basis accounting does not use accounts payable or accounts receivable. Instead, these transactions are only recorded when the cash changes hands.
Let’s simplify this concept with an example. Suppose your business has received $5,000 in payments from customers, and you have $2,000 in unpaid invoices. You have already paid $1,000 in expenses for this month. However, you have a bill from your supplier that is $500 that you haven’t yet paid.
Using cash-basis accounting, you would record the transactions for all payments you’ve received ($5,000). You would also record all expenses that have already been paid ($1,000). The unpaid invoices ($2,000) and unpaid expenses ($500) would not be recorded until they were paid. This would show that we had a total profit of $4,000.
A little later in this article, we’ll use this same example to see how the numbers change when using the accrual method.
The Advantages Of Cash-Basis Accounting
When deciding which accounting method to use in your business, you’ll want to fully evaluate the advantages and disadvantages of each. There are several benefits to using cash-basis accounting, including:
Tax Advantages:Â One of the major benefits of using the cash-basis method is that you won’t have to pay taxes on revenue that hasn’t been received by the end of the year. Instead, you would pay taxes on the income the following year after payments have been received.
Simplicity:Â This method of accounting is fairly uncomplicated, which could benefit a small business owner with a lack of accounting experience.
Current Cash Flow: Cash-basis accounting gives you a more accurate picture of your current cash flow. This method allows you to see exactly how much cash you have on-hand at this point in time.
The Disadvantages Of Cash-Basis Accounting
Of course, we can’t talk about the benefits without looking at the drawbacks of cash-basis accounting. The disadvantages of using this accounting method in your business include:
Tracking Accounts Payable/Accounts Receivable:Â The cash-basis method doesn’t track accounts payable and accounts receiveable. While this does save time in recording transactions, it can also be easy to lose track of who you owe money to … and who owes money to you. If you use this accounting method, you have to have some type of system in place to ensure that you’re collecting the money that’s owed to you and paying what you owe in a timely manner.
Higher Risk Of Errors:Â While cash-basis accounting may be easier, there is a higher chance that errors will be made. The double-entry system used with accrual accounting makes it easier to catch and correct errors. Learn more about double-entry accounting and its benefits.
No Long-Term View: Cash-basis accounting gives you an accurate picture of your company’s finances in the here and now, but it doesn’t provide an accurate view of your financial health over the long term. Let’s say you have a lot of cash on hand now. While this looks good for your business, further analysis could show that all of your customers have paid, you have many unpaid expenses, and business has been slow. In other words, things look good now, but they may not stay that way.
IRS Restrictions:Â Not all businesses can use this method of accounting. According to the Internal Revenue Service, businesses with over $25 million in revenue over the last three years must use the accrual method of accounting.
What Is Accrual Accounting?
The other method to consider for your business is accrual accounting, which is the more commonly used accounting method among business owners and is generally more recommended by accountants. When your business uses the accrual method, transactions are recorded when they occur. When a job is completed for a customer, for example, the transaction is recorded whether or not the customer has paid. If your business receives a bill from a vendor, this expense is recorded even if you aren’t paying it immediately.
These transactions are posted as accounts payable and accounts receivable.
Accounts Payable: Accounts payable are expenses that your business owes but hasn’t yet paid.
Accounts Payable: Accounts receivable is revenue that you’ve earned but haven’t yet been paid.
Now, let’s go back to the example we used for cash-basis account to show how accrual accounting works. Your business has received $5,000 from customers this month. You have an additional $2,000 in unpaid customer invoices. Your paid expenses for the month are $1,000. You have unpaid expenses totaling $500.
Unlike cash-basis accounting, if you were using the accrual system, all of these transactions would be recorded right away. If you wanted to calculate your profit or loss for this time period, you would first add all of your earned revenue — whether you’ve received payment or not. Adding the $5,000 you’ve received with the $2,000 in accounts receivable would give you a total of $7,000.
From this number, you would subtract your expenses, whether or not they have been paid. You would subtract $1,000 in paid expenses and $500 in unpaid expenses from your total revenue of $7,000. This would reflect a profit of $5,500 — quite different from the $4,000 profit we calculated using the cash-basis method.
The Advantages Of Accrual Accounting
Why would you choose accrual as the accounting method for your business? There are a number of advantages:
Fewer Errors: The accrual method uses double-entry accounting. This means that every transaction is posted to at least two accounts, keeping your books balanced. While double-entry accounting is more time-consuming, it does make it easier to spot and correct accounting errors.
Long-Term Cash Flow: While cash accounting might be better for gauging your current cash, accrual accounting gives you a clearer picture of the long-term cash flow of your business. This is a tremendous asset for budgeting, planning, and decision-making.
Obtaining & Tracking Funding: Whether you’re seeking investors or a loan from a bank, the accrual method of accounting allows you to run statements that give a better picture of your company’s future, which could improve your chances of getting a loan. For investors and lenders, this shows if your company is a risk and could be a factor in determining if you’re getting funded. After you receive a loan, credit account, or other form of financing, using the accrual method will also make it easier to track these accounts.
The Disadvantages Of Accrual Accounting
Accrual accounting has several big advantages for your businesses, but there are also a few drawbacks to keep in mind:
More Complicated: Accrual accounting uses double-entry accounting, which we’ve already established has its benefits. However, this does make it more complicated and time-consuming than cash-basis accounting. Fortunately, though, there are plenty of good accounting software options available that eliminate the need for manual calculations, in most cases.
Tax Implications: When you use the accrual method, all earned income is recorded. Some of this income may not have been received yet, but it will still be reported on your tax return. For example, if you have $5,000 in unpaid invoices at the end of 2019, these earnings are recorded in your accounting software and reported on your taxes for 2019, even if you don’t actually receive the money until 2020.
Current Cash Flow: Accrual accounting gives you a great overview of your business finances over the long term. However, it doesn’t give you a good picture of your cash flow at this moment. For instance, your books may show that you have quite a bit of money, but some of this could be money that has been earned but not yet received. When using the accrual method, you must keep track of cash to know how much money you have on-hand in the present.
Which Accounting Method Is Right For My Business?
By this point, you should have an understanding of the two accounting methods. Even though we’ve gone over the pros and cons of each, you may still be on the fence when it comes to choosing the right method for your business. If you’re still feeling unsure, consider these factors and situations to help you make the best decision for your business.
Factors To Consider
When determining which method is right for your business, keep the following factors in mind:
If one of the goals of your business this year is to seek funding, investors and lenders generally want to see numbers that reflect the long-term financial health of your business. This is more accurately reflected when the accrual method is used. Furthermore, using the accrual method makes it easier to track what you owe to creditors and lenders.
If you extend credit to many customers and/or send invoices to customers, the accrual method will help you accurately track what you are owed as accounts receivables.
Filing Tax Returns
Choosing the cash-basis accounting method does have some tax advantages. For example, if you’re a small business with many unpaid invoices at the end of the year and you use the accrual method, having to pay taxes on this income that hasn’t been received could negatively affect your cash flow.
Size Of Your Business
If you own a small and simple business without too many customers, the cash-basis method could work for you. However, if you have a very large business with many customers and complex transactions, the accrual method is typically a better fit for your business.
Monitoring Cash Flow
If one of your most important goals is to monitor how much cash you have on-hand in the present, stick with cash-basis accounting. If you would rather have a long-term overview of the cash flow of your business, choose the accrual method.
When To Use Cash-Basis Accounting
Cash-basis accounting is best for small businesses, sole proprietors, and freelancers that want a simple way to track income and expenses. This type of accounting is best for cash-based businesses, businesses that do not keep inventory, and smaller service companies.
If cash-basis accounting is what you choose for your business, there are plenty of great software options available. One important thing to note, however, is that some software programs may say they offer cash-basis accounting, but in reality, they just offer the ability to run reports as cash-basis. If you want a cloud-based option that allows you to track your finances using the cash-basis system, QuickBooks Online is one of the most popular choices among business owners and entrepreneurs. Want to take your accounting offline? QuickBooks Desktop is another solid option to consider.
Read our Review
When To Use Accrual Accounting
Most small businesses opt to use accrual accounting — and most accountants recommend accrual over cash accounting. Although it is more time-consuming and complex than cash-basis accounting, the good news is that there are plenty of software options that simplify the process. While you do have to learn and understand the program you choose and manually enter some data, today’s accounting software offers a variety of features, such as automatic bank reconciliation, receipt scanning, recurring invoices, and payment reminders.
As previously mentioned, there are some businesses that don’t need to use accrual accounting. Small service-based businesses, businesses that primarily operate on a cash-basis, businesses that don’t have inventory or extend credit to customers, freelancers, and independent contractors may find that cash-basis accounting best suits their needs.
Even if this sounds like you, as your business grows, you’ll want to consider the benefits of accrual accounting. Or maybe you’re already there. If so, your next step is to find the right software for your business. Some of the most popular options include Wave, Xero, Zoho Books, and QuickBooks Online.
The Bottom Line
When you’re an entrepreneur or business owner, one thing that should never be overlooked is accounting. Whether you plan to hire a bookkeeper or you’re simply going to take this task on yourself, it’s extremely important to choose the method that will work best for your business. If you’re still unsure of which is the right choice, you can always talk to an accountant to learn more about the pros and cons of each method. If you have made a decision, you can get started by checking out our software recommendations above or comparing some of the best software options on the market.
The post Cash VS Accrual Accounting: Which Is Better For Your Business? appeared first on Merchant Maverick.
Payroll is a daunting component of any business, and many small business owners admit frustration with managing their payroll documents. But payroll is necessary. Not only is it important that you pay your employees correctly, but making a mistake on payroll is messy, complicated, and could impact taxes. If you’re looking for a quick and easily digestible introduction to payroll, you’ve come to the right place. Let’s delve on in.
What Is Payroll?
If you have employees, you pay them a wage for their work; that’s just a basic fact of life. Payroll is defined as the regular payment of wages to employees, and it includes withholding the correct amount for taxes, insurance premiums, or retirement plan contributions. Payroll can be complicated and unwieldy with technical minutia, but managing payroll is a legal requirement, so don’t try to skimp on understanding the basics.
In essence, with all payrolls there are dual systems at work — there is the money allotted to employees as wages and there is money that is withheld for payroll taxes. As a small business owner, you are responsible for managing those withholdings. So, when payday rolls around, you give your employees a check that has the appropriate amount withheld for taxes, and when tax time arrives, you provide employees with statements of income (more on this below) and pay the government their share of the booty. That’s payroll, in a nutshell.
The Components Of Payroll
Payroll is broken down into several steps. As the small business owner, you are responsible for providing your employee the correct wages and for withholding state and federal taxes. Your records for payroll need to be clear and accurate, and whether you do these calculations by hand or use payroll software to run the numbers for you, it’s important to understand how payroll works. Anything dealing with money and taxes is fundamentally crucial to your business, and it’s important to your employees, too. A functional payroll sends a message of respect and stability to the people you employ.
Before you set up a payroll system, here are the payroll terms and the concepts you should be familiar with.
What does it mean when someone runs payroll? It can mean running the monthly wage reports for employees, including their withholdings. And it can mean organizing the financial documents related to wage and withholdings for the entire fiscal year, as well. Payroll can also simply mean the amount you pay to employees and the government every year.
Your employees work for you for a certain amount of money, and processing the money you owe them is payroll. In order to set up a payroll system for your business, you will need to acquire some information from your employees. Here’s everything you must have to set up your payroll system:
Your company’s legal name or DBA (Doing Business As)
Your Federal employer identification number (EIN)
State tax withholding ID number
State unemployment tax ID number (SUI)
Local tax ID numbers
Your state unemployment tax rate information
Details on the pay rate for each employee
Personal information for all employees, including
Social security number
Tax filing status
Information on deductions and contributions
Once you’ve gathered this information, you can set about calculating the appropriate withholdings and deductions in order to be compliant with the law.
Salary & Wages
Money, money, money, money! Look, wouldn’t it be amazing if each of your employees was independently wealthy and believed in your business enough to work for free? I mean, sure, as a small business you may temporarily use your friends, but if you have someone working for you day after day, then put that person on the payroll. It might feel easier to pay a handful of employees under the table, but it’s both illegal and hurtful to your bottom-line. Here are some salary and wage terms to understand:
Gross Pay/Gross Earnings
Gross pay is the amount of money your employee has earned before any deductions. This includes commission, bonuses, and other payments.
Net pay is the amount of money your employee has earned after deductions and taxes are withdrawn. This can also be called “take-home” pay.
This is the accumulative yearly wage for employees. That salary is then divided up and distributed on a set pay schedule. The payment schedule could be weekly, bi-weekly, or monthly. (A salaried employee has set earnings per month versus an hourly employee.)
This is the amount of money paid per hour to employees who are not receiving a set salary. Freelancers, contractors, and all hourly employees are paid per hour. In a payroll system, the hourly rate is set for employees and is calculated when payroll is run.
If an hourly employee works more than 40 hours a week, any additional hours you approve over that is considered paid overtime. An overtime wage is a set rate and is subject to tax deductions. Overtime calculations can become complicated depending on when payroll is run, so if you have quite a few employees who earn overtime, factor that into your payroll choices.
Someone working for your business on contract has a specific pay schedule related to that contract. As a 1099-employee, a contract is based for a specific amount of time and ends on an agreed-upon date. As an employer, you do not withhold taxes from a contract employee — he/she is responsible for their own withholdings.
This is an amount of money rewarded to an employee for good performance. While it may be a one-time payment in addition to a salary, all bonus money is subject to taxes.
A tip or gratuity is an added amount of money received by employees for a job well done. Some payroll systems allow employees to keep track of their tips, as those wages are taxable income. Having a system to account for tips is important to your business and maintaining compliance.
If you are a sales-based company, your employees might earn money off of each sale they make, and this is called a commission. Even if your employees are commission-only, the IRS still considers commissions as supplemental income and it should be taxed at the regular rate.
