Preparing for End-of-Year Accounting
This post is a guest post from Allan Branch, a one time freelancer who created LessAccounting for freelancers who need to keep track of money or send invoices.
If you’re reading this you’re probably not an accountant so bookkeeping is painful, boring and no one likes it. Let’s see if we can make this as painless as possible. Let’s remember that the reason to keep tidy books is to maximize your tax deductions. I make more on an hourly basis when I do my taxes than any other time of the year. If I spend a few hours properly putting everything together I can save (earn) thousands of dollars in reduced tax payments.
Now is the time to start bringing together all of the records needed in order to process your tax forms for the calendar tax year of 2009. If this is your first year of filing as a self-employed or freelancer, then you must first make a decision on which method of accounting to use for reporting your income and expenses on your business. I always recommend for small businesses without employees or inventory to use the cash method which is defined from the IRS web site.
Cash method (IRS): Under the cash method, you report income in the tax year you receive it. You usually deduct or capitalize expenses in the tax year you pay them.
(The Accrual method is a bit more complicated and should not be chosen without the advice of an accountant.)
What this means is you start gathering receipts for expenses actually paid in 2009. The easiest way is to combine all cash register receipts, canceled checks in envelopes for each separate expense category for your business. (Ex: Advertising, Office Supplies, Postage or FedEx, Travel, Meals note travel is separate from meals.) The Payee’s name, the transaction date and the amount paid must be clearly visible in order to claim the deduction.
For credit card charges, make sure to gather all charge receipts up till December 31, 2009. That is right, credit card charges are deemed an expense in the year charged not necessarily paid.
The best person to compile all of these records is you, the owner, because you recognize them the best. Be sure not to duplicate expenses by adding credit card payments on your account to actual credit card charge receipts. But do total up all of your receipts in each envelope and place the name and amount of the expense on the outside of the envelope. This will reduce your tax preparation fee and may decrease your taxes owed by reporting all expenses properly.
Then January 1, 2010 save yourself a lot of time by using a web based service to help keep your books in order, your accountant will love you for it. Yes, you still need an accountant. A good accountant is hard to find but will pay for herself by saving you money at tax time. Using an web service can help because it saves you time and stress, it’s easier to spent one hour a month than twenty hours at the end of the year. Plus the information will be fresh in your head, it’s a lot harder to remember what that expense was for six months later. Although a good web based service costs, it should easily pay for it’s self with reduced frustration and less time spent doing all the work. Also, any account will be happier if you can point them to a website where they can print reports of the data they need, rather than you bringing in a shoe box, and this should mean a smaller bill from the accountant.
- LessAccounting.com with bank integration
- Shoeboxed.com no more data entry!
- Freshbooks.com – great for invoices!
Is it a bad idea to use something like Turbo Tax instead of hiring an accountant? I’ve used it in the past for taxes when I was employed full time and only had a little bit of side income. Now that I’m self-employed full time I wonder if I’d be able to continue to do my own taxes, doesn’t seem like it should be *that* hard, but I’d hate to miss potential savings by not hiring an accountant. Thoughts?
Thanks for this post. I have to admit, I’m not fond of bookkeeping but at the same time, I can’t bring myself to outsource it (trust and control issues). Your tips help make it a little more palatable.
I do all my accounting and taxes myself. I find that being a freelance web developer, using Billings 3 to track income and expenses makes it super easy to file at the end of the year, because everything is in one place. Luckily I don’t have too complicated of a tax structure, I usually only have expenses in only one or two categories (paypal fees, outsource payments, etc) I save more money doing it myself then paying expensive accountants. HR Block alone charges like $250 to do business taxes.
I agree that a web based solution is best, however if you have your own server somewhere (even a decent hosting plan) it doesn’t have to be a paid solution. I use LedgerSMB which uses perl and Postgres SQL. While they aren’t nearly as popular on hosting plans as PHP andd MySQL decent plans should offer them. Total price – only the pain of getting it setup.
I still say an accountant – a *good* accountant, has value. In my first year with him, my accountant got me back around 7000 I wouldn’t have thought of. At the same time he trained me to do my accounting in a way that means I can do my quarterly BAS (GST) statements myself and only visit him once a year for a couple of hours to go over my (non simple) end year accounts.
There’s less things to worry about when you use someone else app, besides the updates and enhancements to the application. In any regards, use the application that works the best for you.
I luckily have a very intelligent grandfather who helps me with my taxes. I don’t even think I could look at my income and stubs for the past year and really understand how to do taxes, but the more I do them each year the easier it becomes.
