Welcome to our #AskACPA feature where we answer financial, accounting and business questions.
Question: As a woman small business owner, what goals should I have for my small business this year?
New year goals are not just for individuals. They’re also for businesses looking to continue to grow, expand and do well in the future. In the wake of the COVID-19 pandemic, many, if not most of the businesses impacted are, unsurprisingly, women-owned small businesses. According to a 2020 survey by the U.S Chamber of Commerce, women-owned small businesses have been more significantly impacted by the COVID-19 pandemic than their male counterparts. Additionally, these businesses also have less optimistic revenue prospects, among general fragile recovery prospects for all business owners.
More than ever in recent history, women entrepreneurs, despite their numerous achievements even in the midst of this global health crisis, are faced with a tough battle ahead. Hence the need to set and commit to solid future goals. To keep things simple yet effective, here are three goals women small business owners can shoot for as we usher in a brand new year:
Own your accounting and financial processes
One of the biggest misconceptions and mistakes committed by small business owners is to neglect their accounting and financial processes. Proper accounting and finances are the foundations and the language of healthy businesses. As such, when small business owners do not proactively take ownership of their accounting and finances, or relinquish them entirely to others’ control (even if these are financial experts), they also relinquish effective control and ownership of their businesses.
This is all the more important for female small business owners, who face exponentially larger barriers including funding limitations. The key here is to get familiar with your most basic accounting and financial information first, such as the amount of revenues and expenses for the period to start. Understanding how the business operates in terms of its cash receipts and expenditures, and being able to own its financial story and be accountable for it, is crucial.
Create systems and processes
Running a small business is A LOT of work! Running a small business and staying on top of your accounting and finances is even MORE work! This is why it’s crucial, especially for women small business owners, who also wear many other hats such as working moms and caregivers among others, to create systems and processes to efficiently and effectively track their finances.
Using apps such as Quickbooks or Freshbooks, as well as creating efficient workflows for invoice, revenue and expense tracking, can go a long way to save time, energy and costly business mistakes.
Commit to continuous accounting and financial education
Financial literacy is extremely important for female entrepreneurs, who are most often at the helm of businesses that are disproportionately impacted by lack of funding and scarcity of financial resources. While this gap largely stems from structural and societal This is why it is crucial for female business owners to work at bridging this gap through continuous accounting and financial education through books such as “Million Dollar Women: the Essential Guide for Female Entrepreneurs” by Julia Pimsleur, formal programs, as well as mentoring, and accounting apps such as Quickbooks.
Overall, the importance of setting clear, defined and effective business goals as small business owners cannot be overstated. By keeping these goals simple and actionable, focusing on priorities such as owning your accounting and finances, creating efficient systems and processes and investing in continuous financial education, women-owned small businesses have better chances to succeed in the new year.
What goals are you setting for your small business?
elcome to our #AskACPA feature where we answer financial, accounting and business questions.
Question: I’m a side hustler and small business owner? How should I go about closing my accounting books at year-end?
One question that is often asked by small business owners as the end of the year looms near is: “What do I need to do to close the accounting books in my business?” Year-end can be a scary time for small business owners, only made scarier by how well (or not so well) the business performed over the year, not to mention the prospect of upcoming taxes. As the majority of small businesses, especially those owned by women owners, has been impacted by the global pandemic, it’s all the more important to ensure a smooth year-end accounting.
While there are many year-end accounting tips out there, as a CPA, I like to simplify the process for small business owners. What often intimidates small business owners is not so much the complexity of the accounting process, but the overload of information and lack of a practical approach when it comes to applying accounting to everyday business. As a result, many small business owners don’t feel empowered enough to take the financial reins of their own enterprise, thus relinquishing their power to others and running the risk of mismanaging their own affairs. To this end, I’m sharing 3 tips (not a million!) to close your accounting books at year-end as a small business owner:
Take care of any unfinished business: unrecorded income, expenses!
Year-end is the time also the time to dot you I’s and cross your t’s business-wise. In other words, it’s time to handle any and all unfinished business as related to your year-end accounting, mainly in these areas:
Got unrecorded income or unbilled invoices? Year-end is the time to catch up on these. Look at your unbilled projects for the year, and send invoices right away. Similarly, if you have any unpaid client invoices, it’s important that you follow up with them as soon as possible.
Got unpaid bills from vendors and contractors? Just as you want to address unpaid invoices from clients, you may also want to check on any unpaid vendor bills. In the same way, make sure any open contractor invoice is satisfied on your part as well.
Are you behind on recording your expenses? As a busy business woman and mom, falling off the bandwagon when it comes to recording your expenses happens. However, as year-end approaches, catching up on entering all your expenses, including your mileage, into your accounting system or software, is crucial. Not only will this help your year-end financial reports be more accurate, but it will also come in handy at tax time to deduct all the tax-deductible expenses your business qualifies for.
Verify your payroll data and make any year-end adjustments! Verify your company’s information, as well employee and contractor information, including updated W-9 or W-4. Any year-end adjustments such as bonuses and payroll periods falling during the holidays should also be handled.
Update your data! Much can change in the course of the year, and these changes can adversely affect the way you record the transactions in your business. This includes vendor and client names, as well as any other changes you can track.
Last but not least, plan to count your inventory at the beginning of the year so as to cover any potential software errors, and calculate your cost of goods sold.
Reconcile your bank accounts!
Once you catch up on any unfinished business, especially in terms of properly recording your income and expenses, it’s important to verify that the totals from your accounting system/software match the bank totals on your official bank statements. Otherwise, differences between the two will create inaccuracies in your financial statements.
As a general rule, your bank accounts and accounting system need to be reconciled on a monthly basis. However, if you’ve fallen behind on this, updating your reconciliations before you close your books is essential.
Run and Review your Financial Reports.
One of the most critical steps when closing your books at year-end is to run your financial reports. These include your Profit and Loss statement, Balance sheet, and statement of cash flows, to cite a few. Other reports to run include your Expense report, payroll summary (if applicable), sales tax summary and mileage log. These will not only give you a more accurate and comprehensive picture of the state of your business, but also help you set your budget and priorities for the following year.
While year-end is a busy time overall, it will be well worth it to do your due diligence in order to accurately close your books and start the year fresh.
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?