Earning time-off is an important part of being an employee. Time off can appear in various forms; family and medical leave, paid vacation time, sick leave, and personal time. Your small business needs time-off policies and a way to calculate those hours separately from paid work hours. Your payroll system will also include information about your business’s time-off policies and calculate adjustments to a paycheck for earned time off. An automated payroll system can calculate earned time off for your employees — making it easy to put available vacation hours on pay stubs.
Paid Time Off (PTO)
This is a set amount of hours per year your employee has to take a paid time away from work. Some companies provide a block of hours employees can use toward sick, vacation, or personal days. Under federal law, you are not required to provide paid time off to your employees, but happy and healthy employees are good for business, so offering PTO is often in the best interest of employers (and can be a huge deciding factor for an employee’s job decision).
Set up a policy for paid time off and communicate it clearly to employees. What happens to unused time at the end of the year? Are employees paid a regular or amended rate for paid time off? Once you’ve made these decisions about time off, then you can find a payroll system that automates the process for you.
While Paid Time Off (PTO) and vacation days can be used interchangeably, they are different. Vacation time by definition is time your employees can take and to be totally free from work duties without restrictions. Business policies regarding vacation will vary. Make some choices about your vacation policies: do employees need to declare vacation by a certain time? How many hours of vacation are employees given a year? How are vacation days tracked?
Humans get sick. Humans make little humans who are sometimes sick and can’t go to school or daycare. Illness is a fact of life and business owners need to prepare for the inevitable with a sick day policy. Bonus: encouraging your employees to stay home when they are ill protects your business from sickness spreading! Check with your state to see if there are state-mandated sick leave policies. Note:At the time of this article, 13 states/territories have paid leave laws: Washington, Oregon, California, Arizona, Michigan, Connecticut, Maine, Maryland, Massachusetts, New Jersey, Rhode Island, Vermont, and Washington DC.
In addition to sick leave and vacation leave, you may want to consider offering other leave options to employees. Personal leave is scheduled time for your employees to use for adulting purposes (doctor appointments, car check-ups, parent-teacher conferences, school meetings, emergency plumbing disasters, mental health). Also, developing a plan for family leave/maternity and paternity leave is a must. Brainstorm the ways an employee might need to be absent and have firm policies in place for those occasions.
Employees care about benefits. Second to salary, benefits matter when employees choose where they want to work. Sometimes small business owners think they can’t afford to offer benefits to employees, but they actually can’t afford to risk the loss of employees by not offering benefits. The value far outweighs the potential cost.
So what are benefits? These are the extras a small business provides for their employees — health care, dental care, life insurance, or a retirement plan. As a small business, depending on your size, you might be required to provide some of these benefits to full-time employees, so as always, check the laws in your state. Here are a few benefits that may be legally required:
Time off to vote or serve in the military
Pay state and federal unemployment taxes
Comply with FMLA (Family Medical Leave Act) laws
You are not legally required to provide a retirement plan for employees; however, should you provide a retirement incentive, there is marked improvement in employee retention and happiness. There are also tax credits and incentives for small business owners who provide retirement benefits. The options for retirement benefits are tiered and varied; for companies with a small number of employees, retirement options like a Simple IRA or a Simple 401K are easy to implement, and many payroll software systems can help with employer contributions and matching.
Do you need to provide health insurance to your employees? Possibly! The current legal requirement is this: If your business is considered an Applicable Large Employer (ALE) with 50 or more full-time employees for more than six months out of the year, then you will need to provide your employees with health insurance as a legal requirement of the Affordable Care Act.
If not, then health care benefits are a choice! (But a good choice! And one that leads to happy employees, higher retention rates, and a thriving and healthy community.) Need to know more about health insurance, even if you are a small business with only one employee? We have you covered. Check out ourÂ Ultimate Guide to Small Business Health Insurance or our post on How Health Insurance Works for One Employee.
As a small business, you may offer life insurance to your employees. Group life insurance is an inexpensive and easy way to communicate to your employees that you value them. (Also, did you know that you can even singularly insure a really important employee? Like, if your business won’t function without a particular human being…insure that human! It’s called Key Person Insurance. Check it out.)
Fringe benefits mean any additional supplement to income that you may offer your employees. They include the benefits listed above, but also include many other types of assistance you may want to offer. Some companies provide access to a company car, rewards for healthy living, transportation vouchers, discounts for schooling, employee discounts on merchandise, technology grants, and paid career advancement conferences. Most fringe benefits are tax-free, but it’s important to check with a tax expert.
Tax Deductions & Withholdings
The most important thing, equal to paying your employees, is paying the government. Managing federal and state tax withholdings is a crucial component of payroll. It is your responsibility as the small business owner and employer to understand the tax law and the federal tax rates (you, or a software program, or a hired accountant). Your employees, when hired, will fill out and send the proper forms to the Internal Revenue Service (IRS), and that paperwork along with current tax rates will tell you how much to withhold for payroll taxes.
We know it’s a lot to take in, but before you start hyperventilating, we’ve broken down the tax withholding basics below.
Federal Income Tax Withholding
This is the amount of money withheld from an employee’s paycheck each month that goes to pay federal income taxes. The federal rate for income tax withholdings changes depending on your income level and your employee’s allowance preferences (as reflected on their W-4s).
State Income Tax Withholding
This is the amount of money withheld from an employee’s paycheck each month that goes to pay state income taxes. As an employer, you are required to calculate how much to take for state and all local taxes.
The social security tax is a federal income tax that affects all employees, no matter what. The tax rate for social security depends upon a formula that takes inflation into account. In 2019, the current rate is 12.4 percent which accounts for a 6.2 percent employee and 6.2 percent employer contribution. (Unless you make over $200,000 a year, then you gotta pony-up an extra .9 percent.) Combined with Medicare, this is what is referred to as Federal Insurance Contributions Act (FICA) Taxes. And FICA taxes are also called payroll taxes.
Along with social security, Medicare is considered a FICA Tax which is considered the cost to the government for employment. The current Medicare rate is at 1.45 percent for all employees, and there is no cap. You will collect this money as part of the paycheck withholdings and send it along to the IRS throughout the year.
Payroll Tax Forms
You cannot create a payroll system without having the right tax documents from each employee. (Cue Roz’s constant battle-cry for paperwork in Pixar’s Monster’s Inc.). Our current digital landscape allows for the ease of sending and receiving tax forms via the internet, so we can cut down on the “paper” part of all this paperwork.
Filing payroll? Here are the forms required by law that you/and or your employees must fill out:
W-2: Every employer is required to send this document to each employee and the IRS. This form is a statement of all wages earned and all taxes withheld during the previous year.
W-4: This form is filled out by employees and communicates how much tax they’d like withheld from their paychecks. You will need to know their withholding allowances in order to correctly run payroll and take out the right amount of money.
1099: This form is for people who worked under contract or freelancing for your business and do not earn a regular salary. This form is for tracking miscellaneous income, or extra income, a person may earn. Money sent to a 1099 employee does not have taxes withheld, which means the burden of paying taxes moves away from you as the temporary employer.
Schedule C: If you are an independent contractor or a sole proprietor of a business, you will need to fill out a Schedule C profit/loss report and file it with the IRS. A profit-loss statement is also called an income statement and its purpose is to help calculate your self-employment tax. Under the new tax laws, you will file a Schedule C form with your 1040 form.
1-9: This form is required to verify the identity and employment availability of your employees. When you hire someone and onboard them to your business, every single new hire needs to fill out this form. After your employee fills out the first part, you as the business owner need to fill out the second part. Since this is used to establish identity, your employees will need to send you formal identification: a current US passport, a green card or alien registration card, birth certificate, social security card, among others.
940: When you run payroll, you will pull out and withhold certain taxes to send to the federal government. One of those taxes is the Federal Unemployment Tax. That money is used to compensate workers who are unemployed and are qualified to receive assistance.Â You will need to fill out a 940 form every year to declare your payroll: how much your employees earned and how much money you pulled for your unemployment taxes.
941:Â This important payroll tax form tells the federal government how much you paid your employees and how much money you withheld to pay for income taxes, social security taxes, and Medicare taxes. You will file the form and then send the IRS the money you withheld from employees when you ran payroll.
944: If you are a big company running payroll, you will pay your payroll taxes every quarter, and this form doesn’t apply to you. However, if you are a very small business and your total withholdings for payroll taxes are less than $1000, then you can file a 944 form once a year.
The phrase processing payroll means several things. We’ve already discussed the biggest decisions regarding setting up payroll. To process payroll means all of these things:
Determining your employee’s wages and salaries
Determining an employee pay schedule
Calculating payroll taxes
Withholding payroll taxes from employee paychecks
Delivering paychecks with the proper withholdings
Submitting taxes to the government
Dispensing paperwork to employees via W-2 or 1099s.
Payroll is not a single step, but a collection of steps that lead to paid employees and a paid government — keeping the people you employ happy and the tax gods happy. Here are the factors to consider in order to set up and process payroll:
Who Is On Payroll?
You’ve hired an employee. Yay! Now, you need to pay that employee. Your payroll will include any W-2 and 1099 employees you pay regularly. But not everyone who works for your business will need to be processed through a payroll system, so who does get paid via payroll?
Whether or not someone is considered an employee has a lot to do with whether or not you control his/her workload, control his/her paycheck, and control your relationship. (If you have control over another human…you’re the boss!) If you can say yes to any or all of those questions, then that person is your employee and you have legal requirements related to paying that individual. If you’re super confused about whether or not you are someone’s boss, you can fill out an SS-8 form with the IRS and they’ll help you figure out the classification.
A contractor is not an employee. They are a freelancer helping your business for a set time or a set project, and are paid according to their contract. Contract employees are responsible for withholding their own taxes! When you run payroll for contractors, pay them their wage and your part is done. (Easy peasy.)
Now it’s time to make important choices about how often your employees will get paid. Twice a month? Once a month? Once a week? Here are the options, challenges, and benefits of each.
On a weekly payroll schedule, employees would receive a paycheck each week for a total of 52 pay runs per year. Some employees like being paid weekly; it can be good for monthly budgeting. However, running payroll every week can be a time-consuming practice for you or your accountant. Many payroll companies will charge you each time you run payroll, so a weekly payment schedule might seem nice, but it’s expensive and hard on the people in your accounting department (or if you don’t have an accountant: you).
A bi-weekly paycheck would arrive every two weeks, regardless of how that week fell on the calendar. Bi-weekly payroll doesn’t always even out since every month is not exactly four weeks. With bi-weekly payroll, there’s a total of 26 pay runs per year (which means that most months, employees will receive two paychecks per month, but twice a year they will receive an extra check). This means the paychecks may appear to come inconsistently and some people find this harder to rely on.
A semi-monthly paycheck arrives twice a month, usually on a set date (for example: the 1st and the 15th; or the 15th and the end of the month). Unlike bi-weekly payroll, semi-monthly payroll has a total of 24 pay runs, meaning employees will get paid twice a month no matter what. Semi-monthly is the best for employees who earn a salary but is cumbersome for calculating overtime.
On a monthly payroll schedule, employees receive a paycheck once a month. Some employees don’t like the once a month payments, but with only 12 pay runs a year, it is the easiest on the person running payroll. The end of the month corresponds with payments to the IRS, so it can be simple to withhold, collect, and report.
One of the components of payroll is giving each employee a pay stub. This is a formal piece of communication between you and your employee about how much they earned and how much you withheld. Each pay stub also includes all the year-to-date figures. The type of information required on a pay stub varies by state.
Payroll Payment Methods
When the time arrives to give your employees their paycheck, you have several methods to choose from. You may offer payment choices to your workers, or you can choose for them. Here the three most popular options you can use to distribute your payroll:
1. Payroll Checks
You can give your employees a paycheck. Manually filling out handwritten checks might take a long time every payroll period, but there are automated ways to print checks, too. (Some require a special printer, so be sure to talk to some payroll experts about your needs.) A check has several benefits: employees don’t need a bank account and there are low distribution costs.
2. Payroll Card
A payroll card is similar to giving employees a preloaded credit card — actually, that’s exactly what it is. Every pay cycle, you put money on a payroll card and employees can use the payroll card wherever debit/credit is taken, or pull the money out as cash. These payment cards are gaining in popularity. This is another method that doesn’t require a bank account.
3. Direct Deposit
If you don’t want to mess with checks and cards, direct deposit into an employee’s bank account can be the way to go. This is the most common way employers pay their workers, and it’s easy: if you have an automated online payroll system, linking a direct deposit creates a seamless payroll. However, it can be expensive to set up and not all employees may have a bank account.
How To Run Payroll
Alright, now the nitty-gritty part of this process. You know what kind of employees you have, they’ve filled out their paperwork, you’ve decided to pay them bi-weekly (or, you know, whatever), you’ve learned about rates of withholding and benefits, and you know how the employees want to receive their money. Bam! You’re on a roll! But now what? How do all those numbers and choices combine into a seamless process that won’t eat up major hours of your time?
Here are the options you have as an employer for calculating and processing payroll.
Manually Calculate Payroll
Manual payroll might be your only choice, financially or otherwise, and that’s okay. If you have only a handful of employees, it could be more cost-effective to do those calculations by hand. If you have a salaried employee, you’ll take their salary, divide it up among the pay periods, and withhold the necessary taxes. For hourly employees, you will examine their time cards and make the calculations based on their hours and rate of pay.
Manually running payroll is cost-effective for your small business and could be a good choice if you feel comfortable and confident working with numbers, and you only have a handful of employees.
For example, you have an employee named Jim. Jim’s a salaried guy making $50K a year, with no overtime. Jim gets paid every two weeks, so his salary of $50K is divided up across 24 payments. 50,000/24 = $2083.33 is his GROSS pay every two weeks. You will still need to withhold payroll taxes though. You can use the IRS’s tax withholding percentages to help you calculate this.
