ALRIGHT! Buckle up for a somewhat lengthy (but hopefully helpful) blog post on organizing business taxes and income! I posted about doing taxes on Instagram and had almost a dozen DMs from people with tax organizational questions! First of all, I want to say that while this is definitely something you want to do to remain legal and keep your business safe (I’ve heard way too many horror stories of having to pay THOUSANDS later on for fraudulent business), you do NOT need to be ashamed to ask for help! If you haven’t been doing this correctly for even a while now, there is no better time to start. And no better time to ask. I mean, no one comes out of the womb just knowing how to do taxes! 😉 Also, one more disclaimer. I am NOT an accountant. And there are certain things I will tell you to ask an accountant about! But, I will give you the broad overview here with some links and what you need to do to get things moving in the right direction. Ok…here we go!
STEP ONE: Make sure your business is registered!
Everything I say from here on out is going to be irrelevant if your business is not registered! You need to be either an LLC or sole proprietor, and you need to get an EIN. This was something I reached out to an accountant for, but you can also do this on your own! I chose an LLC because it separates my private assets from my business assets.
As a registered business, you will need to pay income taxes! When you work for someone else, your taxes get taken out BEFORE you get your paycheck (usually). When you are self-employed and collecting income via invoices, you are collecting everything, and therefore you need to be setting some of your income aside for taxes!
STEP TWO: Register with Wisconsin to pay Sales and Use Tax
If you’re not in Wisconsin, you need to look up your state’s law on this. Not all states require sales tax to be paid for digital images, but Wisconsin is one that does.
There are simple steps on the Department of Revenue’s My Tax website that will help you set up an account to pay sales tax. When you make over a certain amount, you need to be paying in quarterly. You should receive notification of this in your message center and/or via mail.
STEP THREE: Separate your business & personal finances.
I can’t stress how important it is for you to separate your business and personal income! You can imagine how problematic it would be to be collecting income into your personal account, spending it, and then realizing later than you spent the money you owed for taxes. It’s also problematic in case of an audit, since it’s not clear what are personal vs. business expenses.
I opened up a checking account through Landmark Credit Union. Not only is it free, but Landmark lets me break up my income into categories, which I love. More on that soon.
STEP FOUR: Organization
There is no correct way to organize anything in life, but I’ll share what has been helpful for me.
1. As mentioned, I have ALL income for my business going into my business account. All expenses come out of that account. Nothing touches my personal account. I do all invoicing through 17Hats (which is freaking AMAZING and probably deserves a separate blog post – keep an eye out for that in the future or feel free to ask me about it). If you’re interested, here’s my referral link, which gets you a crazy good deal.
2. I organize my finances monthly (sometimes every other month, if I miss a month or during slow season).
I have three separate buckets in my business checking account:
– General account where all money comes into
– Sales tax, where I place the total sales tax collected.
***Note: It may be helpful to note which county the tax is collected in since certain counties (Milwaukee) have things like stadium tax, and you will note total amount for this when doing taxes later.
– Business expenses – a certain percentage goes into this bucket to pay for expenses in my business. I ONLY use this account. ALL receipts are sent to my gmail account, and I keep the receipts for the year in their own folder.
– Business savings- another set percentage
– General income tax – depends on your tax bracket and filing status how much you will set aside. I set aside 25% as a general rule.
If it is left in the general bucket after setting aside expenses, saving, sales and income tax, then it’s fair game to pay myself with!
I also have a spreadsheet that I made that will help you organize income monthly.
Helpful? Have additional questions? Leave a comment below and let me know your thoughts and questions!
Pic of my cuties, just because 🙂