Manage Your Business Better With Financial Foreplay
Here’s what my work to-do list looks like for this week:
Aaah look at all that creativity, sketches due, finals to work on, a picture book idea to re-write… wait whats that at the bottom? Work on taxes?? (sound of needle screeching on record)
TAX stuff?? bluugh
Taxes are something that most people, but especially creative people, shudder about. When I polled several artist friends most admitted to just shoving a bag full of receipts at their accountant. Fellow Once Upon A Sketch contributor Kevin Cross put it bluntly “not everything in this job is butterflies and rainbows.” As a small studio owner you have to do it all, from creating the work to cleaning the coffee maker. Watching income and expenses is just another part of that job. Just like you wouldn’t clean the coffee maker once a year (well you shouldn’t do that,) you also shouldn’t wait til the end of the year to get a clear snapshot of your studio’s financial picture. But many creatives, especially those starting out, are not sure where to start or where to get answers. So I sat down with Laurel Green, principal at Greenbooks, a bookkeeping agency that works exclusively with visionary and creative small businesses, to ask a few questions about tax basics for creatives. She shared her answers below… and even made it sound fun with Financial Foreplay:
OUaS: What are the three absolute must-haves or must-dos that any creative should keep in mind when it comes to preparing for tax time?
LG: First, find a knowledgeable and reliable CPA or Certified Tax Preparer who works with clients in your creative field. Do not use a preparer who is not registered with the IRS or received a Preparer Tax Identification Number (PTIN). Ask friends and colleagues for referrals.
Second, maintain separate accounts. According to IRS Small Business officials, the tax agency is turning its attention to “flow-through entities,” which includes S corporations and sole proprietorships. This means they’ll be on the lookout for business owners who try to deduct the same expenses on different filings. If you haven’t done so already, get a business checking account to match your personal accounts and separate all transactions. It can reduce the chance of an audit.
Third, save every tax form that arrives in your mailbox. Being organized will reduce stress, save time and money, and ensure that you get all entitled deductions.
OUaS: What is the biggest mistake you have seen or know of creative people making when preparing for taxes? How can it be rectified?
LG: Don’t wait until the last minute. Nothing is more frustrating than searching for everything you need when the tax return is due in a couple of days.
The biggest mistake a creative person (any person) can make is bringing a shoe box or manila envelope crammed with receipts to a CPA or Tax Preparer and paying them to organize it for you.
Motivate yourself to sort through your receipts with what I call Financial Foreplay. Pour a glass of wine, light a candle, and dump those receipts on a bed. Organize your records by month, separating them into two categories: income and expenses. Then sort them by type. For example, under the expense category you might have advertising, office supplies, utilities, labor, and taxes to name a few. The more detailed your information is the less time your tax preparer will spend decoding information.
OUaS: What sites or resources would you recommend people look at when getting started setting up a business?
LG: Invest in financial software like Quickbooks, Xero, Intaacct, Quicken, or Freshbooks, and input all your income and expenses from each financial account. At the end of the year simply print out a report. Don’t wait until the end of the year to do your financials. Set aside Financial Foreplay at least once a month to enter income and spending.
Do your small business research to get clarity on what is deductible on your tax return. Consult with your CPA or Tax Preparer or read on-line blogs. Keep current with tax laws (they change every year). Believe it or not IRS.Gov can be quite useful. One of my favorite blogs is Tax Girl at Forbes.com. She makes taxes accessible, funny & easy to understand.
Digitize Paperwork: Scan, scan, scan! Then shred, shred, shred! Back up, back up, back up! A Cloud service such as Dropbox which lets you save two gigabytes of data free is one example. Many people ask how long they should keep records and the answer varies depending on your filing situation. Here’s Tax Girl’s answer. Regardless of how long you have to keep records, rest assured it’s always easier to file a correct return the first time than wait for the consequences.
Most creatives don’t want to bother with the bookkeeping and prefer to focus on what they do best – being creative. I can’t tell you how many panicked creatives contact me because they focused all their time building their business and no time building their books. If your business has grown to such a point that you are waaay to busy to clean the coffee maker, then its time to consider hiring a bookkeeper!
Laurel also advised to look into your local tax ordinances, beyond federal filing, state/province and local taxes vary greatly. Start with your state Department of Revenue to find out what your studio is liable for beyond federal taxes.
Fellow OUaS contributor Chris Jones has a great system that mirrors Financial Foreplay. It’s part paper trail, part technology. Chris says:
To keep all of my paperwork organized, I keep a separate folder for each year. In each yearly folder I have an expenses folder for every month where I keep all receipts for that month. I also have folders for monthly print outs of my bank account and credit card activity – just in case I need to refer to them to verify when money came in or out for a certain expenses or payment. At the beginning of every month, I set aside a couple of hours to enter all expenses for the previous month into my accounting software. I force myself to do this every month so I’m not buried under a huge pile of paperwork at year end.
To manage my records for income/invoicing/expenses – I use Harvest. It’s an online time tracking/invoicing system that allows me to keep track and manage everything all in one place, and it’s accessible from anywhere since it’s online. In Harvest I can send and record payments on all my invoices, enter all my expenses (in various categories I have set up), and track my time on various projects. I find this system works really well at keeping me on top of everything – so when it comes tax time, all I have to do it run off some reports for expenses/income, and give them to my accountant. And because of the physical filing system I use, I have all the expense receipts in folders by month as backups in case I need them.
I also have an app for Harvest on my phone that lets me enter expenses and track my time when I’m out and about. I find this very handy, as it let’s me enter expenses as I incur them. It’s quick and easy, and it auto syncs to my account, so I know all my information is updated no matter where I am. Harvest is a monthly subscription service. They have different pricing tiers, but I use the basic one which is $12 a month, a small price to pay for the convenience and organization it gives me. It also has a really great invoicing system which I love.
Perhaps the most important thing a creative business person should remember about tax time is to actually save some income for that purpose. My senior year portfolio class instructor advised us that 25% of any paid invoice should be rerouted into a separate tax savings account. Some years after starting my freelance career I owed Uncle Sam a five figure check. I was intensely grateful to have been sitting in class taking notes that day. As your income grows try to commit to saving even more, not only because your tax liability may increase as well but also because it gives your studio a healthy financial cushion – something all businesses need to weather a downturn. If ideas and content are the butterflies and rainbows in a creative professional’s life then financial and tax planning are the branches and rain from which they spring. They may not be as pretty to look at but they belong on your must-do list.
A big thanks to the following people for contributing to this piece:
Laurel Green of Greenbooks lives in Nashville with her husband & son. She’s a virtual bookkeeper specifically geared to manage the books for small & creative business owners. You can contact her at firstname.lastname@example.org
Chris Jones is a member of the Society of Children’s Book Writers and Illustrators and specializes in fun and humorous children’s illustration. He lives in Toronto, Canada with his family. Visit him online at www.jonesid.com
Once Upon A Sketch is a bunch of talented artists and not a group of CPAs. Please consult your CPA for actual tax planning.