Hello and welcome to the webcast titled tax and accounting basics for sole proprietors and single member LLC's. My name is Sierra Lrum. It is so exciting to share space and time with you today. I have a wonderful guest speaker with us today named Katherine Wright. So, Katherine is an enrolled agent licensed to practice taxation by the United States Department of the Treasury with over 19 years of experience as a former IRS employee. Miss Wright founded Rightway Tax Solutions LLC in 2010. At her firm, she offers services to both individual and small business taxpayers, including tax resolution, tax preparation, and bookkeeping. Additionally, Miss Wright is a small business mentor at WHC LLC and serves on the Maryland's Comprollers Tax Advisory Board. She is also a board member of the Baltimore Green Justice Workers Cooperative. Katherine, I'm going to kick it over to you. Thank you so much for being here. Thank you so much, Sierra, and I look forward to today's presentation. So, first, let me just welcome everyone. and we're going to be doing a workshop on the importance of tax and accounting for small business owners that are either sole proprietors or single member LLC's. Right. So, to make this lesson more relatable, we're going to follow the journey of Angela. She's an artist who recently launched her business, Angela's Art Shop LLC. And like many entrepreneurs, Angela is very passionate about her craft, but she finds business finances to be overwhelming. So, we're going to walk through how she set up her business finances and learned to manage her taxes effectively. So, in today's workshop, here are our learning objectives. We're going to learn how small businesses handle money and taxes, the importance of accounting and taxes, and choosing the right tax professional. All right, so let's talk about business banking and financial organization. At first, Angela was using her personal bank account for both personal and business income and business expenses. This made it difficult for her to track which transactions were business related. To solve this, Angela opened a separate business bank account. So, always keep your personal and business money separated from each other. The next thing she did was she set up an accounting system system. She chose QuickBooks to track sales and expenses for her business. You can set up any type of accounting system you want as long as you are accurately capturing your business income and business expenses. You can use a spreadsheet. However, I prefer accounting software. Accounting software reduces errors by automatically automatically calculating your entries to create financial statements. You get real time financial insights and most importantly you save a lot of time organizing your f your business finances. I also recommend going to found.com which is a userfriendly accounting software and it's free. There are other options for free and paid accounting softwares available. So a simple Google search can help you find an affordable option for your business. And then the next thing that Angela did was she consulted with her accountant to make sure she was categorizing everything correctly. So if you do not have experience in bookkeeping or you don't understand um accounting, then it would be a good idea to have someone just review your work to make sure that your financial transactions are being captured correctly. So, Angela, she she kept her personal and business money separated. She set up her accounting system and she sought the help of a professional to make sure that her accounting system was maintained properly. So, let's talk about tracking revenue, expenses, and your profit. Angela's first month in business was very exciting because she sold $3,000 worth of paintings. But when she looked at her bank balance, it didn't seem like she had that much money left. And why was that? That was because of the business expenses she paid. And those expenses included paying for her art supplies, her website hosting, shipping materials, and advertising costs. So, what Angela learned was that profit isn't just revenue. It's what's left over after your business expenses. She also discovered that all this needed to be tracked properly for tax purposes and her net profit would be reported on form schedule C, which will be included with her personal tax return. So revenue if you look at the slide revenue is money that you may make make from your sales other is also called your gross uh revenue and then you have your expenses. So your necessary and ordinary expenses that you pay to to allow your business to run uh th those are your expenses and after that is what your profit is your net profit. So you take your revenue minus the expenses and that will give you your net profit and that is what's reported on for tax purposes and you will use a schedule C and you will use a schedule C to submit with your tax return to report this business activity. We're going to move on to inventory. So if you have a business that is similar to Angelus where you sell or manufacture products, you must track your inventory. If you provide only services, there are there is no inventory for you to track. At first, she only focused on how much she was spending on new supplies, but she learned that she also needed to track her beginning inventory, which is the value of the materials that she had when she first started her business. And then she had to track her ending inventory which would which would be on December 31st. And that is the value of materials she hadn't used yet and the completed products she had not sold. So you must track your ending inventory each year. If you have not been tracking your inventory, start now and then each year all you have to do is track your ending inventory. Tracking inventory is crucial for correctly calculating cost of goods sold for tax purposes which we will discuss in the next slide. Angela realized that some of her business costs were directly tied to making and selling her paintings. This is