According to the IRS, for a bi-weekly gross pay of $2,083.33, federal withholdings are $267.00, social security withholdings are $129.17, and medicare is $30.21, which means you’d give your employee a NET amount of $1717.37 on their bi-weekly paycheck.
How did I calculate that? Well, I did spend some time with a calculator and the federal rates we discussed above. Then I checked my numbers against a payroll software program. Was I right? Yup! Did the software calculate it faster and give me more confidence? Well, also, yup. So, if manual calculation doesn’t get you feeling all fun and loose, there’s a software for that.
Business software has come a long way in recent years, and payroll software is no exception. There are tons of online, easy-to-use payroll solutions. The benefits of payroll software include built-in time tracking and payroll calculations, expert help from customer support teams, peace of mind, and saved time.
Merchant Maverick has already reviewed a few payroll software providers, including Gusto and Paychex. These comprehensive payroll reviews cover pricing, features, customer support, user feedback, security, and more so you can make an informed decision about the right payroll software for your business.
The last option is to hire an accountant or a payroll outsourcing company to manage your payroll from start to finish. While a payroll program can do the calculations and manage your tax tables, as the small business owner you might still be the singular responsible person for managing payroll. By outsourcing the entire process, you can rest assured that professionals are handling the numbers, and it doesn’t have to be a monthly or bi-weekly chunk of time.
How To Choose Payroll Software
So, you’ve decided that as much as you enjoyed your high school math classes, you want to trust in computer calculations, and you want to check out available payroll software. There are many options at your fingertips. All those options can also make finding the right payroll software a bit overwhelming. Do you need bells and whistles? How much can you anticipate to pay? What if you make a mistake?
Ask yourself the following questions before you start to look at programs:
How many workers do I need to run payroll for?
Do I have mostly salaried employees or contract employees?
Do I provide a benefits package?
Do I have a payroll manager who is comfortable with the legal requirements of payroll?
How much am I willing to pay to outsource the work?
Payroll Software Features
Each software program that helps you with payroll comes equipped with different features. Only you will be able to know what features are needed most for your company. To start, here is a list of all the basic features a good payroll software should have:
Payroll Processing Abilities: Maybe this should go without saying, but your software needs to calculate and process your payroll, whatever that looks like. Look for integration with timekeeping software, ease of use, etc.
Tax Calculations: Since this is the trickiest part of payroll, it’s important to have software that you trust to manage and perform automated calculations. There’s less human error and the system will help you file those taxes, too.
Direct Deposit: Automate everything and make sure when you run payroll that your software has the capabilities to work directly with banks.
Time & Attendance Tracking: Some payroll software can also be used for timesheets and keeping track of employee hours. If you have many hourly employees, this might be a nice integration tool so you don’t have to import hours from a different program.
Payroll Training & Support
When shopping around for a payroll system that works for you, make sure that it comes with real-person training and help. Should you get stuck, you’ll want to make sure there is someone who understands compliance issues available to help you. If your business doesn’t have an accountant, then purchasing software that comes with human support should be a high priority. Payroll can be complicated, daunting, overwhelming, and there are many opportunities for human error.
But there are also many online support and training opportunities if you want to learn it on your own or pay an employee to become payroll certified.
Cost Of Payroll Software
As with the costs of all things, the monthly number differs depending on need. There are some payroll systems that start as low as $10 a month and no additional fees per employee; however, some programs charge a fee per employee (in the $4-5 range). And some payroll software companies can charge up to $200 a month. With that much of a variance between programs, it’s important to set a budget and decide what features are the most important for your business as you move forward.
Getting Started With Payroll
Paying your employees is not an optional part of running a small business. You need to find a payroll system and a method of running payroll that adds quality to your business, not chaos. Compliance, necessary HR onboarding, and running payroll during tax season are all components of a small business that might make you want to go take a long nap and turn your brain off if you have a tendency to want to sleep for years when life gets overwhelming (…or is that just me?), but in today’s digital world payroll is easier than ever.
Research and understand what you need, know your business, and take the leap into organizing your systems with seamless payroll. The IRS and your employees will thank you.
The post Everything You Need To Know About Small Business Payroll appeared first on Merchant Maverick.
Before you launch your business, you have to check a few items off your to-do list. Perhaps you have to purchase inventory, find a commercial building to lease, and explore different types of business software. Maybe you operate a home-based business so your list isnât as extensive. No matter what type of business you plan to open, though, thereâs one thing all business owners must do: select a business structure.
Thereâs no getting around choosing your business structure. The way your business is set up determines both how youâll file your taxes and how much youâll pay. Your business structure may provide you with personal liability protection against the debts and obligations of the business. It will also determine specific requirements for your business, from registering with your state to ongoing requirements (like holding meetings and recording meeting minutes).
If your business has just one owner, one business structure to consider is the sole proprietorship. But before you make that critical decision, itâs important to understand what a sole proprietorship is, registration and paperwork requirements associated with this structure, and the benefits and drawbacks of being a sole proprietor.
While the business structure you choose should ultimately be whatâs best for your business, we hope to make the decision process a little easier by breaking down exactly what to expect as a sole proprietor. Keep reading to find out more.
Sole Proprietorship Definition
Merriam-Webster defines a sole proprietorship as âa business owned and controlled by one person who is solely liable for its obligations.â
Letâs break down this definition. A sole proprietorship is a business that belongs to and is run by only one person. If your business has multiple owners, youâll be unable to operate as a sole proprietorship.
In aÂ sole proprietorship, the owner alone is liable for the obligations of the business. A sole proprietorship is not a separate legal entity. This means that the ownerÂ — you — is responsible for the debts, obligations, and liabilities of the business. Your personal assets may be seized to fulfill debts, and lawsuits can be brought against you personally.
Many people choose this structure because a sole proprietorship is the quickest, easiest, and most inexpensive way to start and operate a new business. A sole proprietor is not required to register with the state. Simply engaging in business activities legally establishes a sole proprietorship. However, the sole proprietor is still required to apply for the appropriate business licenses and permits needed to legally operate in their state.
Sole proprietors can operate under their own legal names or can create a fictitious trade name when doing business. Using a trade name does not establish a separate legal entity, and the business owner will still be held responsible for the liabilities of the business.
Sole proprietors do not have to file separate tax returns for their businesses. Instead, these business owners report business profits, losses, and expenses on a Schedule C form. Self-employment tax for the sole proprietor is reported on a Schedule SE. The Schedule C and Schedule SE are both filed with the business ownerâs Form 1040. Weâll dive deeper into the benefits and drawbacks a little later in this article.
Next, weâll compare sole proprietorships to other business structures so you can better determine which works best for you.
How Is A Sole Proprietorship Different From A Partnership?
The biggest difference between a sole proprietorship and a partnership is the number of owners of the business. A sole proprietorship has a single owner. A partnership has two or more owners.
Comparing a sole proprietorship with a limited partnership (LP) and limited liability partnership (LLP) reveals a few additional differences. With these types of partnerships, limited partners are protected from personal liability. These partnerships are also more expensive and more complicated to form because they require registering with the state.
Other than the number of owners, a sole proprietorship and a general partnership (GP) are very similar. Neither has to be registered with the state to exist. The profits and losses for a sole proprietorship and general partnership are also filed on personal tax returns.
How Is A Sole Proprietorship Different From A Corporation?
A sole proprietorship is very different from a corporation. A corporation is the most expensive business entity to form, whereas a sole proprietorship is very inexpensive. Corporations must be registered with the state. There are also multiple ongoing requirements corporations must meet, such as holding meetings and having a board of directors. Sole proprietors do not have to register and there are no ongoing requirements.
Corporations may have multiple owners, whereas a sole proprietorship has just one owner. Corporations can also raise capital through the sale of stock — something a sole proprietor can not do.
Corporations also offer the best personal liability protection for its owners. As previously discussed, sole proprietors are held personally responsible for the liabilities of the business.
Another big difference between sole proprietorships and corporations is how each business structure is taxed. Sole proprietors are able to report business profits and losses on their personal tax returns. Corporations are taxed differently — a corporation is the only business structure that must pay separate income taxes. If dividends are paid to shareholders, shareholders must report this on their personal tax returns, resulting in double taxation for the corporation.
How Is A Sole Proprietorship Different From An LLC?
A limited liability company, or LLC, combines benefits of different business entities. An LLC must register with the state, and there are some fees associated with starting an LLC. This is in contrast with sole proprietorships, which are not required to register and are the least expensive to start.
Another difference between the two is that LLCs have liability protections in place to protect the personal assets of the owners. Sole proprietors do not receive these same protections. LLCs may also have multiple owners, whereas a sole proprietorship is limited to a single owner.
There may also be differences in how the LLC is taxed. Owners of an LLC can choose how they are taxed. In some cases, they may opt to be taxed as a sole proprietorship. In other cases, however, owners may choose to be taxed as a partnership or corporation.
What Types Of Businesses Are Sole Proprietorships?
A sole proprietorship is best for businesses with one owner that wants full control of the business without complicated requirements or additional expenses. Self-employed business owners, home-based businesses, independent contractors, and even some franchise owners may choose this business structure.
Any business can be a sole proprietorship provided there is just one owner and the owner is aware of the benefits and risks of this business structure. Smaller businesses are better suited for sole proprietorships. Companies that plan to grow much larger and want to take out business loans or raise large amounts of capital in the future would benefit from another business structure, such as a corporation or LLC. Some common small businesses that are sole proprietorships include:
Home Healthcare Businesses
Freelance Writers, Editors, Or Designers
Computer Repair Technicians
Regardless of what type of business you operate, the business structure you select should be based on the long-term needs and goals of your business.
Benefits Of Sole Proprietorships
After breaking down the definition of a sole proprietorship, you should have at least some idea of why business owners would choose this structure. However, letâs take a closer look at the full list of benefits of operating your business as a sole proprietor.
Less Expensive: Sole proprietorships are the easiest and least expensive forms of business structures. This is ideal for business owners that aim to keep their startup costs as low as possible.
No Registration Required: Sole proprietors simply need to participate in business activities to exist. No state registration is required. However, any applicable permits and licenses will need to obtained to legally operate in your state.
No Ongoing Requirements:Â Sole proprietors are not required to hold meetings, record meeting minutes, or have a board of directors.
Full Control Of The Business: As a sole proprietor, you will be the sole owner of your business. There are no additional owners or shareholders to consider. You get to make all business decisions and you receive all of the profits.
Easier Tax Returns: Sole proprietors can file their business profits, losses, and expenses on their personal tax returns with just two additional forms.
Drawbacks Of Sole Proprietorships
While being a sole proprietor definitely comes with its benefits, there are also drawbacks to consider when youâre weighing out your decision. Those drawbacks include:
No Liability Protection: As a sole proprietor, you will be held responsible for the debts, obligations, and liabilities of your business. If you default on a loan, lenders can come after your personal assets, such as your bank account, vehicle, or real estate. If your business goes bankrupt, your personal finances could be affected. Finally, lawsuits can be filed against you personally, which would also put your assets at risk.
Financing Challenges: As a sole proprietor, getting business financing can be a challenge. Most lenders — from traditional lenders like banks to online alternative lenders — only provide financing to registered entities. Sole proprietors also canât sell stock in the business as a way to raise capital. As a sole proprietor, you may have to get more creative with your financing, such as launching a crowdfunding campaign or taking out a personal loan for business.
For many aspiring business owners, operating a sole proprietorship is the right path to entrepreneurship. However, what works for some doesnât always work for others. After weighing out the pros and cons of a sole proprietorship, consider consulting with an accountant and/or attorney to help determine if a sole proprietorship will meet the needs and goals of your business.
Ready to learn more? Download our free beginner’s guides for business. You can also learn more about the different types of business structures to help you further pinpoint which option is best for you.
The post What Is A Sole Proprietorship? appeared first on Merchant Maverick.
Everyone wants their small business to succeed, which means everyone needs a small business accountant. Yes, even if you use accounting software and do your own bookkeeping, a professional accountant is indispensable.
But how do you even find an accountant? And once you do, how do you know if they’re any good?
In this post, we’ll provide five easy steps for finding an accountant for your business. We’ll teach you where to look and how to tell a good accountant from a bad accountant. We’ll also give you the top tips and tricks for choosing the perfect accountant.
How To Find An Accountant For Your Business
Step #1: Pinpoint Why You Need An Accountant
Step #2: Choose the Right Type of Accountant For Your Business
Step #3: Know Where To Look
Step #4: Learn What To Look For
Step #5: Ask The Right Questions
Know When & Why You Need An Accountant
The first step is knowing when to hire an accountant. Spoiler alert: the answer is now.
Sure tech-savvy business owners can use accounting software to manage their own bookkeeping, but when it comes to actualÂ accounting, you’ll want the many advantages of having an expert onboard.Â As a small business owner, you should do everything you can to set yourself up for financial success; the best way to do that is to hire an accountant.
Accountants do so much more than just help you file your taxes. An accountantÂ can give sound business adviceÂ when you’re setting up your business,Â analyzing your cash flow,Â trying to improve efficiency,Â facing an audit, and much more. Read our full postÂ When Should You Hire An Accountant For Your Business to learn every instance when an accountant can help.
When beginning the process of hiring an accountant, it’s important to pinpoint why you want help and exactly what you want your accountant to do for you. Common tasks accountants can perform include:
Basic bookkeeping tasks
Verifying your bookkeeper’s work
Setting up your business
Offering business advice
Analyzing your business’s finances and assets
Cash flow management and projections
Providing tax advice
Filing tax returns
Maximizing your tax deductions
It’s important to know which tasks you want your accountant to perform before starting your search as services vary from accountantÂ to accountant.
For example, if you just want tax advice and help filingÂ your tax returns, you may want an enrolled agent (EA) instead of a full-on accountant. If you want business advice and tax advice, a certified public accountant (CPA) with expertise in your business industry may be a better way to go.
