Even if you work with a bookkeeper and accountant, as I do, there’s still much work to be done this time of year.
Every year I learn something new at tax time that I wish I had known in advance – insights that would have made the filing process much easier.
These three actions are a compilation of what I’ve learned from my experiences and those of my clients, which should eliminate some of the crazies around tax time.
1. Take charge of your business finances.
Don’t rely on a spouse to take care of your business finances. You, as CEO and CFO of your art career, need to know how to manage the money. You must take 100% responsibility for your future. [Tweet “Be the CEO and CFO of your art biz: take charge of your finances @abstanfield http://artbizsuccess.com/tax-time-crazies.html”]
As sad as it is, I’ve heard many stories about people being duped out of their life savings by spouses who made poor financial decisions. These weren’t features in the paper or characters in a television exposé. These were artists and clients.
At the same time, if someone besides you pays your household bills, get a grip on what your expenses are: garbage removal, newspaper, electricity, cable, Internet, phone, water, and everything else. You want to know exactly what it would cost to continue living in the manner to which you are accustomed and do your part to eliminate unnecessary expenses.
You’re probably thinking: How is all of this work “simple”? Wouldn’t it be easier if someone else did it? The simplicity is accepting the truth that you are in charge. It’s up to you to step into this role and start making informed decisions that eliminate the possibility of any future surprises (crazies).
2. Separate your business from your personal life.
If you haven’t already done so, apply for an Employer Identification Number (EIN). Also known as a Federal Tax Identification Number, the EIN isn’t mandatory unless you are incorporated or in a partnership, but it comes in handy.
Even if you never hire any employees, the EIN can be used in place of your Social Security Number as a sole proprietor. That means you can give your EIN to anyone who pays you for services (such as teaching) instead of your SSN. This adds a layer of protection from identity theft.
Requesting an EIN is easy and free using form SS-4 from the IRS.
Use a business credit card and business checking account to clearly delineate personal from business transactions. The IRS wants to make sure you are running a legitimate business, and mixing records makes you look more like a hobbyist.
Bonus: separating your business from your personal life will simplify the complex task of bookkeeping like you can’t yet imagine.
Things might seem rosy now, but you need to safeguard your future.
A client once shared with me the heartbreaking story of how her deceased husband’s grown children fought with her after his death. She paid dearly in this battle (financially and emotionally) because she had intermixed her personal and business finances.
She told me her story so that I could do my part to see that other artists didn’t do as she had done.
3. Make bookkeeping part of your routine.
As tax deadlines draw closer each year, have you ever tried to reconstruct something that happened a year ago? I know I have, and it’s torture.
The longer you wait, the more likely you are to forget details of a financial transaction. You’ll spend two or three times as long to figure out what should have been a quick entry in your records.
Set aside a regular time every month that you spend with your financial records. You might:
- Input income and expenses into your financial software, and then file receipts
- Send invoices, receipts, and statements to customers/clients/collectors
- Reconcile accounts
- Review checking, savings, and retirement accounts
- Pay credit card balances
- Reimburse yourself for any out-of-pocket business expenses
- Note sales taxes owed (pay sales taxes, if required, each month or quarter)
- Review profit & loss (P&L) statement, as well as sales totals and accounts receivable
During this same time, you might also review your itemized deductions to see that they are properly recorded:
- Track your mileage
- Verify charitable contributions
- Record health care expenses
Next time April 15 rolls around you’ll be sitting pretty because you did most of the work throughout the year. It’s a simple solution to avoid the crazies.
How do you simplify tax time?