A CPA's Business Accounting Tips for Entrepreneurs

Yes, incorporation may reduce your taxes (in same cases). And, true, incorporation typically reduces your legal liability. But unless you truly need a regular corporation, keep your accounting simple by staying "un-incorporated."

Here's why: Incorporation means annual corporate income tax. And even if you're the only person working in the business, incorporation means annual and quarterly payroll tax returns. That's just too much paperwork for your new business.

By the way, if you are concerned about your legal liability, know that you have another great option for protecting yourself. You can form an LLC, or limited liability company. You should get the same legal protection. And if you're a one-owner LLC, you'll be able to treat your business just like any other sole proprietorship, which means no corporate income tax returns and maybe no payroll tax returns.

If you own and operate a business, you really do need a simple accounting system. Don't fool yourself. Invest the time (an hour?) and the money (about $100?) to get a simple accounting system like Quicken Home & Business or Microsoft Money Home & Business.

You'll need an accounting system to track your profits anyway. That's actually the law. Furthermore, by starting out with a good accounting system, you'll much more effortlessly capture tax deductions that will later save you money.

You don't want to co-mingle your personal and business accounting. Get your business its own business bank account. Use that account for your business's deposits and for your business's payments.

Only bad things happen, accounting-wise, when you pay personal expenses out of your business account and business expenses out of your personal account. For example, you'll miss tax deductions. You'll inappropriately count personal expenditures as business expenses. And you'll lose your ability to precisely measure how much money you're making or losing.

One of the responsibilities you shoulder when you become self-employed is paying quarterly tax payments using the 1040ES form (both form and instructions are available from www.irs.gov). But this makes sense.

Someone who is an employee doesn't have to worry about paying income taxes on their wages. Their employer withholds taxes from their paychecks and then deposits that money with the Internal Revenue Service.

But you need to pay the income taxes on your business profit. And you should do so in quarterly chunks as the year progresses: one-quarter of your tax bill on April 15, another quarter on June 15, another quarter on September 15, and, finally in the next year, the last quarter on January 15.

In general, you'll owe a combined tax of about 20% to 25% of what your business makes. So you want to use your accounting system to regularly estimate your profits and then you want to set aside 20% to 25% of that profit in a savings account for later paying your income taxes.

If you make $80,000, for example, you'll owe $16,000 to $20,000 in tax. And you would pay $4,000 to $5,000 a quarter in estimated taxes.

By the way, the big crisis you want to avoid here is not a penalty. That's the least of your troubles, in a sense, if you don't make quarterly payments.

The big crisis occurs on April 15th when you find yourself with a surprise tax bill for $16,000 or $20,000. Ouch.

And a final tip for keeping your accounting clean, simple and low-cost: Don't put cars, home computers and other personal assets into your business and then attempt write off the expenditure.

The accounting rules for expensing these kinds of "easily-used-for-personal-stuff" assets are cumbersome. You'll find the rules hard to follow and easy to break. And if your accountant charges for the extra work he or she needs to go to on your tax return, the money you save is embarrassingly modest.

Seattle CPA Stephen Nelson is the author of Quicken for Dummies and edits the do-it-yourself limited liability company web site http://www.llcsexplained.com and the do-it-yourself s corporation web site http://www.scorporationsexplained.com . Nelson holds an MBA in finance from the University of Washington and an MS in taxation from Golden Gate University.


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A CPA's Business Accounting Tips for Entrepreneurs