Welcome to our #AskACPA feature where we answer financial, accounting and business questions.
Question: I’m a side hustler and small business owner? How can I keep track of the expenses in my business?
One of the most frequently asked questions by small business owners is how to keep track of expenses, so as keep them from getting out of hand and better control them. If you’re a small business owner, whether you are side hustling or working on your business full-time, you know how important this can be. Not only is it crucial for you to account for what you’re actually spending, but having an accurate record of your expenses also comes in handy at tax time when you’re reporting these and potentially getting some related deductions.
Here are a few ways that can help:
Open a business bank account
Having a separate business account dedicated exclusively to business transactions makes it easier to track your business expenses and record them accurately. While you may use your personal account in some (rare) instances, you will eventually need a business bank account.
Set up your accounting system: Cash or accrual accounting?
Cash or accrual accounting?
Cash accounting consists of recording transactions when cash is exchanged. As such, you would only record your expenses when you pay for them in cash, and would record revenue only when received. Cash accounting is often used by very small businesses, as well as freelancers and sole proprietors, because of its simplicity and ease of use. However, this simplistic accounting method quickly becomes inadequate as the business grows, uses other forms of payment than cash, or needs more detailed bookkeeping.
Accrual accounting, on the other hand, requires that revenue or expenses be recorded when the transactions generating either actually happen, not when cash is paid or received. As such, you would record revenue when selling a product or service, not just when you’re paid for it. Similarly, you would record an expense when incurred, not just when you pay for it. This system of accounting is more accurate, and more suited to growing businesses.
It’s essential that you set up your accounting system properly based on your business goals and outlook.
Manage your records accurately
Last but not least, manage your receipts properly so you have accurate records for your expenses. While this can be done using a manual system such as folders and envelopes, it is more practical to do so using an application you can easily access through your phone or compute. Quickbooks offers a convenient way to scan in your receipts or download them as part of their bookkeeping suite.
In addition, make sure to promptly record your expenses in the system of your choice. While you may also use more of a manual system such as Excel spreadsheets for instance, using an accounting software that allows you to electronically record and keep track of your expenses can be more beneficial. Quickbooks not only allows you the convenience of scanning in your receipts, but also helps you record these expenses as part of your bookkeeping.
All in all, tracking your business expenses is central to your business. Without properly recording and managing your expenses, you put your business at risk and endanger your hard-earned revenues.
Welcome to our #AskACPA feature where we answer financial, accounting and business questions.
Question: What business structure is best for my side hustle and/or small business?
Answer: The answer is: “It depends!” There are a number of factors that go into deciding the right structure for your business, including tax, liability, funding and personal considerations. As a small business owner, you must choose a business structure before registering your business with the state. Let’s start by taking a look at some of the most common structures for businesses…
Sole Proprietorships
A sole proprietorship is one of the most straightforward business structures, as it’s easy to form and gives its owner complete control over the business. If you perform business activities yet have not registered as any other kind of business, you’re automatically considered to be a sole proprietorship. You are also able to get a trade name.
However, this also means your business assets and liabilities are not separate from your personal liabilities and assets. In other words, you may be held personally liable for any obligation of the business. In addition, raising money may be challenging as banks may be more reluctant to lend to sole proprietorships, and your structure doesn’t allow you to issue and sell stocks.
Who is this for? A sole proprietorship may be a good choice for anyone wanting to test the waters for their business idea first, and in general, for any low-risk business.
Partnerships
Are you and one or many partners planning to own a business together? Then a partnership may be the right business structure for you. Keep in mind there are two main types of partnership structures, including Limited Partnerships (LP) and Limited Liability Partnerships (LLP).
In Limited Partnerships, only one general partner has unlimited liability and must pay self-employment taxes, while the other partners have limited liability and limited control over the company. Any profit is passed through to the partners’ personal tax returns, hence the reason why partnerships are also known as “pass-through” entities.
As for Limited Liability partnerships, they afford their owners limited liability, thus protecting them from debts against the partnership.
Who is this for?
Similar to sole proprietorships, partnerships may be good for groups of owners wanting to test their ideas before building a more formal structure. In general, partnerships are well suited to professional groups such as accountants or lawyers.
Limited Liability Company (LLC)
Are you looking to have both the advantages of partnerships and corporations?
Do you have a medium to high-risk business?