called cost of goods sold. So Angela's cost of goods sold includes the cost of paint, brushes, canvases, shipping cost for materials, and any labor she hired. For example, she hired an assistant to prep her canvases. So, your cost of of goods sold is the cost of materials and supplies to make your product, the shipping cost for your product, uh cost of labor to create your product, and any other cost you pay to get the product ready for sale. So, knowing your cost of goods sold helps you understand your true profit margins. So, let's talk about taxes for small business owners. And this is probably your favorite topic, as it is mine. And we're going to cover a lot. Um, we're going to cover self-employment taxes. I'll briefly talk about income taxes, and we'll talk about sales tax. Uh, we're also going to talk about planning ahead for these taxes so that you can avoid uh tax surprises. So, let's talk about self-employment tax. You are required to pay self-employment tax on your earnings if your net profit, remember, which is your revenue minus your minus your expenses, is $400 or more. So, Angela found out that once her net profit exceeded that $400 uh threshold, she had to pay a self-employment tax. And that self-employment tax rate is 15.3% on the net profit and it covers social security. It covers your social security and Medicare contributions. she needed to file a schedule C, I'm sorry, a schedule SC along with her tax return to report her self-employment tax. The IRS shares this form with the Social Security Administration. And if you create an online account with Social Security, you will see that you have been given credit for contributing into Social Security and Medicare. However, if your business does not have a net profit, but your business had a loss, you cannot contribute to social security. So, self-employment tax is required. If your net profit after expenses is $400 or more, your self-employment tax will be reported to the Social Security Administration. and you report that by filing schedule SE that will also be attached to your personal tax return along with the schedule C. So let's talk about estimated tax payments. Um these are quarterly payments that you pay based on the profitability of your business. So, your estimated tax payment is not only going to cover your self-employment tax, but it's also going to cover your income tax on your profit. So, your income tax is just a regular tax that we all pay. Your your self-employment tax is a separate tax. So, Angela learned that she was responsible for these multiple types of taxes. her self-employment tax, which again is your social security and Medicare, and your income tax, which is the income tax that everyone pays. So, she decided to plan and pay quarterly estimated tax payments in order to avoid penalties. Now, these quarterly payments will be for the current year that you are in. So, for example, we're in 2025. These payments will be applied towards your 2025 tax return, but you're paying them in advance. And here are the due dates. The first estimated tax payment is due on April the 15th. The second one is due on June the 15th. The third one is due September the 15th. And the last one is due on January 15th. You will make estimated tax payments to the IRS. You can do that via their website or you can mail them in. And if you have a state income tax that you have to pay, then you can also make a state estimated tax payment. Failure to make estimated tax payments when you are required can result in tax penalties. And I will say that if you get into the habit of making these estimated tax payment, it takes a lot of stress off of you at tax time because you know that whatever your balance may come out to be, you have already paid a portion of it or all of it. So the last tax that I want to talk about is the sales tax. Angela is selling paintings at art art fairs and she also sells online. So she found out that her state requires her to collect a sales tax. In her state, she had to apply for a sales tax permit and collect tax or her on her instate sales. So, if you are selling a product or a service, you need to check with your state income tax division to see if you're required to pay a sales tax. And if you are required to pay a sales tax, then you have to apply for your sales tax license. Now, for online sales, Angela had to check with the marketplace laws, and that can be very complicated. So, if you are selling your products online and you're selling to people in other states, wherever you're shipping your product to will determine whether or not you are liable to pay a sales tax to that state. And then if you're selling online, there are different thresholds before you're even required to make a sales tax payment. So, what I suggest is that you have a third party help you with the sales tax if you sell to multiple states. uh if you use platforms like uh Square, Shopify, they Amazon, they have a sales tax component. They will apply for all your sales tax uh permits and and and numbers that you need or you can find a a third-party company that offers sales tax uh preparation and payment on your behalf. So sales tax can be complicated, especially if you're doing multiple sales in multiple states. So I do suggest that you not take on that task on your own. Um but see if whatever platform you're using, if they can help you figure um out how to pay those taxes and to file all the reports uh that will be required. So, now that we talked about taxes, let's talk about choosing a reputable tax preparer. Angela felt so overwhelmed by all these taxes that we just discussed that she decided to find a tax professional. So, key things that she looked for in a tax preparer, she wanted someone who had experience with small business and sole proprietors. She needed someone who understood self-employment tax and she wanted a clear breakdown of her fees. She decided to hire an enrolled agent because it gave her a piece of mind and helped her maximize her deductions. So, when you're