Hello everyone. Can you hear me ok?
It sounds really loud up here.
Can you hear me way back there, though? Is it good?
How's everyone doing today?
That's great to hear. Everyone seems super
pumped up to learn about accounting and taxes.
Yeah, woo! I love it.
Real quick, just so you know who I am and
why I might be a little qualified to talk
about accounting. I own a business, I've
owned a few different businesses
over the years. And then I have a few
plugins, the main one quiz and survey master.
And I'm the lead organizer of
WordCamp Jacksonville, FL. I have a website
and a Twitter if you ever want to look me up.
Disclaimer: before I get into anything, I am not an
accountant. Everything I'm going to talk about
is experience and tips I've learned over the
years from running several businesses as
well as consulting with my accountant.
But I am not an accountant. Just want to
throw that out there. You should also consider
booking some time with an accountant. They may
be able to clarify some things as well as
find tips and best practices for your
particular business.
Any questions on the disclaimer before
I proceed? OK.
The very first thing I want to talk about
is knowing your business structure.
For a lot of people they wait until the end of the year or
tax season and they don't really have any
business structure so they didn't know what
they should be keeping, what they should be
holding on to, what could be deductible in
their current business.
So, knowing your structure when you get started
is probably very important in both a legal
aspect as well as taxes.
The most common for people in this industry
or freelancers or small agencies is usually
either a sole proprietorship, an LLC, or
an S Corp. Anything above those and beyond
that is probably a little bit outside the scope
of most the people here, so those are the
three I'm going to talk about today.
The sole proprietorship and LLC. There is a
really big difference in the eyes of the law,
but in taxes they are the same exact thing.
When you go to file your taxes the LLC and Sole Proprietorship
They are pretty much identical and can file almost the exact same way.
They are both known as something called
a pass-through entity. Essentially all of
the money in your business account, or any
money, any income you receive
is pretty much treated as all your income.
If you have a separate business account and
keep the money in there and only take out
a small portion, it's still technically all
your income because they're all pass-through
entities. Now, the difference here with the
S-Corp is that it's slightly different
in that you are more of an employee and
then the income business is slightly
different than your personal income. So, it
helps with a tax break. But, it's not a
super big tax break until you get past
the $30,000 mark. So, usually when I'm helping
people get started I recommend they start
with an LLC and then once you pass $30,000
I suggest going to an S-Corp for tax purposes.
Obviously, consult your lawyer as well to
see where you would best stand to start with.
But, for tax purposes usually start with LLC
and then you transition to an S-Corp down
the road. Does that make sense?
Did I lose anybody? No. OK.
The next thing is all these forms and
paperwork and stuff that no one wants
to deal with. 1099, W-9, W-2. Those are all
random forms, most people have no idea
what those are and most of the time you
probably won't deal with them. I will have
the slides available afterwards for those
of you trying to catch pictures.
Ut oh [silence]
While Shawn is fixing that, the first form
is 1099. Essentially this is what you'll use
for your contractors and vice versa if you're
being contracted to. The 1099 is the form.
If you make more than $600 from a client
usually they're going to ask for something
called a W-9. That's where you're going to fill
out this cool paperwork saying who you are.
Then the 1099 form is what says hey this
is how much I paid this person. So, essentially
the same thing on the opposite side, if you
have a contractor, if you have lots of work,
lots and lots and you hire on a designer
or you bring on a developer and you have some
work to send to them, you'd do this the opposite
way, you would collect a W-9 from them and
then issue them a 1099 if they have over $600
throughout that year. Then at the end of the
year when they're doing taxes they're going
to use their 1099s and you'll use your 1099s
to show how much income you've made through
that avenue. There are a few different ways
you can keep up with your W9's. Either as you
have contractors you can ask for a W9 as
you bring them on or as you get to the
$600 mark. Personally I'd rather just get
the W9 when I first bring them on so I don't
have to worry about tracking them down
afterwards. Some contractors will disappear
on you eventually. So if you were to contract
out some design work and developer work
and then at the end of the year remember
you didn't collect a W9 yet and then try to
hunt them down it might be difficult. So, usually
I collect the W9s right up front. That's just
personal preference.