In this case, you may elect to form an LLC. While an LLC protects you from personal liability in case the business faces a lawsuit or bankruptcy, it also can allow for profits and losses to pass through to your personal income and avoid corporate taxes. LLC members, however, are treated as self-employed and have to pay the self-employment tax.
Who is this for?
LLCs are well suited to members who own sizable personal assets they need to protect, as well as owners who aspire to a lower tax rate than the corporate tax, and medium or higher risk businesses.
Corporations
There are many corporations, including:
C corporations
C Corporations are legal entities separate from their owners, and protect the latter from legal liability. As a matter of fact, they can be taxed, make a profit, and be liable legally. In many instances, C corporations can be taxed
A great advantage of corporations consists in their ability to raise capital through the sale of stock. However, they are more costly to form than other structures, and demand more complex processes, reporting and record-keeping.
Who is this for?
C corps are a good choice for medium to higher-risk businesses in need of capital.
S Corporations
S Corporations help you avoid the double taxation that C corps are subject to. Profits and losses are passed through to the owners’ income without being taxed at corporate rates. S corporations may be taxed differently depending on the state they’re in.
Who is this for?
S corporations are good options for businesses that would be structured as a C corporation, but do qualify to be an S corporation.
B Corporations
Benefit corporations, called B corporations, are for-profit corporations taxed like C corporations. However, they are required by shareholders to generate a public benefit, in addition to financial profits.
Who is this for?
B corporations are a good choice for business owners interested in producing a public benefit along with financial profits.
Close corporations
Similar to B corporations, close corporations are less traditionally structured. They are usually not traded publicly. Usually, they can be run by small groups of shareholders. However, they don’t have a board of directors.
Who is this for?
Close corporations are well suited for business owners who do not want a traditional corporate structure.
Nonprofit corporation
Nonprofit corporations, often called 501(c)(3), are usually dedicated to dong charity, religious, educational, scientific or literary work to benefit the public. As such, they can receive tax-exempt status allowing them not to pay state or federal income taxes on their profits. However, they follow an organizational structure similar to a C Corporation.
Who is this for?
Nonprofit corporations are a good choice for business owners who want to do work to benefit the public.
Cooperative
Cooperatives are businesses or organizations benefiting those using its services, also known as user-owners. They are run by an elected board of directors and officers. Members can join the cooperative through the purchase of shares, and distributed profits among themselves.
Who is this for?
Cooperatives are for owners interested in using the services and sharing the profits of the business among themselves.
After reading about these different structures, which one(s) do you think appeal most to you?
Welcome to our #AskACPA feature, where we answer accounting, financial and business questions. Send us your questions at corporate@thecorporatesister.com.
Question: Should I report my side hustle income in my taxes?
The answer is yes! Any money you make through your side hustle is income, and should be added as such as part of your income taxes. Whether you babysit on the weekends, walk dogs every now and then, or freelance as a writer, in addition to your main job, the income you generate on the side should be reported.
If you hustle on the side by working for a company, and earn more than $600 in the course of the year, most likely you will get a taxable income form (1099-K or 1099-MISC) from the company outlining the amount of money you earned.
Your side hustle income affects your total taxable income, which is why it’s so important to track it. You can do this by opening a dedicated business checking or savings account, and setting money aside out of your revenue for taxes.
Got more accounting, financial or business-related questions. Email us at corporate@thecorporatesister.com
If you’re among the 45% of Americans who have a side hustle, you are in good company along with the roughly 70 million people side hustling in the U.S. If you’re a working woman, you may be part of the 51% of women who actually rely on the gig economy to make ends meet. Although on average, women’s side jobs earn less than men’s, both on a yearly and hourly basis, despite the fact that women are clocking in more hours, thus perpetuating the gender gap at a rate of 35%, side hustles are still prevalent among working women. As a matter of fact, 24% of these women consider their side gigs could become a full-time job.
All in all, there are many reasons why, as a working woman, you may have or consider having a side gig. From paying off debt, to purchasing a home or making more money to pay bills, your goals may vary. However, whatever your motivation or results may be, accounting for your side job accurately is crucial. Indeed, any income you may earn from it is taxable, which makes you liable to the IRS. Additionally, there are a number of deductions you may be able to get if and when you properly account for your expenses and revenues.
