How do we do our own accounting for our businesses online as entrepreneurs, especially if we have just converted our hobby into a business?
What can we do with QuickBooks Self-Employed, a business bank account and credit card to make it all super-easy to do our accounting?
Accounting for Online Entrepreneurs with QuickBooks Self Employed QBSE + Business Bank Account
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I’m Jerry Banfield and I’ve been in business online since 2011. I really wish I had got this information early on. It would have saved me a ton of time and energy and wasted money doing things a less efficient way.
What I will show you now is the really easy way to do your own accounting, and then all you need to do is google stuff, maybe have a support group to ask questions from people that are established and maybe if you are still having a hard time, then you can consult a professional like a CPA on very specific questions instead of just outsourcing it from the get-go and costing a lot of money, and not being in the middle of your own business.
I think it’s really important to be in the middle of your own business finances, especially if you are self-employed, especially if you are working from home because this gives you the ability to stay on top of stuff all the time, and not just give the responsibility to someone else.
What I will do is show you in this everything you need to do to get started. I’ve got links to everything in the description of the video and I will give it to you in the order you want to do it along with suggestions about more reading and more things to learn.
I’m grateful for the inspiration for this today from Ricky Live. He has just hit that point on Facebook where he is seeing that what he is doing online is now a business.
What is the difference first between a business and a hobby?
If you are a live streamer or you are working online and you are getting started, you haven’t made that much money yet, or you are just starting to make some real money, where do you draw the line between a hobby and a business?
For live streaming like Ricky does, when he first started out this was just a hobby. Now, he has a dream of being a full-time live streamer, which he looks like he is right in the middle of.
How do you know when you have drawn the line and you need to do all the things I’m about to show you?
If you have got money coming in every month, like Ricky Live’s got hundreds of supporters, that is a business.
If you have got donations, like over a thousand dollars of donations, it seems like that’s a business, especially if they are coming in on a regular basis and if people are having their donation pop up in the middle of the screen where everyone can see it.
If you just maybe got a few dollars, maybe you only got like a hundred dollars in donations all year, which is more than a lot of live streamers get, if you haven’t spent that much money to do it, if you are not doing it every day, that might just be a hobby.
But if you are doing it every day, if you have got regular money coming in every month from it, if you are getting thousands of dollars in donations during a year, that very likely is a business.
And if you qualify that as a business, I highly recommend going through and doing all of these things because failure to do this can be most uncomfortable. It can result in huge surprising tax bills at the end of the year. It can result in needing to go back retroactively and figure all this stuff out years later in the case of perhaps an audit or something.
The earlier you start doing this, the easier it is. The longer you wait to do this, the more things you need to go do manually, and from my experience, you do not want to do tons of transactions manually.
First, when is the best time to start a business?
I think the best time to start a business is in January or the beginning of the year because if your business spends some money and loses money, like mine lost money for the first several years, so you can actually take a loss and deduct that against your other taxes.
The worst time to start a business is right at the end of the year like I started mine in October 2011. If I had just waited to start it till the next year, then I could have taken another year of losing money.
If your business is making money, that’s good and you can start it right away if you need to. If you have got a profit to show for it right away, then maybe you can start at the end of the year.
You also may need to consider things like health insurance and for health insurance, it’s really nice to have that in place alongside your business. I will talk more about that in the end.
When you know you need to start a business and you know you need to stay on top of the accounting, that’s what we will go through and do right now.
So Ricky, I just told Ricky on a stream, “You definitely need to start a business. You’ve absolutely got a business and you might as well get on top of all that right now.”
Ricky was talking about hiring an accountant. While that is an option, it also costs money to have an accountant, and especially earlier on in your business, you want to spend as little as possible on things that you have to spend on indefinitely.
Once you hire an accountant, that’s an expense that you might need to pay indefinitely and you also don’t get the ability to learn and see how all of it works yourself.
So, here’s how all of it works. I found a link, howtostartanllc.com and this looks extremely helpful. It’s got a very nice walkthrough guide to all the things you need to do.
So, the first step, when you realize like the point Ricky is at, “Okay. I’ve got a business. This is no longer a hobby.”
If you got a hobby, you might not even need to bother with reporting the income for it if it’s not very much and depending on how you received it you might not need to even bother with that.
But Ricky at this point looking at his numbers, he definitely got a business.
Okay, what’s the first step?
The first step is to form an LLC.