looking for a reputable tax preparer, you want to look for someone who has been trained. You want to if they have credentials, you want to verify their cred credentials. And you also want to feel comfortable that you're able to ask questions so that you can understand your taxes when you file your taxes. Uh you're signing those taxes under a penalty of perjury statement. So you're ultimately responsible for what is submitted. So if you don't understand your tax return, please make sure you set up an appointment with your tax preparer to discuss it before you sign and before they are filed. And if your tax preparer does not want to answer questions or it seems irritated that you're asking questions, then you may want to consider finding someone who can understand that you want to understand what your taxes are saying. So I just put together a little chart of the different types of tax professionals that you may use. You have your enrolled agents such as myself. I'm regulated by the Internal Revenue Service and I am federally licensed. You have CPAs or your certified public accountants. They are regulated by their state board of accountancy and they are their credentials comes from the state. Then you have accountants. Uh they're unregulated and they do not require any credentials. However, they may have um a certain number of college credits in accounting. And then you have your regular tax preparer. They are unregulated unless they're required to be regulated by the state. In the state of Maryland where I am, they are required to be regulated by the state. And tax preparers, if they're just a tax preparer, they do not have any formal credentials. So, these are your four different choices that you have um to choose from if you're looking for a professional. also want to talk about uh the volunteer income tax assistance also called VITA. It's a program um that runs through the internal revenue service. Uh they partner with organizations across the country to offer free tax preparation. So you may qualify for free tax assistance with your taxes. I put a link here in the slide and I also have a hand handout that um I'll have Sierra provide to you u where you can visit the IRS website to see if you qualify for the free tax preparation and if it's offered in your state. So in summary, here are some common mistakes to avoid. mixing your personal and business finances, failing to track all your expenses and also your income, missing your estimated tax payments, and ignoring your sales tax obligations. So, let's just go over these items as it pertains to Angela. So, Angela made a few costly mistakes and she learned how to avoid them. As far as mixing her personal and business finances, she now uses a separate business bank account, tracking, failing to track all her income and expenses. She now uses her accounting software and she also keeps copies of digital receipts. So that's also important because if you're have a lot of paper receipts, they do fade over time and uh so it's best that you can either scan them in or they have apps where you can take pictures of them and upload them and some of the software will also allow you to upload your your receipts and that keeps the integrity of the receipt so that they don't fade. and then she um was missing her estimated tax payments. So now she sets up quarterly meetings with her tax professional and she sets up automatic tax payments so that her estimated tax payments can come out automatically for her and so she doesn't have to remember to do it. And the last thing was she would she ignored her sales tax obligations because she was not aware that she was required to pay a sales tax. So she applied for her state sales tax permit and now she tracks her sales properly. So a avoiding these avoiding and correcting these mistakes has saved her money and and has reduced her stress especially during tax season. So I hope you enjoyed this presentation and I hope you learned some things and you know don't be discouraged if you have not been following all these rules and tips that I've given you. the time is to start now and I wish you the best with your business. Thank you so much, Katherine. I have some questions if you're up for it. Sure. Um, so the first question is, we know how important it is to have a separate personal and business bank account. Do you have any advice if someone should go for a credit union, maybe an online only account, or at one of those larger banks? Does it matter? Well, it it's going to depend. In my experience, if you're a larger company, you might want to go with a traditional bank. Um because sometimes the traditional banks offer more. They can meet the needs of a larger company. But if you're a small business, um it really doesn't matter. The the credit unions are really good because credit unions are owned by the people and sometimes they have programs in place that can help you. The important thing though is that you're keeping the business finances separate from the personal finances. That's the most important thing no matter what which type of account uh that you tr choose especially if you are an LL single member LLC because you don't want to run into any legal issues down the down the road because you were comingling your personal and your um business account. though. Okay. And then um how can is there some sort of database or website where a small business owner can use to search the enrolled and trained accountants or taxpayer or tax um um or like bookkeepers in their area or is this more just like a search in their community? Okay. So, well IRS.gov gov will keep um a list of registered tax return preparers um that are federally licensed. You can also um I think you can search for enrolled agents on that site. Um your state if they're regulating the tax preparers normally they'll have a site where you can check to see if a if a person is registered to prepare taxes in in that state. So, you may not find too much information on um CPAs and attorneys on the IRS website, but