Take a careful look at your finances and your business’s current situation and create a list of problem areas where you would like help from a professional. Do you need help managing your cash flow? Are you worried you aren’t taking all of the deductions you’re eligible for? Are you simply overwhelmed by finances and need a helping hand with the day to day work? Pinpoint these concerns and write them down in a list. Later, when you interview prospective accountants, you can return to your list and determine if their services would be a good solution to address your business’s needs.
Why Picking The Right Accountant For Your Business Matters
As a business owner, you pick tools all the time that help your business — accounting software, a new ecommerce site, a file organizer for your office — you name it. One, if notÂ the, most important tool you can pick is a good accountant. A good accountant will help you successfully manage your finances so that your business can be successful and grow.
But there isn’t a one size fits all accountant. The second step in finding the perfect accountant for your small business is knowing whichÂ type of accountant you need. There are three main types of accounting professionals: bookkeepers, accountants, and CPAs.
Bookkeepers handle the day-to-day finances and bookkeeping tasks of a business. Tasks can include invoicing, reconciling accounts, managing accounts payable and receivable, creating reports, entering data, and running payroll.
Accountants offer business and tax advice and handle the big picture finances of a business. Tasks can include bookkeeping, business advice and planning, tax advice, tax filing, cash flow management, creating reports, and analyzing business financials.
Certified Public Accountant (CPA)
A CPA, or certified public accountant, is and accountant who has passed a certification exam. Often considered more knowledgeable and trustworthy because of the education and work it takes to get and maintain their licensing. Tasks can include everything an accountant can do, plus the ability to create audit reports and represent your business legally before the IRS.
If you are overwhelmed by daily financial takes and looking to save time, a bookkeeper might be the best way to go as they are often cheaper than accountants. However, that doesn’t mean you should hire just a bookkeeper and call it good. You still need an accountant. An accountant will provide insightful business and tax advice that a bookkeeper can’t.
So the real question becomes, does your business need an accountant or a CPA?
All CPAs are accountants, but not all accountants are CPAs. Here’s how accountants and CPAs differ and what advantages each can offer your business:
Certified Public Accountant (CPA)
Must have a Bachelor’s and have successfully passed the CPA certification exam
Generally has a bachelor’s degree, preferably in accounting
Offers advice and insight about the big picture finances of a business, and can often offer deeper knowledge of tax codes
Offers advice and insight about the big picture finances of a business
Can create audit reports and review reports
Can only create compilation reports
Can legally represent a client
Cannot legally represent a client
Often an experienced CPA will charge more than a traditional accountant, but because of their rigorous education and certification, many business owners view CPAs as more qualified and trustworthy. Plus, a CPA can legally represent your business before the IRS in case of a tax audit. If these are qualities your business requires, you can narrow your search down to CPAs specifically.
Another thing to be aware of is that accountants can specialize in certain areas.
An accountant who analyzes books for fraud, inaccuracies, and discrepancies. Often tasked with figuring out if an employee is stealing from the business.
An accountant who helps businesses understand how certain decisions affect their finances. Tasks include planning, budgeting, business strategy, and risk management.
An accountant who focuses on current costs and how they can be improved. Tasks include cost analysis and budgeting.
An accountant hired on a project-by-project basis to manage and oversee a specific business project. Tasks include management, approving expenses, project invoicing, job costing, and maintaining budgets.
Knowing whichÂ type of accountant you need and what you need them to do will help guide your search.
Where To Find An Accountant
Step three: where can you find an accountant?
Well, there’s always the good ol’ Internet, but let’s face it — there are just some things you shouldn’t Google and an accountant is one of them. The best way to find an accountant is by getting a referral.
Ask your friends and family if they know of any good local accountants. See what accountant your fellow business owners use. Ask your local Chamber of Commerce or other local small business organizations and clubs if they have any recommendations. One tip from the accounting software provider Patriot Software is that oftentimes if you are a member of your local Chamber of Commerce, you’ll have access to accountants who partner with the organization and provide discounts for their services.
A personal referral is one of the best ways to find a trustworthy accountant, but if this doesn’t work, there are some trusted sources you can use to find and vet a potential accountant including:
The American Institute of Certified Public Accountants (AICPA)
The IRS Directory
If you use existing accounting software, you can often find referrals to certified accountants through your accounting software company. The nice part about this is that the accountants will already be familiar with the software you use.
Factors To Consider When Choosing An Accountant
The fourth and most important step to finding the perfect accountant is knowing what to look for. Here are some of the key factors to consider.
Pay attention to the prospective accountant’s credentials. Are they a certified public accountant? Do they have any additional credentials such as a CMA (certified management accountant) or CFE (certified fraud examiner)? Are they licensed to practice in your state? Find an accountant whose credentials you value and trust.
In addition to credentials, an accountant’s experience speaks volumes. Learn where they went to school, how long they’ve been in business, and what area they specialize in. Do they have experience with your specific type of business and industry? This expertise will be key in choosing an accountant who will help you grow.
Every accountant specializes in different areas and offers a variety of services from basic bookkeeping to taxes to audits to business planning and more. Learn exactly which services and tasks a prospective accountant will perform and make sure their work lines up with your business’s wants and needs.
Ask yourself if location matters. In the past, a local accountant was the only way to go. Now, with the rise of the internet, you could opt for a remote accountant. Ask yourself how important face-to-face interaction with your accountant is so you can find theÂ right fit for your business.
As with anything, the cost can make or break your decision. Take a careful look at your budget (or take this time to create a small business budget if you don’t already have one) and see how much you can afford to spend on an accountant. When interviewing prospective accountants, ask them about their fees and pricing structure. You want to get a good deal, but more importantly, you want to get a good accountant, so don’t sacrifice quality for cost.
When choosing an accountant, analyze the prospective accountant’s reputation. Ask for referrals and speak to current clients. Do a little LinkedIn stalking and see how the prospective accountant interacts with their clients. Are they nice? Do they seem excited about their work? Are the customer reviews positive? These are all good signs.
As a business owner, you’re going to be working closely with your accountant so personality matters. Make sure a prospective accountant is someone you can talk with, work well with, and get along with. Figure out if they are fiscally conservative or aggressive. You want an accountant who pushes your business to grow, but you don’t want someone who is on the completely opposite end of the spectrum from you and makes you feel uncomfortable about your finances.
These factors will help you evaluate how well an accountant will fit your business and its needs.
Characteristics Of A Good Accountant
In addition to the key factors for evaluating an accountant, you also want to look for the qualities that make a good accountant.Â A good accountant should be:
Above all else, a good accountant should be trustworthy. Not only will you be turning to them for wisdom and advice,Â but they will also have access to sensitive information about you and your business. You want someone who you can trust and communicate with easily. You should feel confident in their ability to keep your information protected and private.
When looking for an accountant, you’ll want to focus on hiring a good communicator that will keep you posted on the status of accounts, taxes, and business reports. Since accountants often have to explain confusing accounting concepts, you’ll also want someone who is a good teacher and skips the accounting jargon so you can easily understand your business’s finances.
An accountant should value your time and perform the services you ask of them in a timely manner. A good indicator of this is if they show up on time for your consultation/interview with them. You can also ask existing clients about the accountant’s track record.
Detail Oriented & Organized
When it comes to accounting, it’s all in the details. Accountants have to be incredibly organized and detail-oriented to handle bookkeeping tasks and successfully analyze every aspect of your business’s finances.
A good accountant should be friendly and have a personality that you get along well with. You’ll be spending a lot of time with your accountant, so you want someone that is a good fit for your business.
Your accountant should be committed to their job as well as to your business. You want someone who is dedicated to his or her work and who is invested in the success of your business.
Knowledgeable & Wise
As accountants are a source of business advice, you want an accountant who is knowledgeable and wise. CPAs are often the most knowledgeable when it comes to accounting and taxes as they have to meet education requirements every year and stay up to date on the latest tax laws. You also want someone who is knowledgeable about your specific type of business and industry so they can offer sound advice to help your business succeed.
When you meet with a prospective accountant, try to get a feel for how well they display these key characteristics and be sure to talk to existing clients about their experiences with the prospective accountant.
Key Questions To Ask Before Hiring An Accountant
The fifth and most crucial step to finding an accountant is actually meeting with them face to face. You’ll want to set up a consultation to get a feeling of who the accountant is, what services they offer, and if they’re a good fit for your business. Accountants want you to work with them, so most offer free consultations.
Treat the consultation like an interview. Just as you’d perform a job interview to see if a potential employee is going to work for your business, interview a prospective accountant to see if he or she can fill the role you need for your business.
Here are fifteen key questions to ask before hiring an accountant:
What experience and credentials do you have?
Ask the accountant what experience, credentials, and licensing they have. Are they a CPA? Do they have any extra credentials like a CMA? And do these certifications match up with the needs of your business?
How long have you been an accountant?
Often, you’ll want a seasoned accountant who has a lot of experience with accounting and your business’s industry.
What made you decide to become anÂ accountant?
This question allows you to get a feel for the accountant’s priorities and personality. Did they go into accounting because they love their work and want to help businesses or did they want a good paycheck? The answer to this can speak volumes about a person and be a good indicator of how well you’ll get along with them.
What types of clients and size of business do you work with?
You want an accountant who has experience working with your business size and type. For example, if you’re a freelancer, you don’t want an accountant who has never had to file Schedule Cs. The more experience an accountant has with businesses similar to yours, the better they’ll be able to help you succeed.
Do you have experience working with the IRS?
If having a CPA who can represent you before the IRS is important to your business, you’ll want an accountant who has previous experience with audits.
What services can you provide my business?
This question is key. Different accountants mayÂ perform different services and tasks. Before hiring an accountant, you’ll want to be 100% clear about what they can do for you. If their services match up with your list of business needs, great! If not, you’ll want to move on to the next prospect.
Which accounting programs are you familiar with?
This could be a make it or break it situation for your business. Not every accountant will work with every accounting program. Some require you use QuickBooks, some only work with Xero. Others may be more willing to work with your existing software. If you’re incredibly attached to your accounting software, you’ll need to find an accountant who works with it.
How much do you charge for your services, and how do you bill yourÂ clients?
This is probably one of the first questions that come to mind. It’s important to have a clear understanding of exactly how much an accountant charges and how they bill their clients. Some charge per hour, some charge fixed fees for tasks, and others use monthly retainers. Make sure you know exactly how much to pay ahead of time, but also remember that cost isn’t everything. The accountant’s experience and valuable services they can provide your business are just as (if not more) important than the cost.
Will you be doing all of the work or do you delegate or outsource tasks?
Oftentimes, accountants will delegate certain tasks internally to other members of their firm or even outsource certain tasks. Ask who you will be working with most often and what privacy policies they have in place for their outsourcing. As always, never do anything you don’t feel comfortable with, so if you want an accountant who will be doing all of the work themselves, that’s totally okay. There are plenty out there who do.
Will you work directly with my bookkeeper?
If you already have a bookkeeper, ask if your accountant is willing to work with them. Oftentimes accountants will have specific instructions for bookkeepers about how certain transactions should be recorded, and the two should work closely together to ensure your books are balanced and accurate.
When are you available to your clients and how would we communicate with you?
Make sure you know how and when you can reach the accountant if you need them. Choose an accountant whose availability and response times match your wants and needs as a business owner.
Accountants have access to sensitive information about you and your business, like your social security number. Ask what security procedures they have in place and how they protect your privacy. Verify that they will not share your information with third-parties.
How can you help me grow my small business?
This question can give you an idea of what the accountant can do for your business and how they can help your business succeed.
Do you have any references I can contact?
Contacting current clients and asking about their experience with a prospective accountant is one of the best ways to gauge the accountant’s reputation and work.
Is there anything else I need to know about working with you?
This question allows your accountant to mention anything you may have forgotten and gives them a chance to explain why you should work with them.
Do you have any questions for me about my business?
If they say “no,” it’s a red flag. You want an accountant who is interested and invested in your business. This question gives them a chance to demonstrate that care.
Tips For Finding The Perfect Accountant
Here are some of our tops tips and trick to help you in your search for the perfect small business accountant.
1. Ask For Referrals
Networking isn’t just about gaining potential clients but also accessing more resources. Put those networking skills to good use and ask friends, family, and other businesses for accountant referrals. This is often the quickest way of finding an accountant you can trust.
2. Cheaper Isn’t Always Better
We all like to save money, but sometimes cheaper isn’t always better. For example, an accountant just starting out might charge less to file your tax return, but an experienced accountant who charges more could get the tax return done in half the time. When choosing an accountant, don’t just look at the numbers. Look at quality as well.
3. Do Your Research
Choosing an accountant is one business decision you don’t want to rush. Don’t be afraid to take your time, meet a prospective accountant face to face, and ask questions. Check out the accountant’s reputation on LinkedIn and Yelp to see what customers have to say. View how they interact on their social media accounts. Do as much research as you can so you can feel confident in your decision.
4. TreatÂ It Like An Interview
Choosing an accountant can seem daunting, so treat it like something you already know. Hiring an accountant is just like hiring an employee. You’re interviewing them to see if they’d be a good fit for your business. If you like them, great! If not, there are plenty of accountants in the sea.
5. Negotiate Your Fees
It’s always worth a shot. Test the waters and see how movable your accountant’s fees and pricing structure are. Try negotiating for lower fees or ask the accountant’s advice on how you can keep the fees low. Maybe they won’t change the rates, but they might tell you certain bookkeeping tasks you can perform to make their job faster (since most accountants charge by the hour, this can help save you some money).
Bottom Line: Trust Your Gut
When choosing an accountant, it all comes down to trusting your intuition. Trust your gut, listen to your instincts, follow your heart, and so on (don’t make us sing a Disney song about it). Seriously though, if you have a bad feeling about someone, or even if your personalities just don’t mash up, move on and look for an accountant you can trust and work well with.
The Hunt Is On
It’s as simple as that!
Step 1: Know what you need your accountant to do for you.