An LLC allows you to do the rest of the things we are about to go through. An LLC is a disregarded entity as far as the IRS is concerned, which means it’s just for legal and for business purposes.
It keeps your taxes very simple, although if you are used to doing them yourself and you start a business there is a lot to learn. It keeps your taxes very manageable though, especially with QuickBooks Self-Employed.
You don’t have to file anything separate. It is easy enough that even I can do it.
So, the first step is to start an LLC and this howtostartanllc.com is great. You can choose your state, you can pick out exactly what state you want to start in.
I live in Florida, so I select my state here and this allows me to go through and do the rest of this guide here.
So, these are the basic steps. These will be similar in lots of states. The basic thing first is to name your LLC. I recommend to name your LLC something you want to use indefinitely.
I used dumb names when I started. I might as well had just picked something like Jerry Banfield LLC or something to start with.
I did Gaming Addiction LLC, Real Productive Life LLC, Banwork LLC and I changed the names. Just pick something you can stick with. The name of your LLC is not that important because it’s pretty much just for business and tax purposes.
This is not something you probably are going to be using all over your branding. You can keep it simple by just putting in your name like Ricky could just put Ricky Live LLC. Really simple. You don’t need to put a whole bunch of time and energy into your LLC.
Ideally, it should just be something you are happy with that you can use indefinitely and it should be very specifically related to your business.
You also don’t want to put any extra words in it like Bank, Attorney, University, etcetera or anything cute.
Now, you might also want to consider whether the URL is available for it. I brand everything off of my name, Jerry Banfield, because I can do it indefinitely that way.
I can’t be bothered to change the name of my company at this point from “Real Productive Life LLC,” but if I had to do it over again, I would call it something like Jerry Banfield Online LLC or something like that.
You can pick whatever name you want and the URL though.
For naming an LLC, it’s something I put too much time and energy in. It really does not matter that much.
The next thing if you are in Florida or in some states, you may need to have a registered agent. A registered agent is someone available from [9:00] to [5:00] every day to accept paperwork on behalf of your business.
If your business gets sued or if your business has any important documents to receive, the registered agent is available [9:00] to [5:00] to get your paperwork. If you are doing things online like me, you can actually pay a company to act as your registered agent. They have staff that are available every day.
This is a good option if you want to work at home and keep your address private. I hire a registered agent and this way I don’t have to put my home address on my business registration because business registrations are searchable.
So, when you go start your business and you are working from home, and you just throw your home address on there, and let’s say you just blow up and all kinds of people want to creep and stalk on you, they can just google your business and come right over to your house.
So, for this reason, I recommend to just pay for a registered agent, if you need a registered agent or some similar function in your state. Mine, I think is like fifty or a hundred dollars a year.
Their address goes on my business registration. They are up to accept everything.
What I combined that with is a mailing address. I use a P.O. Box.
So, I have a registered agent on my LLC, then I’ve got a P.O. Box as a mailing address for people to send mail to me too. I don’t want the registered agent to get the mail. I want the mail to come to me.
So, I’ve got a mailing address for my business, which is in a P.O. Box, then whenever I move the P.O. Box can stay the same. Once you have got the registered agent in Florida, you file the articles of organization.
This might sound intimidating, but it’s not. It is super, super easy.
These are pretty much copy and paste. It’s super basic. You don’t need to hire.
I did this for two different companies. It’s really easy. It’s very standard.
More than likely it’s just you on the business and I recommend, don’t fool around and put anyone else on the business, especially if it’s just your business, just put yourself on it.
Don’t complicate it by trying to make a bunch of officers on it, and put your friends on it, your partner on it, and then you don’t want to be friends with them anymore, you break up with your partner, now you got to edit all this for your business.
So, don’t fool around a lot. Just put yourself on it. Keep it simple.
Some places you need an operating agreement. I didn’t fool around with that.
Now, once you file your LLC, there are websites that will try to get you to pay them money to do it, but you don’t need them. All you need to do is go straight to the official registration one.
This link goes straight to the correct official state filing. No extra fees.
If you use some third-party service they will add a fee plus you will have to pay the fee. This looks like it’s a hundred and twenty-five dollars to file an LLC in Florida.
So, it’s a totally reasonable cost and if you use some other service, you will have to pay that plus whatever they add on to it.
You can do it online, which is how I do mine.