you will be able to find the make to find their information on your state um licensing website to make sure that they are in good standing. Okay. Excellent. And then um so what happens if a small business owner realizes they didn't file taxes for the previous year? Okay. If you realize that you did not file taxes for your business that was actually operating, uh, then you need to file as soon as possible. Uh, if you filed your return, but you left the business out of it, then you would need to do an amended tax return so that you can include your business income in with what you originally filed. Okay. And then you mentioned some forms throughout the presentation. Are all of those um accessible on IRS.gov? Yes, all the forms are accessible um through IRS.gov, but if you're using software or or you're going to a tax professional to get your taxes prepared, they'll have all those forms for you. You don't have to worry about downloading anything unless you're going to print them out and do them yourself. Okay. Excellent. And then, um you mentioned about um doing your estimated tax payments. Is there ever a scenario where someone overpays or overestimates and then they get money back? Yes. So that does happen. So if you overpay your estimated tax payments, then that will be your tax refund the next year. So you're not going to know if you overpaid until after you file your tax return. I see. And if you overpaid, they'll they'll go ahead and send you the the refund back. And you also have the option of rolling that refund over to the following year. So it can help you following year's uh estimated tax payment. Okay. And if a small business owner does not do the estimated tax payments, let's say that's just one of the big lessons that they learn, is there um like payment plans available if there is a large um sum that is due? Yeah. So, if you owe the IRS a balance, then you can always set up a payment plan. Now, they do charge a fee for the payment plans. So, if your bit if you what I tell people to do is if you know you can pay it off within like 3 months, um you can always ask for a short-term extension and that would not require a a payment plan. But what I do suggest that you do if you do owe try to pay as much of that balance as you can um by April the 15th because after April 15th that's when you start incurring penalty and and and penalty and interest charges. So whatever you pay before the due date won't be subject to th those fees. Excellent. Okay. My last question is, what is one major piece of advice that you would provide any small business owner that is just starting? The major piece of advice, and I think we talked about this a few times in the presentation, is keep your business and personal finances separately. That is so important. Um, it causes a lot of confusion when everything is mixed in together. and also that you understand that your bank your bank statements is only one piece of your substantiation. So you have to have the backup to the bank statements. So make sure you're keeping all your receipts and invoices and all that. All the bank statement does is give a description. So you have to back up whatever that description is. So for example, if I say if I saw in your bank statement that you went to Staples and you spent $200 on on something that could have been for a personal personal computer or something. You know what I mean? So, your your your receipts are going to back up what you spent money on um on your statements. And what do you suggest if someone just didn't create that that separation in the beginning of their business and now they are meeting with you um as your tax professional? Would you suggest like them combing through every single thing and trying to find the receipts so that they can separate those or would you just say let's just start let's just start over here right now? Well, it's it's it's okay. Sometimes it's best just to Okay, I've learned now I'm going to move on and do the right thing. Um, that is a good way to do it. But if you think there's a severe under reporting of income, then you may need to go to your bank statements and pull everything out. I will say that normally the IRS won't conduct any audits or anything if the return is more than three years old. They can go to six years if you if they feel that you've under reportported your income by a certain percentage. But you can always start fresh and new to give yourself a clean slate. Um, but if you feel like, okay, I made some I need to really go back and look to see what happened, then you would have to comb through your bank statements or your business credit card statements to make sure that you've captured all your income and expenses correctly. Okay. Oh, and also you can set up an IRS.gov gov account if you haven't already done so. And you can see all the information that has been reported for you um and in your business if you're unsure about what you received in your in your statements or you can't get access to your statements. Okay. And is there contact information for people who do have um questions through the IRS.gov? Like do they have a customer service? Yes, they do. They have a business line. It's 1-800 829 3933 I believe. I'll make sure that's correct. And they also 8008291040 for individual taxes. So you may be on hold for a while, but you can speak with someone. Um, now I will say that a lot of times they will not answer tax law questions. still answer more account related tech uh questions like you know have you filed all your returns um do you owe a balance so the IRS has kind of steered away from answering tax law but those are the two numbers that you can call okay Katherine thank you so much for sharing your time and your expertise around this subject I know it's so needed um and that this webcast will help so many um and you might have some people reach out to you for some just further conversation as well. Okay. Absolutely. And thank you so much for having me. Yeah. All right. Have a great day everyone.