Step 2: Know whichÂ typeÂ of accountant you need.
Step 3: Know where to look for an accountant.
Step 4: Know what to look for in a good accountant.
Step 5: Know what questions to ask a potential accountant.
Follow our tips and tricks to help you find the perfect accountant and read our comprehensive accounting reviews to find the perfect accounting software to work with them.
The post How To Find The Perfect Accountant For Your Small Business appeared first on Merchant Maverick.
Running a business can be quite a juggling act. Between finding the right business software to getting the funding you need to buying business insurance to managing the actual day to day processes of your business, some things get put on the back burner.
Accounting and bookkeeping are often the first places business owners fall behind, but this is the last area where you want to drop the ball. Managing your finances is the key to a successful business. But when can you manage your books on your own and when should you hire an accountant?
In this post, we’ll cover when you should hire an accountant and how much it’s going to cost you.
When Should I Do My Own Accounting?
We all love a good DIY, but let’s face it, we don’t want your business to become a Pinterest DIY fail. Sometimes, you just need a professional. But is accounting one of those times? Can you do yourÂ own business accounting?
To answer this question, let’s first talk about the difference between bookkeeping and accounting.
Although the phrases are often used interchangeably, bookkeeping and accounting are not the same things. Bookkeeping consists of daily business financeÂ processes, like data entry, bank reconciliation, entering sales and expenses, creating reports, etc. Accounting analyzes those reports and data and turns that information into actionable insight about your business’s big-picture finances.
Here are some of the other differences between bookkeeping and accounting:
Handles the day-to-day financials of a business
Offers advice and insight about the big picture finances of a business
Compiles reports and business data
Analyzes reports and business data in order to offer actionable advice
Often has real-world experience, and sometimes a certification, instead of a degree
Generally has a bachelor’s degree, preferably in accounting
Can assist with payroll and sales taxes, but does not file tax returns
Files business and personal tax returns
Has knowledge of the business’s finances only
Has knowledge of the business’s finances and client’s personal finances
A business owner can do their own bookkeeping, but actualÂ accounting should be done by a professional.
If business owners have the time and want to be hands-on with their finances, they can handle bookkeeping tasks like:
Accounting software makes it feasible for business owners to perform these tasks with relative ease and manage their books successfully. However, we always recommend that business owners turn to accountants for business and tax advice.
Even as someone who is very familiar with dozens of accounting programs, if I started a business, the first thing I would do is hire an accountant. Yes, I could handle my own bookkeeping and day-to-day finances, but the advice of accountants is indispensable for running a successful business and creating and achieving long-term financial goals. Accountants can verify your bookkeeping, give business advice, analyze areas where your business can grow, offer tax advice, maximize your tax deductions, and much more.
Additionally, just because you can do your own bookkeeping, doesn’t mean you should. If financial tasks are eating up your time and taking away from the success of your business, hire a bookkeeper or delegate some of the tasks to a trusted employee. This will free up your time so you can get back to growing and running a successful business.
Oftentimes, businesses have both a bookkeeperÂ andÂ an accountant. Bookkeepers are more affordable, so they are a better option for daily finance tasks, whereas a better use of your money and your accountant’s time is big picture finances and business planning.
Remember: If you hire an in-house bookkeeper, make sure that you divide accounting tasks. No matter how trustworthy an employee is, you should never have one person in charge of all the books as this is the easiest way for fraud to occur. Delegate accounting jobs and put strong internal programs in place to prevent fraud, or consider outsourcing your bookkeeping instead.
When Should I Hire An Accountant?
As a business owner, you can handle your own bookkeeping, but when should you hire an accountant? What are the signs your business needs an accountant? And if you already have an accountant, when are the times you should turn to them for help?
Here are fifteen cases when you should hire an accountant for your small business:
1) When Starting A Business
The early stages of business are incredibly important. Put your best foot forward and set your business on the path to success by hiring an accountant as soon as you start a business. An accountant can help you:
Choose the right type of business entity (like a sole proprietor, partnership, LLC, etc.)
Set up your business EIN and any state licenses or requirements
Choose the right accounting software for managing your business
Create a business plan
Create a tax plan and explain which deductions you need to record through the year
And more importantly, they’ll be able to advise you on how to run a financially successful business.
2) When Incorporating Your Business
If you are starting out and want to become an LLC or if you want to make the jump to incorporating your business, an accountant will guide you through that process.
3) When You Need Business Advice
We said it once and we’ll say it again, one of the biggest benefits of hiring an accountant is the business expertise and knowledge you gain access to. Turn to your accountant when you need business advice. Is your cash flow lower than you’d like? Are you losing money on COGs and can’t figure out why? Having trouble obtaining certain data about your business? An accountant can help.
4) When Filing Taxes
One of the biggest parts of an accountant’s job is preparing and filing taxes. An accountant will help you with your personal and business tax returns. They’ll know which forms you need to fill out, which deductions you qualify for, and how to appease the IRS so you can sleep easy come tax season.
5) When Planning For The Future
If you need advice on how to grow your business and prepare for the future, an accountant can offer guidance and help you create a business plan.
6) When You Need Help Managing Cash Flow
Cash flow is the lifeblood of your business. Without enough cash flow, you won’t be able to pay your bills or employees; too much positive cash flow and you aren’t investing your extra money wisely. An accountant can help analyze cash flow trends, give cash flow predictions, and offer suggestions to improve your financial situation.
7) When You Need Advanced Business Analysis & Reporting
Accountants are experts in business analysis. Not sure exactly where your money is going? Want to know where you can cut back and save money? Accountants know all of this and more. They can help create reports and give financial insight and analytics, so you can take that information and use it to improve your business.
8) When You Want To Save Time On Financial Tasks
As we mentioned earlier, if you are spending to much time on managing your finances, hiring an accountant can free up your schedule so you can focus on running your business. (If you need help with daily tasks, we recommend choosing a bookkeeper over an accountant to save money on services. Read ourÂ full post CPA VS Accountant: Which Is Right For You? to learn more.)
9) When Buying Or Selling A Business
If you are considering buying a business/franchise or expanding your current business, talk to an accountant first. They’ll be able to assess if the purchase is a wise financial move. Additionally, if you need to sell your business, an accountant will walk you through the process.
10) When Buying Or Selling Property (And Other Assets)
Along the same vein, talk to your accountant before buying or selling business assets like property, equipment, office furniture, etc. Because accountants know your business finances, they’ll be able to tell you if the purchase is a wise investment.
For example, they’ll tell you if you have the cash flow to buy all new computers for the office or if you should wait until next month when the cash flow trends predict more sales.Â Accountants will also help you manage your assets, track depreciation, and properly write off the tax deductions you’re eligible for. When selling propertyÂ or other assets, accountants will know how to records this on your taxes properly.
11) When Applying For A Loan
Believe it or not, having an accountant can help improve your chances of getting a loan. Lenders want to see that you are fiscally responsible and some lenders, like Fundbox, require that you’ve been using an accounting solution for a certain amount of time in order to be eligible for the loan. Accountants can also offer insight into how the loan will affect your business finances.
12) When Facing A Tax Audit
No one wants to be audited by the IRS, but in business, you have to prepare for the worse and hope for the best. And if the worse does happen, you want an accountant — a CPA to be exact — on your side. A CPA, or certified public accountant, can legally represent you and your business before the IRS in the case of an audit. Read our post on CPAs VS Accountants to learn which is best for your business.
13) When You Suspect Someone Is Stealing From You
This is another worst-case scenario, but if you suspect someone is cooking the books and stealing money from your business, you’ll need to hire a forensic accountant to investigate the fraud.
14) When Going Public
If you have a public corporation or want to go forward with an IPO (initial public offering), you’ll need an accountant. Public corporations are required to have audit reports to show to investors. Only a CPA can prepare these reports for you.
15) Whenever You Feel Out Of Your Depth
Bottom line: If you aren’t sure about some aspect of your business or its finances, ask an accountant. Accountants are invaluable resources that can help you whenever you feel out of your depth or like you don’t know what you’re doing.
Benefits OfÂ Hiring An Accountant
Hiring an accountant will allow you to sit back and relax. You can trust that your finances are in good hands and get back to running your business with the advice and time you need to grow successfully.
Here are some of the biggest benefits of hiring an accountant:
Save time on bookkeeping
Reporting and analytics
Managing cash flow
Peace of mind
Another important benefit of accountants (CPAs in particular), is that a certified public accountant can legally represent you and your business if needed. This peace of mind is priceless.
How Much Does Hiring An Accountant Cost?
It may seem contradictory that to manage your money, you have to spend your money on hiring an accountant, but the cost is more than worth it. Which probably leaves you asking, how much is this going to cost me anyway?
There is no set answer for how much an accountant costs. The price is going to vary significantly depending on:
The complexity of your accounting
The services you require
Whether you hire a bookkeeper, accountant, or CPA
The accountant’s experience
Most accountants charge by the hour and will give you an estimate of how much the services you require will cost. The best way to figure out how much an accountant will cost is by deciding what you need your accountant to do and then searching for the right fit. Get quotes from multiple accountants and CPAs, ask if they do free consultations, and gather information and referrals from other business owners.
Also, remember that cheaper isn’t always better. A more experienced CPA may charge more than an accountant who’s just getting started, but your business may prefer the expertise of a CPA. Or, maybe one accountant charges a lower monthly fee but another, more expensive accountant is faster — the time saved could be money saved as well.
The real question isn’t how much an accountant will cost, but, can you afford notÂ to have an accountant? That’s a rhetorical question. This is no time to be a Scrooge. The benefits of hiring a professional accountant far outweigh the cost. And, if you choose to forgo an accountant, your business and its finances may suffer. Plus, you’d have to do your own taxes, and let’s be honest, who wants that?
It’s true! Behind every good business is a great accountant. Accountants offer financial wisdom and business insight, They make sure your books are balanced and that you get the most out of your tax returns. They walk you through business plans, cash flow management, and can even represent you before the IRS in case of an audit.
Accountants give you the tools to help your business succeed and are an important asset to have. Now that you know when to hire an accountant read our full post CPA VS Accountant: Which Is Right For You? to help you find the perfect accounting professional for your business. Then hop on over to our post How To Find The Perfect Accountant For Your Business to take the next step.
The post When To Hire An Accountant For Small Business appeared first on Merchant Maverick.
Tax season is upon us, and if you are a small business owner, there is a good chance that you will need your Employer Identification Number (EIN) to file business taxes. For example, if you have an EIN for the first time this year, or are using a new CPA or service to file your business taxes, you will need to bring your EIN and other information to your accountant when you file your business taxes. There are also various other reasons you might need your EIN, such as to open a business bank account,Â open an online store, or apply for business financing. If you have misplaced your EIN, or aren’t sure if you even have one, you have come to the right place! Read on to learn what an EIN is, how you can find your EIN, and how you can apply for an EIN if you don’t already have one.
What Is An EIN?
An EIN (also sometimes called a “business tax ID number”) is a unique 9-digit number that identifies your company, similar to the way your social security number represents your personal identity. Specifically, your EIN identifies your business to the IRS. However, in addition to IRS-related filings such as business taxes, you might also need your EIN to apply for a business license, apply for a business loan, or open a business bank account.
The IRS requires most, but not all business types to have an EIN. For example, most sole proprietors and LLCs with no employees are not required to have an EIN and can instead use their social security number as their taxpayer identification number. As the name indicates, employer ID numbers are required for companies that employ people; if you have employees, then you need an EIN. Even if you are not required to have an EIN, you may opt to get one in order to establish your business as its own entity, separate from your personal identity. For example, having an EIN can help you establish your business credit profile so you won’t have to use your personal credit for your business.
How To Find Your EIN
If you have applied for and received an EIN in the past, then it shouldn’t be too difficult to find it. You’ll just have to do a little digging.
Method 1: Check Your Business Documents
Your EIN can be found on many of your important business documents, whether you have physical or virtual copies of these items. You should have the easiest time finding your EIN on your EIN confirmation letter from the IRS, and on your previous business tax returns.
Here are some documents where you can find your EIN:
Your EIN Confirmation Letter — The document the IRS issued when you originally applied for the EIN
Previously filed business tax returns — Your EIN should appear prominently at the top of your federal return
Your business credit report
Business licenses or permits
Business bank statements
Other tax filings, such as 1099 forms issued to independent contractors
Old business loan applications
Any tax notices from the IRS
Method 2:Â Run Your Business Credit Report
Okay, so let’s say you don’t have any copies of the above documents on-hand and you need your EIN, ASAP. Another option is to run your business credit report online and get your EIN that way. This is not free, but it’s a quick and easy way to get your EIN (or another company’s EIN), and it’s a good idea to check your business credit report from time to time anyway.
The three major business credit scoring agencies are Dun & Bradstreet, Equifax, and Experian. Equifax and Experian are more appropriate for smaller, less-established companies, and Experian offers the cheapest business credit report at $39.95.
Method 3: Call The IRS
You can also get your EIN by simply calling the IRS and asking them for it. Just keep in mind that they might have you on hold for a long time. From the IRS’s website:
Ask the IRS to search for your EIN by calling the Business & Specialty Tax Line atÂ 800-829-4933. The hours of operation are 7:00 a.m. – 7:00 p.m. local time, Monday through Friday. An assistor will ask you for identifying information and provide the number to you over the telephone, as long as you are a person who isÂ authorized to receive it.Â Examples of an authorized person include, but are not limited to, a sole proprietor, a partner in a partnership, a corporate officer, a trustee of a trust, or an executor of an estate.
Method 4: Ask Someone Else
IRS hold times too long? Call someone else who might know your EIN.
Here are some people who should be able to look up your EIN and give it to you over the phone:
Your account manager at the bank where you do your business banking
Your accountant (or you can consult your accounting software)
Any organization that you have a business license or permit from
Method 5: Use Other EIN Lookup Options
There are a few other places where you should be able to look up your EIN online:
Your online account with the bank where you do business
For publicly traded companies, the SEC’s online database
For nonprofits, the free Melissa database
As a last resort, you could also try a paid EIN database, but I would only recommend this if you’ve exhausted all other options. And if you’ve gone through all the other options and still can’t find your EIN, well … are you sure you even have an EIN?