The W2 for employees you would issue out
W2s and contractors would be 1099s.
Essentially those 2 forms are the same thing,
they're just saying how much you've paid
them or how much someone's paid you, if
you are an employer or a contractor.
Quarterly estimated taxes. A lot of people
don't do this. I know I didn't to start with
but you really should. Essentially the IRS
expects any profitable business to make
quarterly taxes. Profitable is defined as
making over $1000 during the year.
Most people that will be a client or 2.
Most people in this industry, once you start
freelancing or doing agency work, you're
going to be profitable enough that you're
supposed to do this. However, while you can
be penalized, if you're a small business,
the penalty is usually very small, so that's
why I didn't do it the first little bit.
But, you're supposed to. There are a variety
of ways to do that. Usually, it's essentially,
say last year you made $30,000 hypothetically,
so this year you would make 4 equal payments
of $7500. It just adds throughout the year,
that's how you'd estimate it, until you get
enough experience under your belt to kind
of estimate how much you're going to be
making this year. Most accountants recommend
taking how much you made last year and then
splitting it up into quarters and then making
that every quarter. Does that make sense? [inaudible audience question]
Yeah, I meant taxes on the $7500, Yes,
you're not going to be paying your entire income
in the taxes. Just to clarify. Track your
income. I've helped a lot of freelancers over
the years and one thing I've found is that
a lot of them don't really keep track of
how much money they're owed or how much
money is out there, what kind of income they're
expecting. That's not probably a good idea.
You probably should know how much money
is out there. I was helping a freelancer about a
month ago who wasn't even sure which invoices
they've sent out, so you can't make money if
you don't send out invoices first of all, but
tracking your income is vital. So you can 1,
see how much money you're expecting to come
in, how much money you're making, where
you're making that money from.
Say you have a variety of different services
you offer, by keeping track of this income
you can categorize it and see which services
are profitable, things along those lines.
It's pretty important to track your income.
And then, if you're tracking that you want
to keep all the records accurate. In this case
you want to stay on top of your books. It can
be time consuming, depending on what you
exactly do, what kind of services you offer,
what kind of payments you take. But, for most
people who are just taking maybe a client
or 2 at at time this won't really take that
much time. Essentially you want to log all
of your expenses and payments as they happen.
Some people love to wait, maybe once a month,
once a week, once a quarter to go in and
try to reconcile all their receipts and all
their paid invoices. Once you get to that point
you'll be like I have to set aside 6 hours
this coming Sunday and then you're not
going to want to do it, because no one
wants to do accounting stuff for six hours.
If you do it as you go, you're more inclined
to actually do it.
Now, expenses to log. There's a lot and
this not even an inclusive list, but this is
most of the big ones for our industry.
Purchases such as computer, printer,
accessories, office supplies, your contractors
obviously you want to keep track of how
much you're paying your contractors.
Office, your coworking space, adverrtising, business
cards, Facebook ads, Twitter ads.
All of your legal, lawyer stuff, legal fees,
mileage, gas, WordCamps, meals.
Meals, for most meals, if it's business related
and it's under $75 you don't have to keep
the receipt, but you should, because if you were
to be audited by the IRS and you don't have
your receipts it's kind of hard to prove that
it actually happened, and all this fun stuff.
I keep all my business receipts, but technically
under $75 you don't have to.
[inaudible audience question]
It has to be business related with someone, yes.
Now, over $75 then you have to have a receipt
no matter what, but for most cases I always
keep the receipt, just the habit.
Clothing. A lot of people love to write off
their suits or their dress nice shirts, or their
dresses, because they're going to meet
clients. Technically you can't. The clothing,
if you can wear it in another setting it's
not technically required for your business
so this outfit I can not write off on my taxes.