Here are a few tips to properly account for your side hustle, or at least set the foundation to do so:
Understand your side hustle
The first step to accounting for your side hustle is to understand your business. Answering basic questions such as the ones below may help to get you started:
What are your products?
Are you selling products or services?
Where are your revenues coming from?
What type of expenses do you incur?
These simple questions will help you better understand what your source(s) of income are, where your money is going in terms of expenses and expenditures, and how your side hustle works in general.
Keep track of your income and expenses
While you may not have a fully formed business just yet, you may want to keep track of any revenue your side hustle is generating. The same rationale also applies to your expenses. Anything you’re spending as related to your side hustle, be it in supplies, technology, courses, etc, should be accounted for.
You may even think about opening a business bank account to keep track of your income and expenses. In the meantime, you can use simple and free tools like an Excel spreadsheet to keep a record of these. This will help you know whether you’re actually making a profit, and will also come in handy when it’s time to report your revenues and expenses at tax filing time.
Carefully consider your taxes
Now that you understand how your side hustle operates and you’re starting to keep track of the revenue and expenses it generates, you can go one step further and consider some tax implications. Yes, you will have to pay taxes on your side hustle income, however, once you start generating substantial revenue, there are other tax factors to consider. For instance, if you’re selling services and/or products in a state where these are taxed, you have to collect sales tax from your customers. This is tax that you collect and then pass on to the state, consider it a pass-through tax. Keeping track of it is crucial if you don’t want to end up using your own income to pay it.
Another tax concern to keep in mind has to do with making quarterly estimated tax payments once your side gig starts generating substantial income. While you may be able to cover your business taxes with the taxes set aside from your regular employment at the beginning, after you owe more than $1,000 in taxes from your side hustle, you may need to start making estimated tax payments.
All in all, while side hustles are great ways to generate extra income and even lay the foundation for a lucrative business, they also carry with them important accounting and financial implications. The sooner you are aware of these and start looking into them, the better.
As a small business owner, you may have been hit particularly hard by the COVID-19 pandemic. You are certainly not alone. While countless businesses have literally sunk under the economic, societal and political effects of the pandemic, small business have suffered the most under the pressure. Most of these small businesses are also owned by minorities, including women and African-Americans, worsening the socio-economic impact of an already devastating crisis. Of these struggling minority businesses, a majority is women-owned and has registered a 13 point drop in overall health in July 2020, as compared to a five point drop for male-owned businesses, according to the U.S. Chamber of Commerce.
As vaccines are getting distributed more widely and the next normal is slowly setting in, a reset is imposing itself for most companies. From the way they operate, to their employees’ schedules, not to mention their very revenue-generating activities, companies have been gearing up for significant changes. Despite being provided some assistance relief, these changes are still spelling doom for many. Yet for most, these are necessary changes carrying with them incredible lessons of resilience, adaptability and growth.
At the end of the day, the main, and most resounding concern small business owners have, is around resetting their organizations for the best after the pandemic. The main question, however, is how.
How do you change and adapt at the same time? How do you create opportunity out of apparent scarcity? How do you manufacture the next normal in an uncertain landscape still ridden with crisis?
Get re-acquainted with your “why”
Crisis are excellent opportunities to reconsider the “why” behind our motives, projects and organizations. As a small business owner, a crisis of such a magnitude as the pandemic we all faced, may have put everything you thought you knew back in question, especially when faced with the horrid prospect of life or death, of survival or destruction.
While there are many mechanical, financial and tactical concerns that may appear to rule the existence of a successful business, its main driver really is its “why”. All systems, processes and people ought to rally around a strong sense of identity of the business. This sense of identity may have been altered or reinforced by the recent crisis, or may have been even reinforced. Whatever the case is, re-evaluating your business’ why is indispensable to moving forward and resetting as a small business owner after the pandemic.
How can you adapt your business to the current business landscape
One thing that has been made even more constant by the recent pandemic is change. As individuals, we’ve changed the way we related to each other, the way we live, the way we parent, and definitely the way we work and do business. More than ever, our adaptability and resilience skills are needed to help us understand, manage and overcome the onslaught of change we’re now facing. Our organizations and businesses especially are grappling with these drastic changes in unprecedented ways.