Don’t Have An EIN? Here’s How To Get One
If you’ve read all the way to the end of this post without finding your EIN, odds are that you probably don’t have one. Or, you may have discovered that although you have an EIN, you need to apply for a new one. This may be the case if your ownership or business structure has changed, or you are subject to a business bankruptcy proceeding.
Fortunately, an EIN is actually pretty easy to apply for and obtain.
As long as your company is located inside the United States or a U.S.-owned territory and you have a taxpayer ID number such as your SSN or ITIN (Individual Taxpayer Identification Number), you can apply for an EIN on the IRS’s website.Â The application is short and sweet, and you will receive an EIN immediately upon successful form completion and validation of your information.
Note that while you will receive your EIN immediately online, it will take up to two weeks before your EIN becomes part of the IRS’s permanent records. You will have to wait until this happens before you can use your EIN to file an electronic tax return, make an electronic payment, or pass the IRS Taxpayer Identification Number matching program.
The IRS’s online EIN assistant is secure, but if you’re not comfortable submitting sensitive info online, you can download a PDF of Form SS-4 (also from the IRS’s website) and apply via snail mail.
For just about any business owner, an Employer Identification Number, or EIN, is a very useful thing to have. It’s useful for completing various legal tasks related to your business, such as filing taxes. You also need an EIN to build your business credit profile or apply for a business loan.
If you already have an EIN and need it in a hurry, don’t panic; it shouldn’t be too difficult to find. If you need to apply for an EIN, either for the first timeÂ or because you need a new EIN, this is also a quick and easy process. Once you have an EIN or have rediscovered it after doing some digging, please keep track of it because it will likely only be a matter of time before you need to retrieve it again.
The post How To Find Your Business EIN Number appeared first on Merchant Maverick.
There are over 55 million freelancers in the US. With perks like being your own boss, setting your own schedule, and the flexibility to work from anywhere, it’s easy to see why freelancing is becoming such a popular choice.Â Whether you are self-employed full-time or are freelancing on the side to earn some extra income, there are key software tools that can help you run a more effective and profitable business — the most important being accounting software.
As a freelancer, it’s easy to focus on growing your business, finding new clients, creating marketing campaigns —Â anythingÂ but accounting. However, having a strong accounting process and being in control of your business’s finances is the key to running a successful business.
Luckily, there are plenty of easy to use, affordable accounting solutions that will help you manage your freelance finances and taxes quickly so you can get back to doing what you love.
In this post, we’ll share the top accounting software for freelancers. We’ll also share some other great freelance tools that you should know about to help your business succeed, including everything from email marketing software to website builders to mobile payment apps and more. We’ve spent hours researching and testing software so that you can find the perfect software solutions to run your freelance business.
$10 – $17/month
$0 – $18/month
Size of Business
Ease of Use
Number of Users
Number of Integrations
Cloud-Based or Installed
iOS & Android
iOS & Android
iOS & Android
Characteristics Of Good Freelance Accounting Software
In terms of accounting software, freelancers have very specific needs. Most traditional small business accounting software simply won’t fit the bill. Freelancers need an easy-to-use financial management solution designed specifically for the self-employed. Here are some of the key characteristics a good freelance accounting software should have:
Affordable:Â For freelancers, every penny counts. With a slim or nonexistent accounting budget, freelancers need a solution that is free or offers affordable, low monthly payments.
Easy To Use: Good accounting software should be easy to use as most freelancers don’t have time to spend hours balancing the books. Many also may have little to no previous accounting experience so they need something that is easy to learn and understand.
Time-Saving Automations:Â All accounting software should feature automations, but freelancers are in particular need of any way to save time. Standard automationsÂ include automatic receipt uploading, mileage tracking, and live bank feeds.
Manage Personal & Business Finances: While freelancers should open a separate business banking account to safeguard against tax audits, this simply isn’t the reality for many self-employed individuals. Because of this, many freelancers need to be able to separate their personal expenses from their business expenses using their accounting software
Good Organization: As a freelancer, it’s easy to put finances on the back burner, but knowing your exact income and expenses is key to running a successful business. Accounting software should help you stay organized, run key financial statements, and make more informed business decisions.
Tax Support: With estimated quarterly taxes and ever-changing deductions, freelance taxes can be overwhelming.Â The best freelance accounting software will include tax support to help you manage your self-employed taxes.
Support Resources:Â Good accounting software will also provide you with ample learning materials to help you better your business.
We weighed all of these factors when selecting the best accounting software for freelancers. Each of the top three accounting options displays many, if not all, of the features listed above to help make managing your freelance finances as simple as possible.
1) QuickBooks Self-Employed
Overall freelance accounting and tax support. Ideal for filing directly with Turbo Tax.
Created in 2014, QuickBooks Self-Employed was designed specifically to help freelancers manage their finances and file their taxes easily. QuickBooks Self-Employed is incredibly easy to use, offers great mobile apps, and has the best tax support of all three programs on this list. The software helps you calculate your estimated quarterly taxes, track your mileage, find other deductions like the home office deduction, and even has a Turbo Tax integration for easy filing. On top of tax support, QBSE also helps freelancers keep track of their income and expenses.
The software is ideal for freelancers looking for tax support, a way to separate personal and business expenses, and basic expense tracking.
Suited for freelancers
Limited invoice features
Calculates estimated quarterly taxes
No state tax support
Easy to use
Turbo Tax integration
QuickBooks Self-Employed offers two pricing plans ranging from $10 – $17/month. The difference between the two is that the larger plan includes a built-in Turbo Tax integration and the ability to pay estimated quarterly taxes online.
QuickBooks Self-Employed supports a good amount of features, especially where taxes are concerned. Here’s an idea of what QuickBooks Self-Employed has to offer:
Track income and expenses
Separate personal and business expenses
Record tax deductions
Fixed asset management
Calculate estimated quarterly taxes
Ease Of Use
QuickBooks Self-Employed is incredibly easy to use. It has a modern, well-organized UI that takes very little time to learn and offers strong mobile apps that are also easy to navigate.
QuickBooks Self-Employed’s customer support has its pros and cons. There’s no phone support, but there is a live chat feature if you want to get in touch with a representative directly. The good news is that QBSE provides a great selection of learning resources for freelancers including a comprehensive help center and a small business center chock full of business advice.
QuickBooks Self-Employed is one of the best accounting and tax support solutions out there for the self-employed. The software offers the most advanced level of tax support on the market, and while this isn’t a full-fledged accounting app, it allows freelancers to manage their income and expenses.
Read our full QuickBooks Self-Employed review to find out if this software is right for your business.
2) AND CO
Freelancers looking for strong accounting, good customer support, and the ability to create and send contracts to clients.
Founded in 2015, AND CO is an up-and-coming freelance accounting software that was recently acquired by Fiverr, one of the leading freelance marketplaces. The software is easy to use, offers great customer support, and provides traditional accounting features like time tracking and project management. While the software does not offer tax support, it does have a one-of-a-kind contract feature that allows you to create legal contracts for projects that are compliant with the Freelancers Union. This allows you to dictate who retains rights to your work and accept signatures directly from clients.
AND CO is ideal for freelancers who don’t need the extra tax support of QuickBooks Self-Employed and would rather have more traditional accounting features, contracts, and better customer support.
Suited for freelancers
No tax support
Easy to use
Unsuited for product-based businesses
Good customer support
Strong mobile apps
AND CO has a free plan for freelancers with a single client and a paid plan which costs $18/month. The larger plan includes unlimited reports and more advanced proposals and contracts.
While AND CO may be lacking in tax support, the software has a lot of great features going for it. Here are some of the features AND CO has to offer:
Ease Of Use
AND CO is incredibly easy to use. The software was originally designed solely as an iPhone app so the mobile apps are also easy to navigate.
AND CO offers great customer support. Representatives are generally kind and quick to respond to questions. The company also offers great business tools and support resources for freelancers, as well as all of Fiverr’s extensive freelance resources.
AND CO is a great accounting and finance management tool for freelancers. The main drawback is that there is no tax support. However, you won’t find such developed proposal and contract features anywhere else.
Read our complete AND CO review to see if this freelance tool is right for you.
Freelancers looking for a complete accounting solution for free.
Wave is a free accounting software solution that offers an incredible number of features for $0/month. While the software wasn’t designed specifically for freelancers like QuickBooks Self-Employed and AND CO, Wave is one of the best accounting programs to fit the needs of freelancers. It’s affordable, easy to use, and allows business owners to separate personal and business accounting.
The software is ideal for self-employed individuals looking for a full accounting solution or those who need an affordable way to manage their freelance finances.
Easy to use
Poor customer support
Good feature set
Limited mobile apps
Positive customer reviews
Wave only offers one accounting package and it’s completely free. There are no user limits or feature limits. You get all of the great features of Wave for $0/month. The only extra costs are payment processing, payroll, and professional bookkeeping services.
Of all three options on this list, Wave offers the most features. While you won’t find tax support, Wave does offer strong accounting and is full-fledged accounting software. Because of Wave is actual accounting software, it’s the only program on this list that will allow you to actually balance the books. Here are the features you’ll find with Wave:
Ease Of Use
Wave is well-organized and its modern UI is easy to navigate.
Wave offers many great support resources; however, getting in touch with an actual representative is difficult. There is no phone support and response times are slow.
Wave is an affordable accounting program that gives you strong accounting and tons of features without breaking the bank. The software does not offer tax support, but it does offer payroll, making it a scalable solution if you plan on growing your freelancing business. The professional bookkeeping services are also great for freelancers who aren’t comfortable doing their own accounting or simply don’t have the time.
Read our full Wave review to see if this accounting software is right for you.
Other Great Freelance Tools
Your freelancing business is your baby, and as it takes a village to raise a child, it can also take an army of integrations to run a business. There are tons of great freelancing tools that can help you manage and grow specific areas of your business, like email marketing, invoicing, ecommerce, and more. Here are some of the top freelance software tools we recommend.
The Best Invoicing Software For Freelancers
If your freelance business reliesÂ heavily on invoicing and isn’t quite ready for all of the other features included with accounting software, invoicing software could be a simpler alternative to meet your business needs.
Zoho Invoice is an easy to use, cloud-based invoicing program with incredible invoicing features. With over 15 invoice templates to choose from and international invoicing options, Zoho Invoice has a lot to offer. Read our complete Zoho Invoice review to learn everything this software is capable of.
Invoicera is also a could-based program with a good feature set and attractive invoice templates. A forever free plan and over 35 payment gateway integrations are just a few of the perks of this invoicing option. Read our complete Invoicera review to learn if this software is right for you.
Visit our invoicing software reviews for more options or compare our top favorite invoicing solutions for small businesses.
The Best Receipt Management Software For Freelancers
Business owners are all too familiar with the dreadedÂ receipt shoebox. Receipt management software or expense tracking softwareÂ can help freelancers get organized and handle reimbursements with ease.
Expensify is a cloud-based expense management solution with mobile receipt scanning, expense approval workflows, and next-day expense reimbursements. The software also integrates with key accounting programs for a seamless expense tracking experience.
Shoeboxed is also a cloud-based expense management solution with receiptÂ scanning, mileage tracking, expense reports, basic CRM, and even tax prep. Shoeboxed also integrates with key accounting programs.
The Best Payment Processing Software For Freelancers
Need to accept mobile payments from your customers? Mobile payment apps allow freelancers to accept payments anywhere — whether that be at a home show, a small storefront, or even a client meeting at Starbucks. If your freelance business could benefit from accepting payments on the go, mobile payment processing is a must.
Square is one of the most popular mobile payment apps. It offers affordable flat rate pricing and free tools for selling online, making it easy to accept payments from your customers in multiple ways. Read our complete Square review to learn how Square could benefit your business.
Take a look at our other mobile payment processing reviews or compare our top five payment processing solutions for businesses.
The Best Website Builders For Freelancers
A website is key for many freelancers who sell goods online or who need a professional online portfolio to showcase their work to clients. Luckily, there are plentyÂ of affordable, easy to use website builders that can give yourÂ freelance business the edge.
Wix is an easy to use website builder that is ideal for ecommerce and blogging. Wix offers a compelling free version with unlimited pages and hundreds of customizable templates to choose from. Read ourÂ complete Wix review to learn more about this affordable website solution.
Squarespace is a website builder that is perfect for ecommerce and blogs While there’s no free plan, the software offers amazing templates with a huge degree of customizability. Read our complete Squarespace review to see if this website builder is right for you.
Read our other website builder reviews and ecommerce reviews to find the perfect solution for your business.
The Best Email Marketing Software For Freelancers
One of the most challenging parts of freelancing is finding clients. Email marketing software can be a great way to market your services and target clients so you can grow your business.
MailChimp is an easy to use email marketing software with affordable payments. The software offers email campaigns, email automations, and even analytics and reporting. Read our complete MailChimp review to learn how this software could help your business.
Benchmark is another great email marketing option that is easy to use and offers good customer support. The software has hundreds of templates to choose from and the unique ability to send video emails and online surveys. Read our complete Benchmark review to see if this software is right for your business.
Read our other email marketing software reviews or compare the best email marketing solutionsÂ to find the right option for your business.
Picking The Perfect Freelance Accounting Software
Running a freelance business can be difficult, but with the right tools, you can set your business up for success. With accounting solutions like QuickBooks Self-Employed, AND CO, and Wave, you can manage your finances and gain valuable insight into your business’s income and expenses.
QuickBooks Self-Employed is ideal for freelancers in need of tax support; AND CO is ideal for legal, professional contracts; and Wave is ideal for the complete accounting package. Identifying your freelance needs and examining your current financial process can help you decide which program is the perfect fit for your business.