After you have done that, now you need to obtain an EIN if you are in the USA or if you are in a different country there may be some different procedures.
In the USA this is an Employer Identification Number or a federal tax identification number. This EIN will help you to open the business bank account.
Now, you will notice I’ve talked for 12 minutes and we haven’t even got into it because you need to do this stuff first, so that you can set up and use the QuickBooks Self-Employed accounts I’m going to show you later.
You will need to go to your bank with the state LLC registration and that EIN that’s from the IRS. That allows the bank to put your account under the EIN instead of it being under your social security number.
So, you need this EIN.
I’ve got a direct link into this from the IRS. Here’s what it looks like. You apply for your Employer Identification Number.
This is not hard either. You can just go through this to apply online now. It is pretty easy. It comes in the mail. It’s not a big deal. It says that for international applicants you don’t need a social security number.
So, you can apply online to the IRS to get your EIN, and then you are set. You have got your EIN.
Now, there are some things to consider. If you are selling a physical product, you may need sales tax for your state or if you are hiring people you may need employer taxes, but we are not going to do that because I’m assuming you are having an online business.
If you are selling things, you can learn about state tax.
After you have formed your LLC, then howtostartanllc.com recommends business banking for personal asset protection and I absolutely do also, but not just for personal asset protection though.
I do it, so that I can go through and have my accounting because I need to see, for example, that I’ve got six thousand dollars, it recommends I pay in taxes for April.
I can see like last year, I can very easily go and look at my income for the entire year all at once. I can then go over here in QuickBooks. I can see like month to date. I can see exactly like this month I’ve actually spent $1,527 more than I’ve earned so far this month.
You can see doing it this way, the power of having all this information.
So, while the “how to start an LLC” website says it is for personal asset protection, that’s true but that’s not realistically how you are going to use it on a day-to-day basis. On a day-to-day basis, you need to be able to know exactly how much money your business is making and spending.
Because unlike having a job, the only way you know how your business is doing on a day-to-day basis and how much money you are making is through your own accounting, and you don’t want to have to depend on someone else to show you this.
I can look and see today that this month the amount I’ve spent versus the amount I’ve earned, I’ve actually spent money to do my business this month, which is fine.
The main mistake I made when I first started my businesses is I was not constantly on top of this net income number and you need to be on top of that net income number because this is how much money you are actually making with your business.
This is my paycheck for this month after I put together everything I’ve got plus everything I’ve spent.
This is important because you want to be able to do this for the whole year also. You need this data then to estimate how much tax because you need to pay tax four times a year if you are in the USA with your own business.
When you are employed somewhere it normally is taken out of your paycheck and taxes paid repeatedly throughout the year, but when you have got your own business you are getting income pre-tax.
That means, you need to pay the tax to the IRS yourself during the year that normally would be paid to you on a check and the only way you know how much is to be on top of your income, and then when the end of the year comes there is no surprise. You can see exactly how much money you have made, exactly how much money you have spent and exactly how much money you have profited and therefore exactly what you need to pay tax on.
Therefore, you don’t need a personal asset protection as much as you need to constantly know how much money you have earned and how much money you have spent, and then you can calculate expenses based on that.
You can also use this information to calculate whether you are ready to quit your full-time job or not because while your donations might be good, while everything might be looking good and feeling good compared to say working a job and just having some extra income, when you actually put all the expenses, like for Ricky you put your Xbox you spent, you start putting all your expenses, you can get an accurate idea of, “How much money is my business really making?”
For example, if this was my first month in business and I had not done anything, I still had a job, like if this was my first month in business…
This is better than my first month in business. I lost $50,000 starting my business.
Every money I made was wasted on some bad idea that cost more and I ran myself into a ton of debt by not doing what I’m showing you.
When you do what I’m showing you here, you will not make the same mistake. I can see on a month-to-month basis that I will need to either do more income or cut more expenses for the next month unless I want to spend all of my savings up.
You can also get an idea from this for how much money you should have saved because there is a lot of up-and-down months having your own business.
Once you have got your EIN, you are ready to go get your bank account and they have got a link to get $200 when you open a business checking account with Chase on here.
You also want to get a business credit card. I recommend just like this website says, have a business bank account and a matching business credit card that are preferably in the exact same interface.
Here’s what I do with it.
I put all my income into the business bank account, and then I put my expenses on the business credit card and this gives me all of this smooth interface you see in QuickBooks.
