Accounting is like flossing. We all know how important it is, but very few of us take those extra few minutes to get it done.
Shane Gibson knows that all too well. He jumped ship from an old-school accounting firm and founded Skyward Accounting. As a Certified Public Accountant (CPA), Shane works with solopreneurs and startups, helping them streamline their accounting practices and grow their businesses.
Shane gave me some great tips, tools, and do-not-ever-do-this examples that demystify accounting. Check them out!
What time during the year should start-ups, solopreneurs and small businesses start preparing tax returns?
As soon as possible. Think about prepping documents at the end of the year. You can submit state and federal tax returns as early as January. Don’t wait until March. It turns into a big, stressful month for accountants and small business owners alike. It’s a much more positive experience if you can get your paperwork ready earlier.
What’s the deal with estimated taxes?
As your own boss, no one is withholding taxes from your income throughout the year. If you make $1000 or more of income from self-employment, you need to pay quarterly, estimated tax payments.
There are two ways to calculate your estimated tax liability:
Look at your 1040 form from the prior year. Pay 100% of the tax liability on your income from the past year, split up over four payments.
Pay 90% of this current year’s actual liability in four payments. You can estimate these payments based on your income from quarter to quarter. Note that the IRS will fine you if you pay less than 90% of the liability that you owe.
If you work with an accountant, they should give you a 1040-ES, which lists out your estimated tax payments. Estimated quarterly taxes are due 15 days after the end of each quarter. Here are the dates for 2015:
April 15, 2015
June 15, 2015
September 15, 2015
February 15, 2016*
*If you file your tax return and accompanying payment by February 1, 2016, you do not need to pay your 4th quarterly; it’s already included in your yearly payment. Another reason to get it done early!
Is it important to monitor your accounting records on a daily or weekly basis?
So, a lot of people don’t keep track of their accounting. They do something I call “shoe boxing” where they put all their expenses and receipts into a shoebox until the year’s end. During tax season, they try to go through everything and come up with a number that’s fairly accurate. It’s a mess.
Here’s why you should keep track of your accounting.
The IRS requires that you have separate records of all of your income and expenses. It’s much easier if you do the work as you go along.
Accounting is the best way to know if you’re profitable, and what aspects of your business are bringing in the most revenue. Sometimes, I ask clients, “Hey! How are your numbers?” They say, “I didn’t run out of money, so I guess okay.” Accounting records offers you a lot more detail.
Can you give us an example or two of how tracking accounting records can make a company run better?
Here’s an analogy that works for a lot of my clients: there’s a bankruptcy attorney who talks about an old car she used to drive. It didn’t have a fuel gauge. The car broke down a lot because there was no way to know when she would run out of gas. Running a business without tracking accounting records like driving a car without a fuel gauge. You don’t know the vitals of your business: your profit, your loss. It’s running a big gamble, especially for someone creating or selling a product.
I had one client who sells products. He sold the highest volume of a certain product, and so he assumed that product bringing in the most revenue. When we actually broke down the cost of producing that product, he could see that high input costs meant he was actually losing money on every sale.
I have another client who realized that his primary business activity, which took a lot of effort, only made up 20% of his revenue. Another faction of the business, which took very little energy made up 80% of the revenue. We were able to shift his priorities and increase his revenue while decreasing the effort he needed to expend.
Accounting doesn’t lie -- see if things are going the way you think they are going. You may be surprised! If you’re making $1000 less than you want, dig in and see if there are any expenses you can cut. It’s so valuable when you’re starting out and you’re growing.
What are your favorite accounting tools, especially for keeping track of expenses and revenue?
There are some awesome tools that keep you away from “shoeboxing.” I prefer cloud accounting software, which acts like online banking. It automatically pulls in your bank and credit card transactions -- all you have to do is categorize them. You can take photos of receipts on your phone and upload them, too.
My favorite tool is Xero. As the alternative the Quickbooks, it’s making waves with a beautiful design and it’s great network of accountants. The mobile feature is fool-proof, allowing you to take simple photos of receipts. Xero also offers unlimited access, so if you’re partnering with another entrepreneur and accounting firm, you can all look at the same screen in real time. Their bank reconciliation is also simple and effective.
Receipt Bank goes a step further. It actually reads the data from your receipts and loads it into your accounting software. You don’t need to type anything, just to scan it and check. Together, Xero and ReceiptBank are the dream team.
QuickBooks is the established software in the accounting world. It’s dependable and widely used. My customers find that Xero is more user-friendly than Quickbooks and offers better add-ons and customer service.
FreshBooks is a great choice for the service industry, but it doesn’t offer bank reconciliation. If your software does not offer this service, you need to go through and match each transaction in your bank accounts with each transaction in your accounting records!
Expert Tip: If you’re using a free accounting software, you will get a skimpy service.
Should people keep paper receipts in addition to digital copies?
If you take a photo of a receipt and upload it to cloud software, you don’t need to keep it. I recommend that people keep paper receipts as a backup because it can’t hurt. You can even use Evernote if you don’t want to hold onto paper.
Is there a particular point in the life of a small business when it would most benefit from a CPA?
Having an accountant to help you with registration and business formation can be especially helpful. You don’t necessarily have to pay your accountant a retainer but instead use them as an on-call resource. A lot of companies don’t realize that they may need a business license. (You have to contact the county that you work in and see if you need a license for what you do.) An accountant can help you with discerning those needs. If you have a store or a product-based company, you should definitely have an accountant set up your accounting system.
Sales tax can be really tricky for startups. Do you have any suggestions for ways to break-down and approach this complicated issue?
First step: figure out if your services or product are subject to sales tax. It will depend by state and industry. If you sell something online to a person in a different state, it can be tricky. You need to have a way to split up your sales in accounting records by in-state or out-of-state.
Avalara can help you keep up with state laws and allows you to track sales tax across state lines. It also integrates with accounting software like Quickbooks or Xero.
Expert Tip: If you are subject to sales tax, make sure to register with your state and complete a sales tax return.
What is your best advice for a solopreneur who wants to separate personal income and business income?
A lot of entrepreneurs say, “I am my business.” Even when the lines are blurred, try as best as you can to separate the two. Start by registering for an Employer Identification Number (EIN). It only take five minutes. Using an EIN enables you to open a business banking account and saves you from sending out your social security number to clients for your 1099.
What’s the best way to find an accountant?
Ask fellow entrepreneurs for a recommendation
Reach out to Shane!
Expert Tip: If you’re paying for a CPA, you want to make sure that they are actually certified. Check out your state’s licensing board to confirm your accountant is a CPA.