Some great advice here – if you aren’t already using a bookkeeping system, now is the time to start for 2010. It will save you time and headache come the end of the year. And you are so right, your accountant will love you.
Also note there is a difference between an “accountant” and a CPA. CPAs have a certification and know the tax system and how to find tax loop holes. Anyone can call themselves an “accountant”. Find a CPA to prepare your taxes. A good CPA will save you more money than they cost.
We use Quick Books for Mac to track everything each and send the file to our accountant to calculate and file everything for us.
We used Turbo Tax the first year we went LLC and it screwed up some deduction item and we did not find out about it till 3 years later… we were then audited for that Turbo Tax error and the interest on the penalty ended up being more than the fine itself.
I would highly recommend an accountant that you can talk to and learn from. It gets easier and better each year for me. We have been doing this for 4 years now.
We use Xero.com for all our accounting needs. It’s a powerful online solution that allows us to keep all our accounts easily organized – easy reconciliation, multi currency, etc. You can even find accountants here in Australia who specialize on this system, making it easier to do your Tax returns at the end of the financial year.
Totally recommended for those people looking for a new system for this new year.
I looked at Less Accounting today and I have to say as a designer, I think the UI is awful, and the voice over on the tour seemed so amateur that I’m not about to trust my info to it. Sorry, guys, you’re going to have to pay for a pro if you want me to fork over $25 a month. And yes, UI matters.
I have for over a year been trying to find a way to get away from using Quicken 2007 and iBiz, which are both buggy on a mac, to a more comprehensive solution. Being 2010, I’ve decided to test out a bunch while keeping my time recorded on paper for the time being.
I don’t feel that paying monthly for a bad UI is going to do it. I’d rather own the software. Perhaps I’m old fashioned in that regard.
Currently giving Billings3 and Macfreelance a spin, and also downloaded Quickbooks for Mac. I understand Quicken 2010 is coming out for Mac shortly, and I’ll give those a shot but I think Intuit has really stunk for Mac for years.
Dave I hope you can find the right accounting solution for your need.
Can anyone recommend a good Iphone or Ipod tool to track these? Or is it recommended to just save receipts and use the software on computers?
I’ve also heard that you can only submit a list of write offs via bank statements and written records for the first time you are filing, after that you must submit actual receipts.. clearly I have no clue what the best approach is.. or what is even correct information.
If anyone can recommend a good accountant it would be most appreciated.
Thanks!
Ruby are you in the US? If so, what state? Save paper receipts should be saved for cash purchases. Cloud accounting (web based) is usually safer than keeping all your bookkeeping data on your computer.
Thank you Allan.. I am in the US in GA.
So which program would you recommend? Right now I am using my ipod touch and applications to keep track of expenses and mileage. I can later dump this information into spreadsheets, but then Im guessing I will need to pay an accountant to go through the spreadsheets and conduct the tax filing.
Is this not a good solution since I will not have cash receipts?
Well I’m bias because I’m the co-founder of http://LessAccounting.com, other great apps are billings, freshbooks and cashboard. I like web based applications because if your computer gets stolen or crashes your data is safe.
I’ve been using Freshbooks for over a year. I love the interface, the simplicity, and the functionality, but I can’t stomach the cost. True, it’s only $14 per month. But as a freelancer/small business owner, every penny counts.
Less Accounting is $12 per month for the basic account. That’s $168 and $144 per year respectively. Compared to $39 one time for Billings, and even an upgrade to the new version sometime through the year, is a 50% savings for your accounting.
Just thought I’d share my thoughts. Freshbooks is awesome. Less Accounting seems like a good tool. Blinksale is good also.
Probably better for those with multiple computers and possibly small family businesses with multiple employees.
Blinksale does have a $6 per month option, but it’s very limited, and is still more expensive than Billings.
To run my business, I use GetCashboard.com to track hours and invoices on a daily basis, mint.com to keep an eye on income and expenses and I use QuickBooks 2007 at the end of the day to hand off a nice file to my Accountant so he can make sure I’m doing everything correctly. I hate retyping everything in QuickBooks, but it gives me some great reports and I bought one copy and have reused it for years.
Just thought I’d share my thoughts. Freshbooks is awesome. Less Accounting seems like a good tool. Blinksale is good also.
The more I see I pay in taxes the more happy I have someone do my taxes for me:) GO H & R Block!
congratulation keep it up