So, it’s got all these expenses that are either from the business bank account or the business credit card, and then all the income is either from the business bank account or if I get money in another way, for example, some of the crypto I did before, I ended up selling straight to my personal account, then I need to manually add that in.
You can use any of the banks on here plus I imagine other banks.
When you connect these, then you will get all this data pulled in automatically. All you need to do with it is go in the transactions and make sure it’s set up the right way.
Every time I get income or expenses, it’s up to me to classify, which one it is. For example, I just spent $352 on Amazon. I ordered a Nintendo switch. That is an advertising expense for me because that Nintendo switch allows me to make videos.
The videos I make allow me to make income on my business. Therefore, that is an advertising expense. I’ve bought something that allows me to make something that then advertises my business and gets me money back in.
Think of it this way. Imagine a company making an advertisement, a commercial that was on TV. Everything they spent relevant to producing that commercial would be part of an advertising expense. If they bought props for the commercial, the lighting, the people they paid, all of that will be an advertising expense.
The main expense you are likely to have is an advertising expense if you have got online. That has been my largest expense. You put money into advertising, you put money into contract labor, they are two of the largest expenses.
Advertising is anything you are using to promote your business or to make things that promote your business.
For example, I have a website Jerrybanfield.com. This website, paying the hosting cost for it, paying the WordPress theme for it, paying the podcast player for it, that is all an advertising expense.
I pay all of that straight out of my business bank accounts and credit cards. It’s all automatically tracked.
Therefore, when I have that expense, that comes out and is counted against any income I have.
So, once I’ve got that business bank account, then as you can see, the next step in howtostartanllc.com, it says you want accounting, and look what it says, the same thing I’m saying:
“The right software makes accounting easy. Look for software that syncs with your bank automatically, matches transactions and can be accessed from your phone.”
Now, while they have got more expensive options on here, I’m giving you the one I use which is the cheapest.
QuickBooks Self-Employed, it was very effective. I’ve used it for over two years now and it has a nice refer-a-friend program. You get 50% off when you use my link and I get $30, so I appreciate that.
In some places you also need business permits. I don’t recommend hiring any employees. Do all contract labor if you can. That means you pay somebody to do something on their own terms, and then they do it for you however they want. They don’t have to come to work at a certain spot without them choosing to do that.
You can have insurance, but I don’t see that as necessary most of the time when you have an online business.
Now, your business will also require annual reports. For example, my business requires a $138 annual report and those are the basics of it.
Now, where do you report the income?
Once it’s time to file your taxes you use the “1040 Schedule C“ if you have a single member LLC, which I recommend to keep it simple. It’s your business. Do a single member.
Now, if you have got a partnership return, you may need to use an extra form to do that.
But if you are a single member, you just use a “1040 Schedule C” to submit your taxes and if you are using something like QuickBooks or Turbo Tax, it makes all of this really easy.
When you have got QuickBooks Self-Employed over here, it makes it very easy to just get all of these expenses in. You go over to your reports by the year and you view your reports, like for last year doing my taxes, I view my reports, I make sure everything is in the correct category.
I put whatever is in here, I move that over and put that in my Schedule C in the 1040, and then the numbers from here get put straight into my taxes. That is the main thing you need to do with the accounting.
Now, paying an accountant for this could cost thousands of dollars. It’s not that hard to learn to do it yourself. If you just put the time into it and research each of these things, you can figure out how to do this yourself.
Now, once you have got your bank account synced over here and you have also got all of your expenses in here, what you will need to do over time is just figure out what things count where.
Google for specific information like “What can count as an advertising expense?”
One thing that can be really helpful for this is a support group. I’ve got a support group at Jerrybanfield.com/partners.
A support group for me is people I can turn to who do what I do or something similar that I can ask questions when googling is not sufficient.
The first step on anything is to just use Google.
“What is an advertising expense?”
You google it.
Then the next step, I’ve got a support group for people like me, an influencer, mastermind and online entrepreneur support group. We talk every week on Facebook. We have got a Facebook group and there are some other benefits.
This support group then allows us to ask each other questions, often things that aren’t so easy to google or where Google is not giving you the answers you are looking for.
For example, you might say, “Well, Jerry, if I buy this for my business, is that advertising or contract labor? Jerry, where do I put the QuickBooks Self-Employed in as an expense?”
