Around this time of year most people are starting to think about preparing their taxes for the previous financial year. But, what if everything you needed for tax season was already in one convenient location? You can greatly diminish the amount of time it takes to put all of the materials together by creating a tax binder at the start of each fiscal year. That will keep everything in place until you're ready to hand it over to your tax preparer.
The most important thing I've discovered is that staying on top of tracking tax related items is key for the overall integrity of my books. Now while in theory that sounds easy, we're all busy running a business which if we're being honest takes A LOT of time and energy so it's likely that tracking your taxes on a regular schedule does not get the attention it deserves. I get it, I really do, but I promise that staying on top of your tax information as it occurs will not only allow for a smoother tax season but allow for the level of accuracy and integrity within your business that I am sure you are seeking!
Tax Binder Breakdown
I divide my tax binder into 8 tabbed sections:
1) Monthly Income/Report
2) YTD Income
3) Monthly Mileage
4) YTD Mileage
5) Monthly Expenses
6) Monthly Reports
7) Quarterly/YTD Reports
8) Pay Stubs/1099's/W-2's/Misc.
Monthly Income/Report & YTD Income Tabs
Monthly Income/Report is used for the current months full report, private studio invoices for each student, pay stubs, and tracking of additional income.
At the end of the month I move all of these trackers to tab 2) YTD Income for easy reference throughout the year.
Monthly/YTD Mileage Tabs
I keep four weekly mileage reports under the monthly mileage tab to cover the current month and move them to tab 4) YTD Mileage at the end of the month. You want to be sure to keep all weekly mileage trackers for the year showing the date, location traveled, purpose, and distance.
Monthly Expenses Tab
I keep all monthly expense logs under this tab and rotate them so the current month is always visible on top.
Monthly Reports Tab
This is where I store the monthly report trackers when not placed in the current month's 1) Monthly Income/Report Tab.
I have created four quarterly reports that outline totals for Income, Expenses, Mileage, and Taxes paid/estimated for each quarter as well as yearly reports for each of the above listed categories.
Quarterly reports are not necessary as the yearly reports will provide the same information. However, I like to be able to track trends on a monthly, quarterly, and yearly basis. That way, I can make the best projections for taxes, retirement planning, and my overall spending.
This is where I store all tax related documents that my tax preparer will need for preparing tax returns.
As a freelance musician I have several streams of income each month which can make it challenging to keep everything in order. I’ve found that by separating my income into three categories each month I am able to keep the most accurate account. I divide my income tracker into the following three sections: Private Studio, W-2’s, and 1099’s.
To track the income of my private studio I print copies of each invoice that is sent to each student at the start of each month. The invoice states the date/times we are scheduled to have lessons that month, the cost per lesson, the total balance, and any remaining balance they may have on their account. From there I make note of the following: the date they paid their invoice (as well as the amount), any cancellations/rescheduling, and any auditions, evaluations, etc. that the student may have coming up. The image below shows an example of the monthly invoice my students receive and is generated using MyMusicStaff; (if you are a private instructor looking to organize your studio, I recommend checking this online program out. If you're interested in trying out MyMusicStaff contact me for a referral code for one month free!)
Using the invoice allows me to account for all lesson income leaving less room for questioning should my books be audited. It is important when reporting income, expenses, etc. that the accuracy of our books is not solely for ourselves. Sure, it's great to see growth in our business and it is essential to know this information to make the most informed business decisions. However, in regard to this tax binder your objective should be to provide accurate information to your tax preparer that supports your tax claims should you be audited at the state or federal levels.
To track any additional income from W-2’s (college/orchestra pay) and 1099’s (any additional income that is not from my studio or covered by a W-2) I use the Monthly Report. In addition, I keep all of my employer generated paystubs under the last tab of my binder. If I do not receive a paystub for paid work I track that income on the form titled “1099 Miscellaneous Income” also located in the back of the binder.
For my business spending I use the monthly expense tracker shown below. I try to keep this very simple noting the date, a short description of the expense, the amount, and the category my tax preparer will likely place it under (i.e. office supplies, teaching materials, meals, etc.). Once I’ve tracked the expense, I then take the receipt and store it in the expense tab pocket in my binder.
A few tips for tracking your expenses:
Standard receipts usually fade over time so it’s worth scanning and/or making a photocopy of receipts that might be harder to read in future years.
If you are buying both personal and business supplies in the same trip, ask the cashier if you can make two separate transactions. They are always understanding when customers need to purchase items separately, and it saves you a lot of time subtracting the cost of personal items and sales tax to determine the business expenses you incurred.
Most importantly, SAVE YOUR RECEIPTS! Without the proper documentation you cannot expense an item no matter the cost. If you are concerned with losing receipts, there are various applications that allow you to snap a picture of your receipt and save it for later.
Expenses can be challenging because the rules often change from year to year. I find Investopedia, the Wikipedia of investing and finance, to be a very valuable resource and easy to understand. If you are looking to track your expenses, or want to know which ones you might be missing out on, use this link for deductions specifically for the self-employed. Another very helpful resource they provide is a dictionary of financial terms that will help you to better understand the various aspects of your business and your tax return.
If you plan to deduct any of your business mileage, you’ll need to keep an accurate record of all the miles you plan to claim. In the past I’ve tried various forms of mileage tracking from apps that track when I am driving to Excel spreadsheets. It seems, the more “high tech” or involved the method, the less likely I was to actually keep track of my milage in a timely manner. I’ve found the easiest way for me to accurately keep track of my mileage is by using this simple weekly spreadsheet at the end of everyday. The biggest advice I can give you is to stay on top of your tracking methods to ensure the most accurate records! It might seem like a pain to schedule a few minutes every day/week but it is way more efficient than trying to organize months of backlogged information!
Putting Your Tax Binder to Use
Remember to keep your tax records where they are readily available. These binders would be a great asset should you ever be audited; you can be confident that all of the information is accurate and in one convenient location.
I hope this helps you think of the various aspects of your business you should be tracking to show growth and to build rock solid bookkeeping methods. You can download my tax templates here. Always be sure to keep your records accurate, to the best of your knowledge, and find yourself a tax preparer who can assist you and your growing business.
Good luck as you develop your tax binder to crush it in 2020!