Then ask yourself, what other tools could benefit my business?
Email marketing software could help you grow your clientele. A website builder could help you create a professional brand. A payment processing app could help you increase your sales. Here at Merchant Maverick, our goal is to help you find the best software to help your business succeed. We have hundreds of reviews across multiple software industries so you can find the perfect software combo. Check out our comprehensive reviews and our other freelance resources as well.
Top 10 Tax Deductions For Freelancers
Loans For Freelance Businesses: Your 13 Best Options
$10 – $17/month
$0 – $18/month
Size of Business
Ease of Use
Number of Users
Number of Integrations
Cloud-Based or Installed
iOS & Android
iOS & Android
iOS & Android
The post Best Accounting Software For Freelancers appeared first on Merchant Maverick.
If your business relies on paper-based invoicing, you donât need me to tell you about the inconvenience of printing, mailing, and waiting to get paid. Despite the hassle, many businesses still rely on printing and mailing invoices â youâre not alone. However, more and more shops are switching to online invoicing platforms to eliminate the expense of paper, printing, mailing, and administrative costs — and get paid faster!
If you’re ready to try an easier invoicing process, one simple and popular new solution is Square Invoices — because yes, in addition to the free mobile card reader and mobile POS, Square offers a fairly robust invoicing platform that syncs seamlessly with the rest of Square’s features.Â
We’ve already reviewed Square Invoices, so I recommend that you check out the review for a more detailed look at how Square stacks up against some other options.
In this post, we are going to dive into Square Invoices and show you how to use the platform! From setting up a one-time invoice to setting up recurring invoices and creating deposit requests and reminders, youâre going to find out everything you need to know about using Square to send and receive payments.
But first, I know the most important question will always be “how much does it cost?”
How Much Does Square Invoices Cost?
The good news is that Square Invoices is entirely free to use. You can send unlimited one-off invoices, recurring invoices, scheduled invoices, and any other type of invoice, and youâll only incur payment processing fees at the time your customer pays you.
When your customer opens your invoice and pays you online with their credit card, youâll pay 2.9% + $0.30Â for processing costs. If you use a saved Card on File from your Customer Directory to process an invoice payment, youâll pay 3.5% + $0.15.
Thatâs it. Square doesnât charge any monthly fees, service fees, or any other fees beyond the processing costs. A transparent pricing model and fully secure, PCI compliant payment processing are what makes Square a leading choice for businesses that need a simple, cost-effective solution. Â
So letâs find out how to use Square Invoices to save time and get paid faster!
How To Send A Square Invoice
To send an invoice with Square, youâll need to set up a Square account. The setup process doesnât take long, and Square only asks for necessary personal information â no credit checks required! Once youâve got an official Square account, you can access everything you need right at your dashboard. The same tools are at your disposal whether you access Invoices from your Square POS app or the Square Dashboard at your computer. Note that for this post, we are creating an invoice from our Square Dashboard â and here it is in the screenshot below.
As you can see, I donât have any outstanding invoices. If I did have outstanding invoices, the blue box labeled Invoices would display the dollar amount. From this tile, I can quickly send a new invoice by selectingÂ Send an Invoice.
1. Fill In Customer Information & Invoice Details
When you first open the form to build an invoice, itâs very straightforward to plug in the details. Add your customerâs name, email address, and a message. The default message for the invoice is, âWe appreciate your business,â but you can certainly start from scratch here and add a more dynamic message. The possibilities here are endless, from inviting them to consider a new service or promoting an upcoming event or discount. You know what they say, âAlways Be Closing.â
Keep in mind that Square Invoices also syncs with your customer directory, so if you’re invoicing a past client, you can pull their name and information from the directory. If this is the first time you’ve sent this customer an invoice, this process will create an entry in your database.
I want to mention the Invoice Method line briefly. This line refers to the delivery method. Square Invoices send the invoice via email as a default, but you can also select Share Invoice Manually in the drop-down and Square will generate a link. You can send the link to your customer via text message, social media account, or any other type of messaging platform.
2. Set Payment Terms For One-Time Invoice
Working our way down the Invoice Details, letâs look at the Frequency. In the drop-down, you can choose One-time or Recurring. In the next section, Iâm going to peel back the layers of recurring invoices. But first, letâs focus on a one-time invoice and the Send line in the image below.
This step is important for obvious reasons. When you think about customer behavior, remember that the fresher the value is in their mind, the more likely you are to get paid. Send the invoice as close to the deliverable as possible, and choose your due date carefully.
3. Set Up Recurring Invoice Schedule
As you can see in the image below, you have some flexibility when it comes to when and how you enable recurring invoices with Square. You can choose to send immediately, or choose a set time block such as in seven days or at the end of the month. You can also select a specific date.
Here, you can also select how often to repeat the recurring invoice. You can set the schedule for daily, weekly, monthly, or yearly invoice billing. Next, select when to stop your recurring invoices. Your options are never, after a specific number of invoices, or on a specific date. You can see in the example I set up below that Iâve ordered my recurring invoices for six months and requested payment due within seven days of receipt. Iâve also enabled Automatic Payments. If my customer approves automatic payments and saves their card, Iâve just made things even easier for myself (and them)! We will revisit the card-on-file situation and what that means for you in an upcoming section. Â
Recurring Invoices can help you get paid on time for a service- or product-based subscription, of course, but you can also utilize recurring invoices to allow your customers to pay in installments. Itâs all in how you set up expectations with your customer. Make sure to lay out what is expected as far as payment for the exchange of goods or services in the Line Item section. Â
Whether you send a recurring or one-time invoice, the next steps are the same, so keep reading to find out how to fill in all of the upcoming invoice options, starting with Line Items.
4. Adding Line Items To Your Invoice
When itâs time to add items to your invoice, youâll choose from the drop-down menu. If you donât have inventory saved, you can simply type in the product or service and the price. Iâve added in ad-hoc services and prices to my Line Items in the screenshot below.
Need to add a note next to the service? Select Customize on the line item, and you can add a simple note next to the specific product or service in your invoice. Remember, the clearer you are here, the better. Avoiding confusion by adding descriptive notes can benefit you if there is a question later on down the road.
Similarly, if you are allowing your customer to pay in installments, use theÂ Line Item section to make clear what installment is being paid and the end product or service (e.g., Installment 2 of 4 for Vegan Suede LoveSeat Couch, Color: Coral)
5. Adding a Discount & Request Deposit
Under our Line Items, we can opt to Add Discount. In the example below, I applied a 25% new customer discount to this gift basket order by manually entering it into the discount fields.
Under the total, notice that you can also Request Deposit. You can request a specific percentage upfront by adding in details here. Iâve added a request for a 50% due immediately upon receipt. Whether the purchase requires you to special order materials or you are holding an item for a customer, requesting a deposit can help reduce risk to your bottom line.
6. Fill In More Options
After you have all of the main parts of the invoice filled out, there is one last section: More Options. Here you can do even more to organize and keep on top of the invoices you send:
Request a Shipping Address
Allow a Customer to Add a Tip
Allow Customer to Save a Card on File
Square Invoices automatically sets up reminders, but you can select Edit RemindersÂ (as seen to the right) and edit the frequency around the due date. If you select Tipping, your customer will have the ability to manually add the tip amount or choose a percent to add to the total.
Store Cards on File For Faster Payments
Storing a card on file can save your customer time and streamline the process for everyone. When you process a payment with a card on file, it is going to cost you a little bit more in processing costs, however. To refresh your memory, processing a Card on File payment costs 3.5% plus $0.15. If your customer sets up recurring invoices and approves automatic payments, you can see how this could benefit your business over the long run, despite the extra charge.
There are a few ways to create a Card on File for Invoices. First, you can select Card on File on the invoice, as pictured above. If you select this, your customer does all the work on their end with approval. If you are at your Virtual Terminal or at the Square Point of Sale app and want to add your customerâs card to the customer director for future billing, you can do that, too.
To add a card on file, head to the Customer Directory and manually add their credit card information. Square prompts you to print out and have your customer sign their approval to save their card on file. Make sure you keep that piece of paper in a safe place!
7. Attach Files
In addition to selecting the option for your customer to store their card on file, you can attach additional files that pertain to the order. Square lets you add up to ten files (up to 25 MB worth, total). This includes JPG, PNG, GIF, TIFF, BMP, and PDF file types. Attaching files such as contracts, mock designs, or information about the sale may help support your case if there is a chargeback issue in the future, so it pays to add as much pertinent information as you can here.
Need help drafting an agreement or documents? Square provides free professional contract templates so that you can customize and attach to invoices. Use these to spell out the details in your contract, get ahead of customer expectations, and avoid payment disputes. Square provides downloadable templates including Completion of Services, Order Forms, Improvement Agreements, Sale of Goods, and more. Visit Squareâs Build Your Contract page to find templates you may need and add to your invoices or keep on file.
8. Preview Invoice & Customize Appearances
After entering in all of the most important details of the invoice, letâs see how it will look for the customer. In the upper right-hand corner of the invoice screen, I selected âPreview.â Here is what we have so far.
You’ll notice right off the bat that the Square Invoice has a pretty large banner that is currently completely unbranded. Square reminded me through the green tutorial prompt that I can update my logo, color, and business information by heading to Account & Settings.
Letâs head there next and update the banner to reflect the brand. Adjusting these setting and information is located at Receipt under Account. Note that the settings, branding, and contact information that you apply in Receipts is also reflected in the settings and branding applied in Invoices and Estimates.
Below, I uploaded a logo and chose a background color from the available colors.
After scrolling through the sample invoice preview, I also noticed that Square had my business name, address, and phone number in the footer. If youâre like me and donât have a brick-and-mortar business location, you can adjust the details of your contact information, which is what I will also be doing in Account & Settings.
All you have to do to disable location display is toggle âShow Location.â The only contact details displayed on my invoices now are my business name, and contact phone number. Just how I like it!
9. Send Invoice
Here is our finished invoice. Note that we selected that the customer can save their card on file. Additional authorization is all ready for them to click right below Billing Information.
As I scroll down in the invoice, you can see that Iâve added a short note, itemized products, and the discount. Also remember that for this order, I required a deposit before assembling the baskets. When viewing the invoice, the total balance and the due date for the deposit are laid out clearly, as seen in the screenshot below.
And that’s it! The invoice ready to send to the client.
Track Invoices & Follow Up With Customers
If you deal primarily in custom orders, or you have multiple clients, it’s quite likely you have several outstanding invoices at any given time. The good news is that with Square Invoices, you don’t need to hope you’ve remembered to enter an invoice in your spreadsheet so nothing slips through the cracks.
In the Square Dashboard,Â you have many options to sort and search for invoices. You can search for and view every invoice youâve sent by customer ID, invoice ID, invoice title, or customer email. You can also sort invoices to only display sent, outstanding, paid, scheduled, draft, and unsuccessful invoices. The other way you can sort your invoice view is by a specific date or a date set.
By selecting only to view outstanding invoices, you know who you may need to follow up with this week. Following up is easy â you simply select the invoice. As you can see in the screenshot below, a vertical screen appears to the right of your dashboard when you select the specific invoice. Here you can view the recent activity, and track when (or if) your client saw the invoice and any action taken with it.
At the bottom left, you can select Remind and draft a quick reminder message to send to your customer. Need to record a payment received by cash or check? No problem, you can manually add the amount by selecting Record Payment under the Payment Schedule section.
Pay Off The Invoice With Square POS
If your customer is standing in front of you or will be heading in to see you, the free Square POS app is a great way to take their payment. For one, if you swipe, tap or dip the card with a connected reader, you can process the payment at 2.75% rather than 2.9% + $0.30.
Here is the next payment screen. You can record partial or full payment or charge a swipe, tap, or dip a card on your connected device.
While we are here, I want to remind you that the Square POS app has all of the same invoice functionalities as far as processing payments, tracking, and yes â even setting up and sending invoices.
Sending An Estimate
Iâm happy to report that Square recently started supporting estimates. If you havenât quite closed the deal yet with your customer, or you provide a service-based business, sending an estimate is an essential step. You can access Estimates within the Invoices section.
I filled in the details of a bathroom remodel estimate below. The same branding and delivery methods apply to estimates as they do to invoices, so if youâve already set that up, you’re all set! Head back to the previous section in this tutorial,Â Preview Invoice & Customize Appearances, for a refresh on how to update logo and colors if you haven’t yet.
As you can see, the process is nearly identical to send an invoice and an estimate.Â
Is Square Invoices Right For You?
As far as making your life easier as a business owner, Square delivers when it comes to simplicity and ease of use. As far as getting paid, invoicing a client is a bit more expensive when it comes to processing credit cards, but you can send an unlimited amount of invoices for free, record check or cash payments, and get the simple tracking and reporting tools with no added fees.
If you compare Square Invoice to paper printing, mailing, and waiting, itâs no contest â Square wins hands down. But Square does have its limitations. If you are looking for advanced reporting features, integrated expense tracking, and live bank feeds, you may want to shell out some more money for a premium solution like FreshBooksÂ (read our review). Check out our Invoicing Software Comparison chart to see different options available.
That being said, I like that Square seems to be listening to their user base when it comes to improving functionality and offering more solutions, as evidenced by the recent addition of estimates this year. All in all, with Square you have everything you need to send an invoice or a deposit request and easily track activity for follow-up. If you are ready to give it a shot, set up a free Square account and start sending invoices!
Want to know more about Square? Again, don’t forget to take a look at our Square Invoices Review, and for a better look at everything Square can do for you, check out our complete, in-depth Square review!
The post How To Use Square Invoices To Ensure You Get Paid On Time appeared first on Merchant Maverick.
Understanding the nuances of the small business tax code has never been a walk in the park (especially when the tax laws are constantly changing), but when it comes to freelance taxes…? Let’s just say that those are a whole different ballgame.