If it had my company logo, and I could only
wear it at WordCamps for that scenario, then
I could possibly write it off as taxes, I could
say that it's for business and that I can
usually only wear it when I'm trying to
work some sort of business deal.
Similar avenues would be like a painter's
outfit. Normally most painters don't walk
around in their painter's outfit at the
grocery store. Those type of clothing could
be written off, but the majority of everyday
clothes you don't get to write off.
Use software. I've met a lot people that
have tried to manage this in excel spreadsheets
and I get a headache just looking at how
they do it. These services make it super
simple. And some of them, like Wave Accounting
has a free plan. I always suggest using a
software. It will help you categorize, it will
help you with invoicing, it will help you
with all these fun things instead of trying
to deal with it all within excel and yourself.
I've used pretty much all of these.
I like Wave Accounting because it's free.
But I really like FreshBooks because it
works really well with our industry, I think.
Then, Bench isn't a software per-se. It starts at
$125/month and you get a dedicated bookeeper
to keep track of everything for you, that
you consult with. So, if you really don't like
accounting or taxes or anything like that
I'd suggest maybe looking into Bench or
similar services.
Use an online one, especially for our industry
in general. You can get one that's maybe
on your computer like Quickbooks computer
edition, But in today's world it's so much
easier with the online. You can just give
your accountant access, or send them
over the details of the reports rather than
having to print it out or email it over.
It's just a lot easier in the online ones
in my experience.
You want to maintain you records.
If you keep your receipts all year and
then throw them out at the end of the
year and then the IRS audits you
the following year you're not going to have
those receipts anymore. You want to keep
your receipts and all of your documentation
usually 7 years. If they decide to audit you
you'll need documentation. Keep copies of
invoices, receipts, statements, tax payments,
etcetera, etcetera, anything that goes into
your taxes at the end of the year that you
might need to show proof on.
Shawn. [laughter and clapping]
I usually keep a filing cabinet. I have one
at my desk at my home office and I keep all
the documentation for the business
in that filing cabinet. At this point now
I have 2 filing cabinets. But it's usually best
practice to just keep all your documentation
in one place. That way you have it.
As long as you have the documentation.
A lot of receipts will fade over time, so
you should make a scanned copy.
Especially the grocery store ones with that
paper that will fade within like
3 weeks. So, always make a scanned copy
regardless. I try to keep the originals but
if they fade over time it's not going
to really. [audience member talking]
What he's saying is that he believes you
should either do all scanned or none scanned.
In my experience I've never encountered
that you have to go one way or the other.
But, again, that's how I've worked with my
accountant. I'm not the most expert to know
the exact situation there. I know that I
don't have everything scanned, I only have
some of it and my accountant doesn't get on
to me. I'm no expert, but I just know what
my accountant and I have worked through.
Now, the next thing is you want to report
every penny. I know a lot of people that
get a lot of 1099s and they're like the IRS
won't notice if I don't report this 1099
of $1000, they may not notice this, I don't
want to pay them that much taxes.
Don't try to get around the IRS.
The IRS will always find out and it won't
end well, ever. Always report.
Report every penny. Report all sources of
income. Then because the IRS will actually
compare your client's tax information, so
those that collected your W9 and they're
sending out 1099s, the IRS is going to check
all that and be like wait, company A paid Joe
$100 or $1,000 or $10,000 and it's not lining
up over here. So, the IRS can actually send
you something called a notice CP-2000
which is a notice of under-reported income.
And they will send you that. If they catch
you they will send you that document.
It can lead to penalty, lawsuit, or jail.
So, it's not fun. Don't go that route.
Don't try to go around the IRS.
[silence]
That's fine. Any questions on anything I've
gone over so far? [inaudible audience question]
I don't have the answer to that. My
accountant helps me with most of it.
Those forms I'm not, I don't have enough
knowledge about to be confident to tell you
one way or the other. I could tell you how
mine is. My accountant kind of works through
and has some dollar amounts that she looks at.
But, I'm not an expert enough that I'd want
to tell you one way or another. That'd be
a question for your accountant.