Sometimes these very specific questions can be hard to find googling, but that’s an easy answer for me. I put QuickBooks Self-Employed in as “equipment, rent and lease.”
Anything that I use on a regular basis for my business, then can go into “equipment, rent and lease.”
So, if you would like to join us, you don’t have to use my particular group, but I recommend being in some kind of group where you are with other people who are in a very similar situation, so that you can work together, you can ask each other questions because I’m about to show you some more things on the tip of the iceberg.
What you might not realize is how much you don’t know you don’t know. There are things that you can learn and ask and connect with people that you might not even think to google and that’s really helpful.
And then if you are googling stuff, you are learning it yourself, then you are a member of a support group and you still can’t get answers there that are satisfying, then you can turn to something like a professional, like a CPA or an attorney as needed to get more detailed answers and that gets progressively more expensive.
Here are a few more things you really need to know. Hopefully, you have made it this far in.
So, you have got a “1099 Form K” and a “1099 Miscellaneous.”
What you really want to understand from the beginning is, how do I stay compliant with the IRS?
How does my income get reported to the IRS and what do I need to do about it?
Your income, especially when you are working online will get reported two primary ways to the IRS. Either through a “1099-K” or a “1099 Miscellaneous.”
Most of the time it will probably be a “1099 Miscellaneous.”
These are forms given out when you have met these requirements:
Ten dollars in royalties in lieu of dividends or tax-exempt interest or at least six hundred dollars in rents, services a.k.a contract labor, prizes, awards income, medical and health care payments, etcetera.
The “1099 Miscellaneous“ form, let’s say you have a client or you work for a client, they pay you a thousand dollars to do something. If they paid it to you, say they gave you a check directly or a wire transfer to your account or ACH, then you are likely to get a “1099 Miscellaneous,” which is miscellaneous income.
That form is also sent to the IRS.
The IRS has a copy of that and expects to see that this income is reflected on your tax return.
The IRS has an automated under-reporting program, which I’m now familiar with. If your income reported to the IRS is not as high as the income you report, you will get automatically flagged for under-reporting your income.
That is not even an audit, that is automated under-reporting, and this even includes if it happens by mistake or neglect.
So, one of the critical things to understand upfront are these two forms. The “1099-K” and the “1099 Miscellaneous.”
These are forms you are likely to get when you are earning money online.
Now the “1099-K“ is one that’s fairly new that you really want to pay attention to if there is any chance you will get gross payments that exceed $20,000 and more than 200 such transactions.
That means for somebody like Ricky Live, he at this rate is on his way to earning a “1099-K“ form, and this is why you want to be prepared upfront.
Because all it takes is 200 donations and a total of $20,000 or more and you have earned a “1099-K” form that reports the entire amount you got without subtracting any fees straight to the IRS.
I hit the automated under reporting program one year because PayPal gave me a “1099-K” on the exact same income that Udemy hit me with a “1099 Miscellaneous” for and $300,000 was reported twice to the IRS.
Meanwhile, I only reported it once on my taxes because I only actually got three hundred and eight thousand dollars once.
Therefore, you need to understand these two forms upfront, so that no one double reports income to you also. There are still like even companies that have accountants. The mistake I’m telling you about was made by Udemy, a big company, one of the top websites in the world who I’m sure has plenty of professional accountants.
This “1099-K” is fairly new, which means it’s up to you if you get somebody who sends you a “1099 Miscellaneous” who also sent you income that was reported on a “1099-K,” you need to immediately get them to correct that “1099 Miscellaneous” to zero or you can get your own letter from the IRS like I did saying you owe $90,000 in extra taxes on money you did not get.
That took me several months to resolve that and eventually they sent me a letter and said, “You’re good. You don’t owe any extra taxes,” which was nice, but better for you not to even go through that in the first place.
So, if you think there is any chance you are going to exceed $20,000 in an entire year and more than 200 transactions, be prepared for a “1099-K,” and in order to do a “1099-K” you need to have all of your expenses clearly documented.
For example, like say Ricky gets over 200 donations and over $20,000 in donations in 2019 through his Stream Labs donation link.
Then Ricky will get a “1099-K” from either Stream Labs and/or PayPal or Stripe, however Stream Labs has that set up. Ricky will get a “1099-K” and the IRS will get a report that Ricky got, let’s say $30,000. All the donations, completely in the full amount, will just get reported to the IRS.