As a small business owner, what this may mean for you could be to reconsider the environment your business is currently in. Is your business adapted to the new online trends that have prevailed as a result of the pandemic’s physical distancing? Are you prepared to restructure the way you manage your employees? Is your organization open to upcoming economic changes? These are just a few of the questions that come to mind when considering where your business currently is, as opposed to where it is supposed to operate.
Check your systems
If the “why” and the adaptability of businesses are the heart of a business, its systems are its limbs. These systems and processes are the very mechanisms , from accounting to financial, that keep the business functioning to its optimal capacity. In times of crisis, these mechanisms can unfortunately doom an organization to utter failure.
Are your accounting systems adapted to the nature and type of products or services you sell? Is the way you’re structuring your finances adequate for your type of business? If your business is currently changing, are your systems also being adapted to these changes?
Overall, as a small business owner, changes are more than ever needed to recover, and strive through the aftermath of this and any crisis. Resetting priorities, motives, skills and systems is then no longer a luxury, but an ever-present requirement.
How are you re-setting your business as a small business owner?
2020 has been the year of lessons for small businesses worldwide. Women-owned small businesses in particular, have been especially impacted. From the challenge of work-life balance arising from household and childcare responsibilities being shifted to women, to navigating current times and challenges to adapt their business model to the new economy, many women small business owners have been struggling to say the least.
Despite advances made by and for women business leaders, including the 1988 Women’s Business Ownership Act promoting female entrepreneurs, and the nearly 13 millions women-owned small businesses employing 9.4 millions individuals and earning $1.3 trillion in revenue, there is still a lot of progress to be made. The pandemic has taken some of this progress away, instead penalizing women for owning businesses.
A business is an endless source of learning and applied lessons. As contexts and business environements change, as they certainly did in 2020, so are small business owners expected to learn new trends, new concepts, and new ways of doing business. This is even more important for women-owned businesses that are more at a risk of not surviving than others.
Know your business inside out.
Do you really know your business, from your vendors to your customer base and cash flow? Many small businesses fail to survive or stay stagnant because of a basic lack of understanding of the business itself. While you don’t have to be an expert in all areas of your business, you should understand it well enough.
Focus your business.
An unfocused business is a business at greater risk. The more you can focus your business, from streamlining your operations to simplifying your offerings, the more you can control your business and the quicker you can adapt to change.
Plan for childcare.
As a woman business owner, you may have to deal with the responsibility of childcare, along with running your business. Whereas before, your life and business could have been running somewhat smoothly together, now they are blended more than ever. Planning for childcare in a way that allows you to be the best mother and the best business owner you can be, is a priority.
Mind your cash flow.
Most businesses fail because of poor cash flow management. Women-owned businesses are no exception. A cash-poor business is a business that is limited and unable to expand. Make it a point to manage your cash flow, and work to increase it so you have access to additional resources in times of economic strain.
Explore new streams of income.
A successful business is a business with multiple options to create income. This doesn’t mean that you need a gazillion product or service offerings. However, it implies being able to maximize your current products and services so as to create multiple streams of income that can prove helpful in times of crisis.
Mind your costs.
Along with managing your cash flow, you must also make managing your costs a priority. Where can you cut costs in an efficient manner? How can you consolidate some of your costs? These are questions you must periodically ask yourself in order to run a lean and efficient business that can survive and thrive in times of crisis.
Have an emergency plan.
Do you have a contingency plan in case of emergency? Do you have business savings you can potentially dip into when the going gets tough? Due to lack of funding and financial precariousness, many women-owned businesses may not have the necessary emergency structure to help them navigate difficult times. This is a reminder to invest in emergency plans and savings in your business.
Get online: you MUST have a website.
The 2020 pandemic has shifted most businesses to their online platform and offerings as a way to survive at a time when in-person contact was prohibited. This has emphasized the importance of having and developing an online presence as a business.
Diversify payment options.
How can your customers reward you for your products and services? When in-person contact is out of the question, can your business still receive revenue in different forms? Diversifying your payment options, through online and remote alternatives mostly, can also help your business make it through challenging times.
Invest in mentors.
As women-owned businesses face more challenges, especially as related to funding and growth opportunities, than men-owned businesses, having expert guidance can tremendously help. Investing in mentors in and outside of your industry and business type can help you get to the next level, and address challenges and obstacles in a more focused and informed manner.
Focus on hiring and retaining employees.