According to a 2015 study done by Xero, 73% of freelancers don’t deduct any expenses when filing their taxes. Considering how many people now rely on freelancing gigs as a primary source of income, that number is frankly shocking and prompts the question:Â Are you maximizing your tax deductions as a freelancer?
If you are a freelancer, there are 10 very important tax deductions you need to know about. Gaining a basic understanding of how freelance taxes work and what you can and can’t deduct can save you a good chunk of change and spare you from trouble with the IRS down the line.
Read on for several money-saving tips and to learn about the top 10 tax deductions available for freelancers.
The Basics Of Freelance Taxes
Freelancing is a form of self-employment in which a person offers their service for a fee (rather than relying on a traditional employment arrangement).Â A person is required by law to pay taxes to the US government if they receive a freelance income of $400Â (or a church employee income of over $108.82) in a given year.
When you’re paid by a traditional employer, standard taxes on Medicaid and Social Security are automatically taken out of each paycheck. This isn’t the case for freelancers and independent contractors, who are instead required to pay self-employment taxes. The self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicaid). In addition to self-employment taxes, freelancers are also required to pay income tax.
If you are a freelancer, you will have to save a certain percentage of your income inÂ order to pay your taxes. Most financial professionals advise freelancers toÂ saveÂ around 25% (or even 30%) of their total income to cover these taxes. Freelancers may be required to pay taxes every quarter rather than annually (cue estimatedÂ quarterly taxes), depending on the size of their earnings.
Estimated Quarterly Taxes
Most tax-payers are used to the April 15th deadline when filing taxes for the previous year. However, freelancers are often required toÂ pay estimated quarterly taxes. Instead of paying taxes once a year, some self-employed individuals will pay these estimated taxes four times a year.
Quarterly Tax Period
Estimated Quarterly Taxes Due
January 1 – March 31
April 1 – May 31
June 1 – August 31
September 1 – December 31
Note: These due dates are specifically for 2019 and willÂ vary slightly each year.
So, how do you know if you need to pay estimatedÂ quarterly taxes? According to the IRS, individuals who expect to pay at least $1,000 in taxes for the year should file estimatedÂ quarterly taxes instead of waiting until April to file. The 1040-ES form can help you approximateÂ your total income for the year as well as your estimated tax payments.
As always, we recommend consulting with an accountant or tax professional for tax advice — especially when it comes to freelance taxes. They will be able to assist you in officially determining whether you need to pay estimated quarterly taxes, and if so, how much.
Tracking Freelance Finances
When you’re self-employed, it’s incredibly important to keep your finances organized. That’s where accounting software comes in.
Most freelancers would probably rather be finding new clients, creating new marketing strategies, improving their brand and social media presence — basically doingÂ anything but accounting. But earning freelancer income is only half the battle. Managing that income and keeping track of your business earnings and expenses — that’s what sets you up for long-term success.
Luckily, there are multiple accounting programs that are designed specifically for freelancers, like QuickBooks Self-Employed. QuickBooks Self-Employed helps freelancers keep track of their income and expenses, manage deductions, and calculate estimated quarterly taxes. It even includes a Turbo Tax plan so you can easily file your taxes. Read our full QuickBooks Self-Employed review to learn more.
Whichever accounting software you choose, it’s important to record your income so you can set aside the proper amount for taxes, track your expenses so you can maximize deductions, and keep your finances organized in case you ever face an audit.
Tip: Hire A Tax Professional
The biggest tip I have for freelancers is to hire an accountant or tax professional. When you’re self-employed and trying to save as much money as you can, it seems counterintuitive to hire an accountant, but trust me — the expense will more than pay for itself.
As a previous independent contractor, I’m speaking from experience here. When I started out as a 1099 contractor I knew a little bit about self-employment deductions. I saved 25% of each check, kept a careful record of my business-related mileage, and saved all of my business expense receipts. But without the help of an accountant, IÂ still would have missed out on over $3,000 worth of deductions I didn’t know about.
Accountants and tax professionals can help you navigate the murky waters of freelance taxes and find you all sorts of savings. They know exactly what you can write off, which deductions you qualify for, and which deductions could put you on the radar for an audit. This expertise is priceless.
But, don’t let your accountant doÂ allÂ the work. Knowing which deductions you are eligible for and keeping careful records of your receipts and expenses throughout the year can help ensure you save as much on your freelance taxes as possible. (And, since accountants are often paid by the hour, the less work they have to do the more money you’ll save.)
Top 10 Tax Deductions For Freelancers
Whether you about to file your taxes and are searching for last-minute savings or you are trying to track your deductible expenses throughout the year to get ahead of the tax game, here are the top ten tax deductions freelancers and independent contractors should know about:
1. Self Employment Tax Deduction
Rember when we said that freelancers are required to pay a 15.3% self-employment tax? Since freelancers are self-employed, they serve as both the employee and the employer, resulting in the 15.3% tax rate. In a traditionalÂ job, half of that tax would be covered by the employer.
This deduction allows you to deduct the employer-equivalent portion of your self-employment tax (approx. 50% – 57%). This deduction only affects your income tax. Contact an accountant or tax professional to see if you’re eligible for the self-employment tax deduction.
2. Health Insurance Premiums
Since freelancers have to provide their own health insurance, self-employed individuals can often deduct their health insurance premiums. The deduction cannot exceed your annual earned income.
3. Home Office Deduction
If you have a designated space in your home that is usedÂ exclusivelyÂ for your business, you may be eligible for the home office deduction. You can use the simplified method and claim $5 per square foot, or you can use the complex method and write off direct expenses related to your office, including furniture, maintenance, equipment, and a portion of your utilities. Contact your accountant to see if you are eligible and to determine the best way to claim your home office deduction.
4. Office Supplies
Do you use printer ink or buy stamps to run your business? There’s a deduction for that!
Freelancers (and small businesses) can deduct office supplies so long as they are “ordinary and necessary” (which is the IRS’s rule of thumb for all deductions). Be sure to save all of your receipts so you can file your taxes properly at the end of the year.
As a freelancer, you can deduct travel expenses so long as the travel is strictly business-related. Again, be sure to save your receipts, airline tickets confirmations, etc.
If you’re self-employed, you can deduct business-related mileage. The 2018 mileage rate is 54.5 cents per mile, which adds up surprisingly quickly.
Carefully log your start and end mileage, your starting point, your destination, and the purpose of the trip in a notebook (or using a tax software program like QuickBooks Self-Employed). You can also choose to deduct vehicle expenses instead of mileage. Talk to your accountant about which option is best for you.
7. Hardware & Software
If you require specific hardware and software to run your business, these purchases can count as deductions. Talk to your accountant about the best way to deduct these expenses as some bigger purchase may need to be depreciated.
Certain educational or certification expenses can also be deducted so long as they are directly related to your current line of work, not a new career. Keep track of your tuition and other education expenses throughout the year to claim this deduction.
9. Retirement Contributions
Since self-employed individuals are responsible forÂ their own retirement accounts, retirement contributions can also be deductible. Keep track of any contributions you make to your SEP or IRA plans throughout the year to take advantage of this deduction.
10. Advertising & Marketing
Advertising and marketing expenses used to expand your business and bring in new customers can also be deducted.
New Tax Laws May Equal Savings
The new Tax Cuts and Jobs Act was one of the biggest changes to tax law in decades. While the IRS is still rolling out the full implications of these changes, one of the most important changes for freelancers is the new 20% qualified business income deduction, otherwise known as the pass-through credit.
Certain types of businesses — like sole proprietors, S corporations, and partnerships — are eligible for an up to 20% deduction on taxable income. There is an incomeÂ limit for this deduction, so be sure to talk to an accountant or tax professional to see if you qualify.
Now that you know about the top ten freelance tax deductions, it’s time to start saving! (Saving receipts, that is.) Make sure to carefully preserve all expense receipts and keep detailed financial records of anything you plan on deducting. This assists your accountant to maximize your deductions and helps prevent a tax audit.
You can now rest easy knowing exactly what’s expected of you as a freelancer when it comes to filing taxes. You can also be confident about the best ways to save money on your freelance taxes so you can continue to do what you love — and get paid for it.
As always, we recommend consulting an accountant or tax professional for the best tax advice.
The post Top 10 Tax Deductions For Freelancers appeared first on Merchant Maverick.
Unpaid invoices can be a burden for any business. While you know that the money from the invoices will come eventually, slow-paying customers or long repayment terms could have a negative impact on your incoming cash flow — and this could be a problem for your business.
Instead of waiting for weeks (or months) to receive the money owed to your business, how can you get the funding your business needs immediately? What if you could put your unpaid invoices to work for you? What if you could sell your unpaid invoices or use those invoices as collateral to receive the money you need to cover an emergency or to use as working capital?
If outstanding invoices are creating cash flow problems for your business, there are lending options available for you. In this post, weâll explore invoice financing, invoice factoring, and invoice discounting. Weâll discuss the differences, how they can benefit your business, associated costs, and most importantly, how to make the right choice for your business. Read on to learn more.
What Is Invoice Factoring?
With invoice factoring — also known as accounts receivable factoring — a business owner sells unpaid invoices to a lender. This lender is known as a factoring company or simply a âfactor.â When you sell your invoice, the factor gives you an upfront payment that is typically 85% to 95% of the invoice total.
The factor will then proceed with collecting payment from the customer. Once the customer has paid the invoice, the factor will pay the remaining balance to you, less an agreed-upon factoring fee. Factor fees vary by lender but typically add up to between 1% and 6% per month. Factors charge daily, weekly, or monthly fees, so the longer it takes for the invoice to be paid, the higher your fee will be.
Obviously, the factoring fee reduces the amount that you receive from the invoice. This is why itâs important to always weigh out the return on investment before agreeing to sell your invoices. If there isnât an immediate financial need, waiting for your customer to pay the invoice is the wisest decision, but if an unpaid invoice is causing financial challenges in your business, receiving immediate cash may be worth the cost.
Invoice factoring offers a financial solution for businesses that need funds quickly but may not qualify for other loan options. Most business loans require a certain time in business and minimum annual revenues, and many lenders also take personal credit scores into account. But even if your annual revenues are low, your business is new, or you have personal credit challenges, you may qualify for invoice factoring — provided you have qualifying invoices.
Think invoice factoring is right for you? Learn more about how to determine if invoice factoring is a smart financial choice for your business. Once you’ve decided to move forward, check out our comparisons of top invoice factoring companies.
Financing VS Factoring: Whatâs The Difference?
Uses invoices as collateral for a line of credit
Sell invoices for immediate cash
You are granted a credit facility based on the value of your unpaid invoices, and can draw from your available funds at any time
Factor gives you an advance when the invoice is sent and sends you the rest once the customer pays (minus a factoring fee)
You are responsible for collecting invoice payments
Factor is responsible for collecting invoice payments
Two terms that are often used interchangeably are invoice financing and invoice factoring. Invoice factoring is a type of invoice financing. However, when most people use the term âinvoice financing,â they are referring to accounts receivable financing.
Accounts receivable financing — or invoice financing — is similar to invoice factoring. However, with this type of loan, your unpaid invoices act as the collateral to secure a line of credit. The amount of your line of credit is determined by the value of your invoices.
With invoice factoring, you receive a lump sum payment from the factor based on the value of the invoice. In other words, the factor purchases your invoices. Therefore, the factor is responsible for collecting payments from your customers. With invoice financing, the invoices still belong to you and are only being used as collateral. This means that collecting payments from customers is your responsibility.
What About Invoice Discounting?
Another form of lending based on unpaid invoices is invoice discounting. Like invoice factoring and invoice financing, this is an option for qualifying B2B and B2G businesses that need extra capital. Letâs explore what invoice discounting is and how it differs from invoice factoring.
Invoice Factoring VS Discounting
Invoice discounting is similar to invoice factoring in that you use your unpaid accounts receivable as collateral. As with invoice factoring, new companies and startups, business owners with low credit scores, and businesses with low annual revenues that do not qualify for traditional financing may also qualify for invoice discounting.
What makes invoice discounting distinct from invoice financing different is who collects the payment. With invoice factoring, the factor collects payment from the customer. With invoice discounting, your business is responsible for collecting the payment. After submitting qualified invoices, you will receive a lump sum payment of up to 95% of the invoice value. You will collect payment from your customer as usual and pass the money onto the lender, plus fees charged for the service.
How To Choose An Invoice Financing Solution
Even though invoice factoring, invoice financing, and invoice discounting have similarities, there are situations when you should select one option over the others. Before you submit your invoices, keep the following considerations in mind:
Notification VS Non-Notification
If a third-party lender purchases your invoices through invoice factoring, your customers will be notified since the factor will be collecting payment.
With invoice financing and invoice discounting, you are collecting payment as usual, so your customers will be unaware of a lenderâs involvement.
If you donât want your customers to be notified by a third-party, choose invoice financing or invoice discounting.
If youâre a smaller company, you may not have the manpower to chase down customers for unpaid invoices. If you would rather the lender collect payment, invoice factoring is the option that would work best for you.
It is important to note that invoice factoring often has higher fees. However, the additional costs may be worth it if you do not have the time or resources to track down customers and collect payment.
If you use invoice factoring and the factor collects payments, remember that your customers will be notified of third-party involvement. If this is something you wish to avoid, consider your other financing options.
Asset-Backed Line Of Credit VS Lump Sum
If you want to receive a lump sum payment for your invoices, choose invoice factoring or invoice discounting. With these options, you can receive up to 95% of your invoice value upfront.
If you prefer a more flexible option, consider applying for invoice financing. Youâll receive a line of credit that is backed by your unpaid invoices.
If unpaid invoices are dragging your business down, put your accounts receivable to work for you. With invoice factoring, financing, and discounting, you can receive the money you need even when you donât qualify for a traditional loan. Consider what type of financing would work best for you, shop around for the most affordable fees, and select a lender based on the financial needs of your business.
The post Differences Between Invoice Financing And Invoice Factoring appeared first on Merchant Maverick.