Hey, Drew with Hourslogger and in this video we're going to be talking about accounting for consultants. We're going to look at some accounting and bookkeeping basics, using QuickBooks Online, how to get paid, taxes, benefits, and business expenses. Accounting and bookkeeping are related but not identical terms. Accounting is the process of summarizing, analyzing and communicating financial transactions to gauge the financial health of the company and to report to the relevant authorities, meaning the IRS and your state. Bookkeeping is the process of recording financial transactions, usually by entering them into accounting software or a physical set of books.
You want to be able to handle the basic day-to-day bookkeeping tasks so your accountant can prepare your financial statements, like the balance sheet, income statement, and cash flow statement, and help file your taxes. Let's look at some basic accounting. Accounting comes down to tracking debits and credits.
Debits are transactions that increase an asset or decrease a liability. Credits are transactions that increase a liability or decrease an asset. Assets are things that you own, such as equipment, property, cars, or cash.
And liabilities are things that you owe, such as loans, supplier invoices, or employee salaries. The amount of debits... always equals the amount of credits. They are equal but opposite transactions. So for example, if you buy a laptop, the asset gained is tracked as a debit.
The expense or payment is tracked as a credit. Equity is your assets minus your liabilities and represent how much is left over after you've paid off your creditors. This is the net worth of your business.
Equity equals your assets minus your liabilities. Or put another way, your assets equal your liabilities plus your equity. Accounting is responsible for correctly tracking all of your transactions and using them to make business decisions, generate financial statements, and determine tax obligations. You can learn more about accounting at these links. Now let's look at bookkeeping.
In the world of bookkeeping, an account doesn't refer to an individual bank account. Instead, an account is a record of all financial transactions of a certain type, like sales or payroll. There are five basic types of accounts.
Assets. These are resources owned by the business, such as accounts receivable or inventory. Liabilities. These are debts owed by the business, such as accounts payable and loans.
Revenues or income. This is money earned by the business, such as sales. Expenses.
This is cash used to pay for some item or service, such as salaries or utilities. And equity. The value remaining after liabilities are subtracted from the assets.
This is stock or retained earnings. Bookkeeping starts with setting up the necessary accounts. You won't have the same exact accounts as other businesses, but many accounts are common.
Here are some common account names and their account type. Once your accounts are set up, you'll want to track every transaction and log them to the correct account. Recorded transactions in your accounting system are known as journal entries.
It's important that each debit and credit transaction are recorded properly in the correct accounts. Otherwise, your accounts won't match and you won't be able to close your books. So for example, if you buy some software for $1,000 in cash, this transaction affects two accounts, cash and equipment.
You record $1,000 debit for the equipment account, an increased asset, and $1,000 credit for the cash account, a decreased asset. After all transactions have been recorded for a set period of time, either monthly or quarterly, it's time to balance and close the books. Your total debits should match your total credits. This means that the books are balanced.
If the totals do not match, you'll have to go through your journal entries and find errors and correct them. At the end of the year, your books should be balanced and ready to prepare financial and tax documents. You can learn more about bookkeeping at these links.
If this is starting to feel overwhelming, don't worry. Accounting software like QuickBooks Online or QBO helps you automate many of these tasks. QBO creates a basic or default chart of accounts.
Their interface allows you to enter transactions and handles the debits and credits behind the scenes. You're going to need some sort of software to help organize your bookkeeping. I recommend using QuickBooks Online.
It allows you to track your customers, time, invoices, income, expenses, receipts, and other transactions. You can connect QuickBooks to your bank account so you can link transactions as you get paid or make purchases. Then you can match payments to invoices and purchases to expenses or bills.
If you need help, there's some really helpful QBO groups through Facebook groups. Here's a link to a basic QuickBooks tutorial to help you understand the software and get started. Now, I highly recommend that you find somebody that you can ask for accounting and bookkeeping advice. Referrals are one of the best ways to find a trusted accountant.
Ask your friends, family, and colleagues if they can recommend anyone. You can also get referrals by attending small business events and asking people there. If you can't get a referral, You can find a local CPA, Certified Public Accountant, by using the American Institute of Certified Public Accountants, or the AICPA. The AICPA has a directory of CPAs, accounting companies, and local accounting organizations.
You can use Google, but I'd recommend using it mostly for research and reviews to help you find someone. There are so many options on the internet, it can be hard to know what's the right choice. You'll want to make sure that you do your research and evaluate your accountant.
before you start working with them. A few good questions to ask are, how many small businesses have you worked with? How much experience do you have in my industry?
What services do you provide? How exactly can you help me? Who will I be working with? How will we communicate and how often?
And how do you bill for your services? You can find more info on finding an accountant at this link. Let's run through the process of getting paid. First, you keep track of work for the client.
