Written By Dspeakes.
Part 1: Record keeping for the Schedule C
Imagine how easy it is to do a tax return when you start out with easy access to the right information.
What is the right information? Accurate sums for the income you received, the expenses you had totaled by type, a mileage log for each vehicle, registration fees, interest paid on the car loans, home office information summarized by type of deduction.
You can’t imagine that? You shouldn’t be imagining it; you should be in the process of creating it.
One of the ugly facts of life about being self-employed is that you have to compute your own net income. Net income is not the total amount of money you received over the year. It is the amount of money you received, minus all of your business expenses.
The fact is that you must keep records — whether you want to or not.
It’s so easy to do this. You don’t even need a computer program. A spiral-bound or looseleaf notebook, pen, and calculator will suffice. (If you have Quicken or other financial software, or are comfortable with Excel spreadsheets, of course, use that.)
Title your columns like this, at a minimum. You can add other columns if you want. Maybe use one page per month if you’re doing it by hand if you’re a serious shopper.
|MSC.||Client||Type of job||Location.||Date.||Fee.||Paidout.||Total due.||Miles.||Date paid.||Amount paid.||How paid.|
|Acme MSC||Burger Nation||Drive Through||155 Main St||July 15, 2013||$5||$8.47||$13||12||August 20, 2013||$13||Paypal|
(Notice that you’re eating the tax on the example, but it’s still deductible)
There ya go. With that information, at the end of the year you can add up the “Paidout” column, the Miles column, and the Amount Paid columns and have most of what you need for your Schedule C. Note that any jobs that are unpaid as of December 31, you will deduct what you paid out in the year you did the job, but you will take the pay received into income in the year you get it. So you won’t always deduct the money you paid out in the same year as they money you received as reimbursement for it.
Note: even if you blew the job somehow and didn’t get paid, your mileage and expenses for that job are still deductible.
It’s okay to claim it all together in the same year – that’s called accrual accounting – but talk to an accountant about the pros and cons of that; I’m not going into it here.
If you get 1099s from 27 companies (lucky you, having that much work), don’t waste your time entering them all individually on the tax return. If the 1099’s total $3250 and you put $4728 on your tax return, you’re okay. If they total $3250 and you only put $2872 because you subtracted out the reimbursements – you will get a letter and a bill from the IRS for underreported income. What you get is income; what you pay out is a deduction. Don’t subtract the deductions off the Income line just because it was a reimbursement and not taxable. Why trigger an audit unnecessarily?
Always keep the receipts, or a copy of them, for everything you paid out on a mystery shop, until three years after you file the return for that year.
Your other expenses can be totaled on other pages by category, such as Office Supplies, Equipment, Travel, Fees, Conference expenses. You can either keep your receipts for the hotel and meals, or you can take a flat-rate per diem amount if you travel overnight or more than 50 miles from your town.
Finally, if you claim home office deduction, there will be other things you need, but I’ll cover that in the next article.
And that’s really all there is to it. It’s really fairly simple bookkeeping. But you must do it, and it’s a lot easier to keep up that book or spreadsheet as you go.
A good tax return starts with good record keeping. The next article will tell you about things you might not have realized were tax deductions –and things you thought were deductions that really aren’t.
Dspeakes has been a tax preparer since 1998 and specialized in Taxation when getting her Bachelor’s degree in Accounting at Arizona State University, graduating in the top 2% of her class. Her 130 current clients include individuals, sole proprietorships, S corporations, C corporations, Estates, one partnership, and a non-profit organization. She is an IRS Registered Tax Return Preparer.
Editors Note: This is not professional tax advice. Laws and regulations vary depending on your region. Be sure to consult a professional before filing any tax documents.