Any other questions over anything we've gone
over so far? Was it that boring that you're
all asleep. I know taxes are pretty boring. [inaudible audience question]
These are 2 great questions for your lawyer
and your accountant. There are a lot of
variables in this question. But, I would
start as an LLC because you want to keep
your personal and your business separate
and have all those great advantages of having
it separate. But then you switch to S-Corp once
you get around $30,000 is what my accountant
said when we were reviewing this. Mainly
because the tax breaks aren't usually really much
before that. So, she said once you hit $30,000
and over, that's what she suggests to most
of her clients, that's when I switched to
an S-Corp and that's when she suggests
most people do as well. Does that answer
your question?
You want to repeat your question? [inaudible audience question]
From a sole proprietorship and why you'd
want to switch? That's more of a legal
question. But, essentially if you get sued
and you're not separated, you're just you,
they can go after your personal assets like your
house, your car, all that stuff that you don't
want to lose. By working with your lawyer and
establishing an identity, like an LLC, S-Corp, C-Corp
you'll keep it separate. Especially in this industry
you probably want to keep those things separate.
Does that answer your question? [inaudible audience question]
The tax advantages would be the main reason.
Between an LLC and S-Corp most of the legal
aspects are the same. I'm no legal expert. There
are some distinctions. But in my experience,
from the things I've switched over, it hasn't
really done anything, the tax advantages
were the main reasons I switched.
In my experience, with my businesses, and
then what the accountant suggested, it's
usually the $30,000 - $40,000 range when
we start looking into this. [inaudible audience question]
There is a special form that my accountant
fills out. I don't know the exact number
off the top of my head. It's a fairly simple
process. You have to go through a certain
process to do it. But there's no set date
you have to do it. [silence for audience question]
This is more of an accounting talk. I'm not
nearly an expert in legal. I'm definitely not
an expert in accounting, but I'm much
farther away from lawyer.
There is a variety of ways you could turn into
an LLC. You can go to an online route, like legal zoom.
You can go meet a lawyer in person.
There are a lot of varieties.
I always suggest, if this is your first business
to go talk to a lawyer. That way you're making
sure you have all your i's dotted and t's crossed.
That's completely personal preference there.
Does that answer your question?
I guess that was my last slide.
Any other questions?
[silence for audience question]
I have not found any disadvantage. I'm not
an expert here, but in my experience there's
not, I just didn't know about them when I started
the companies. That's why I started the LLC.
[silence, audience question]
Not at my level, at least not according to my
lawyer. Hopefully he's right. There is some
more legal aspects to it. We have some other
entities, I'm more like an employee, and I
have these tax-free dividends. All these
fun complications. It's not quite the C-Corp
level. Every state is different, every county
is different. You'll want to consult with your
lawyer. I'm not an expert. But, not in mine.
[silence, audience question]
If it's under $600, you don't have to.
You can still report it. It's not required, but
it's very strongly suggested. If you can't
hunt it down, then mention it to your
accountant. They have these special forms
they can issue and send to your clients.
As long as you're reporting the income,
then that would fall back on them if they're
not doing their side.
Yes. [silence, audience question]
Are you talking about quarterly estimated
payments? If this is your first year
and you're just starting and you have no
clients from last year then you don't
usually have to worry about it this first year.
Because you're not technically profitable as
of last year. This is a new cycle. You don't
have a defined profitable entity until the
end of the year. That's when you'd start
making estimated quarterly payments.
Now, if you start having a lot of clients
right out of the gate, then you can go ahead
and start making estimated based on your
traction now. But, if not, then you can
wait until the end of the year. Like I said
at our small levels the penalty isn't usually
huge. But they usually give you some leeway
especially if it's your first year. You don't
have to worry about it right out of the gate.
Does that answer your question?
Any other questions on the exciting topic
of accounting and taxes? I will tweet out
on my Twitter a link to the slides if anyone
is interested in that. Everyone else have
a great day. Thank you.