Then, you put together an invoice in QuickBooks and send it to the client. You'll receive payment via check or electronic payment. If you get a check, you're going to want to deposit it in the business bank account.
Then, you want to transfer yourself 65% to 70%, and the remaining 30% to 35% is set aside for taxes and other business expenses. Then, you can match the payment to the invoice in QuickBooks. If you need software to help you do this, Hourslogger can be used to keep track of work.
generate invoices and sync them to QuickBooks. Now at a minimum your invoices should include the client's billing information, your billing information, the amount the invoice is for, the invoice date and the invoice due date, the payment terms, an invoice number, a detailed breakdown of line items, and any terms or conditions. Here's a link to a sample invoice I used. Note that most states don't require you to pay sales tax on your consulting services. However, in some cases you may.
Search consulting services sales tax and insert your state to see if you're required to include sales tax on your invoices. Let's look at business expenses. A business expense is any cost a company pays used to generate revenue.
Business expenses can be deducted and reduce your taxable income. Since you have to pay all your own taxes, You want to try to minimize the amount that you're paying. One of the main ways of doing this is through business expenses. You can enter your business expenses in QBO. Business expenses normally have a date, amount, a payee, description, and an attachment or receipt.
So for example, if you buy a $1,000 item for your business and you made $100,000 for the year, you can deduct that $1,000 from your taxable income so it's now $99,000. You save money on the taxes that you owe because you don't have to pay tax on the 100 grand, you pay tax on 99 grand. Here are some more resources to read more about business expenses.
You want to make sure that you're setting aside at least 30 to 35 percent of your revenue for taxes. This mainly covers your income tax and your self-employment tax. You can read more at this link. Since you're running your own business, you should estimate and pay your taxes quarterly. The IRS allows you to make payments early so that way you don't have to pay a big lump sum at the end of the year.
If you decide not to do this, the fee is pretty minimal at the end of the year. Healthcare is the only benefit that may be legally required by your state. Research your state laws to see if it's required for you. Health insurance plans vary widely based on your location, health condition, and dependence. Assume that plans without financial assistance will be a few hundred dollars a month.
Here's a link to the average healthcare cost in the U.S. Life insurance, dental insurance, vision insurance, and retirement benefits are common employee benefits that you won't receive. If you want any of these services, you must research them and set them up yourself.
Now let's talk about filing taxes. You can use information from QuickBooks and TurboTax to help you file taxes at the end of the year. Make sure you talk with your accountant during this process.
Now filing varies based on your business structure. We'll start with sole proprietors. If you're a sole proprietor, you don't have to file a separate business tax return.
You report your business income and expenses on a Schedule C, profit or loss from business, and then this information gets carried over to your Form 1040. your individual tax return. You can read more about this process at these links. Now let's talk about LLCs.
A LLC is what the IRS calls a pass-through entity. This means rather than being taxed as a separate entity, like a corporation, all of the profits and losses from the LLC pass through to the LLC owners. The owners then report this information on their personal tax returns. The LLC itself does not pay federal income taxes.
but some states have an annual tax on LLCs. LLCs with only one owner will be taxed as a sole proprietor. This means you report it on a Schedule C in your 1040. By default, LLCs with multiple owners are treated as a partnership for tax purposes.
For LLCs treated as partnerships, the LLC files a 1065 with the IRS. This return is for informational purposes only. All income, deductions, and credits are reported by each individual owner on their own tax returns. A Schedule K-1 is prepared for each owner, showing their share of the profits and losses from the partnership. The Schedule K-1 information is transferred to a Schedule E, supplemental income and loss, then the information from the Schedule E is included on your Form 1040. An LLC may also elect to be classified as a C-Corporation or an S-Corporation for tax purposes.
This is usually done because it results in lower taxes for high-income individuals. The election is submitted through a Form 8832 Entity Classification Election. This isn't recommended if you're just starting your consulting business.
You can read more about filing taxes for an LLC at these links. To wrap up, let's talk about audits. An audit is an official inspection of an individual's or organization's accounts.
You want to avoid an IRS audit by keeping track of your bookkeeping and filing everything correctly. An IRS audit is a formal investigation to verify the information entered on your business tax return is accurate and correct. These audits are normally triggered by unusual deductions or forms of income listed on your tax return.
If you're audited, you'll have to pull together your tax returns and records, such as bills, receipts, loans, and more, for proof and answer the questions from the IRS audit agent. This can be costly and something that you want to avoid. You can read more about audits here.
Alright, that's all I've got for this video. Next, we'll talk about contracts for consulting. If you found this helpful, check out Hourslogger for time tracking and invoicing for your business.
Thanks and see you in the next video.