The 2020 crisis has seen an unprecedented rise in unemployment, which has contributed in weakening businesses at an alarming rate. Hiring and retaining employees has thus proven to be one of the greatest challenges brought on by the pandemic. Yet, it is also one of the greatest business needs faced by small businesses.
Learn about financing options.
While women have historically been at a disadvantage when it comes to business financing and funding, there have been increased efforts to grow and develop resources to fill this gap. Make it a point to learn as much as possible about financing options and prepare your business to avail yourself of these.
Create a flexible business structure
A heavy, clunky business structure is also one that doesn’t lend itself to change and growth. Whether it’s around your operations, your personnel, or your finances, ensuring that you can be flexible in case of change, or even worse, crisis, can help you maintain and grow your business over time.
Embrace innovation.
Necessity is truly the mother of invention. When you need to create something out of nothing in your business, and to remedy the lack of resources and results as experienced during the pandemic, you need to innovate. Embrace doing things in a different, still efficient manner, rather than being attached to the same processes and outcomes.
Prioritize relationships.
Business is done through relationships. Being away from each other during this pandemic has reinforced this notion, confirming that businesses really suffer in the absence of concrete, healthy relationships.
Charge what you’re worth.
Women are notorious for not charging what they’re worth, be it through salary or business negotiations. The feminine instinct to help, coupled with a disadvantageous lack of confidence, keep us from truly maximizing our gifts and talents and asking for what we are truly worth. This is also what keeps us from building successful and sustainable businesses, amplifying the impact of crisis like the 2020 pandemic.
Prepare to deal with uncertainty.
Uncertainty is par for the course when it comes to business and life in general, as we’ve seen in 2020. Part of building a great business is also building a foundation that can survive in times of uncertainty and change, through flexibility, adaptability and innovation.
Do it now or never.
Time is not promised to us. Neither is the possibility of starting and running a powerful business. Many women fall prey to insecurity and lack of confidence, foregoing their chances to build the business of their dreams. Don’t be one.
Technology is your friend.
Last but not least, 2020 has shown us all the incredible power of technology in times of crisis. This is a power that as women small business owners, we must learn to harness and use to our advantage to not only bridge the female entrepreneurial gap, but thrive through it.
What other lessons have you learnt as a woman small business owner?
One thing this pandemic has taught so many of us is that our financial situations can change from one day to the other. While some were able to save money working from home, many lost their jobs during the pandemic, and others were furloughed, uncertain as to their futures. During times of uncertainty like these, it can be hard to think about saving any money at all when we’re barely making ends meet, if at all.
However, it’s in times of harsh crisis that we learn our most valuable and powerful lessons. Most of my financial learning didn’t come from books or classes, but rather from lean episodes of my life during which I had to learn to budget, save and avoid financial mistakes the hard way. This pandemic is no exception.
Being at home as a result of the COVID-19 pandemic also means potentially falling prey to a host of temptations, among which online shopping and impulse spending. With the world at our fingertips with a decent wi-fi connection, whipping out our credit cards is far too easy and convenient…until it no longer is.
The first step to saving money in any circumstances, and especially in times of crisis, is to control one’s impulses. This is not just a matter of willpower, but also and most importantly one of setting up the right processes and systems in place not to fall prey to the spending call. One of these systems can be a realistic yet tight budget, setting up automatic payments to avoid the temptation to over-spend, or even having an accountability partner. It can also be reflected in small daily decisions such as opting to cook more at home as opposed to ordering out, or replacing the time spent shopping online with exercise or educational pursuits.
Be proactive about saving
Saving money, especially during a crisis, requires being proactive about it. It takes being mindful of one’s expenses, and researching the appropriate outlets and systems, to succeed in setting money aside during an unpredictable time such as this.
This may mean researching cheaper deals through applications such as Groupon for instance. It may also entail calling utility providers such as Internet provider Verizon Fios or mobile provider AT&T , to inquire about existing rate rebates, or re-negotiate existing contracts.
Build emergency savings funds
Last but not least, building an emergency savings fund can go a long way towards helping improve one’s financial situation in times of crisis. It is typically recommended to have emergency savings of 3 to 6 months’ worth of living expenses. However, just starting with one month goes a long way…This starts with the conscious decision to set money aside, and also find other avenues to make extra money, especially online.
Have you tried saving money during this pandemic? Share your insights with us by emailing us at corporate@thecorporatesister.com
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