So, Ricky will have his regular job income and all of a sudden thirty thousand dollars extra reported straight through the “1099-K.”
Now, imagine if Ricky sets up his business, has all his expenses, it would be very easy for Ricky at the end of the year to just go through, drop his “1040 Schedule C,” put all of his expenses, put the “1099-K,” the full amount of that, subtract all these expenses all year for his business, and then assuming Ricky pays some quarterly taxes, everything goes fine at the end of the year.
There is no big tax bill.
There are no big surprises.
Now, in another scenario, let’s say somebody has the same thing to happen like Ricky. Their stream starts going good, they didn’t take the time to set up a business, they didn’t take the time to learn about the “1099-K” or watch this whole video and let’s say they get one of these surprise 1099-K’s at the end of the year.
They get $30,000 reported and they don’t even know what to do with it. They might spend thousands of dollars talking to an accountant and thousands more only to realize that the IRS now wants seven thousand more dollars in taxes than what was planned for.
Let’s say if someone in the same situation, the example I gave is Ricky, 2020 comes along and you might be looking at ten plus thousand dollars all at once unexpected.
You don’t want to be in that scenario.
So, be ready for this. Set the business up, get all the transactions recorded and be optimistic.
You might say, “Well, there’s no way people are going to donate twenty thousand dollars more than 200 people.”
You don’t know that.
And if you think that’s not possible, why even try building your business online?
If you are just figuring things won’t go that good, why try at all?
Why not just get a regular job where there is peace of mind and security?
It’s your business.
If you don’t believe in your business, who is going to believe in it?
I always imagine things will go well, and then I prepare for that. I’m interested to see how many 1099 K’s I get this year and who sends them. I got multiple 1099 K’s several years because these are by payment processor.
So, for example, if Stream Labs passes the 1099 K’s off to Stripe or PayPal, you might be able to get ten thousand in one payment processor and thirty thousand in another and not trigger a “1099-K.”
Still, even if you don’t trigger that “1099-K,” you want to report all that income because then you don’t have to be afraid of an audit. You don’t need to fear an audit. An audit is no big deal as far as I can see if you have been honest and reported your income.
An audit, as I can see, might be very uncomfortable if you just didn’t report things that the IRS expects to be reported.
So, be ready for this “1099-K“ and if you get one, don’t reduce the income and make sure it’s exactly correct and if any “1099 Miscellaneous” is not included in it.
Finally, you might ask, “How do you pay your taxes?”
One of the reasons I’ve walked you through all of this is because you need to pay estimated taxes. If you are making money on your own with your own business, you need to pay taxes all year.
You don’t just get to wait till the end of the year and see what the tax bill is.
You need to pay estimated taxes all year or there can be a penalty for underpayment in addition to whatever you need to pay.
So, you want to use this entire system, so that you know you make those estimated tax payments throughout the year.
What I have is four times I send payments to the IRS and thanks to my accounting software it tells me exactly how much that I should send, and then I also need to calculate that against any other income.
For example, when I make capital gains that means that whatever QuickBooks says might not be enough, I might need to pay more than that.
As long as you pay most of what you need to pay throughout the year, I think it’s 90%, if you pay 90% of what your final tax bill comes out to be, then the IRS understandably will allow you to pay the extra without any fees or penalties.
But if you don’t pay anything at all, you might be looking at a big extra tax bill, and not only that, but you don’t want to be unprepared.
It’s much better, I just pay my estimated taxes all year, then I don’t have some massive bill when it comes to tax season.
“What is estimated tax and who does it apply to?”
“Everyone must pay taxes on the income they receive during the year whether it’s from a job, self-employment or other sources.”
If you have heard of people getting in trouble from the IRS for not paying their taxes, this is usually the reason. It’s people who have not paid estimated tax.
If you get a 10 million dollar movie deal you are responsible for paying estimated tax on that immediately. Not just taking 10 million and do whatever you want with it, but paying the tax that’s expected on it as soon as you get it.
The IRS expects to receive tax payments as soon your income is earned, not just at the end of the year when you file your tax return.
That’s why we are doing all this.
For those who are employed, you usually have taxes withheld from your paycheck and sent directly to the IRS.
So, if you are used to a job this is a big difference in terms of how you might think of it. When you have got a job, your employer is doing this for you. When you get your own thing going, you have got to pay the taxes that your employer would pay for you.
And if you think, “Well there is probably not that much tax,” add 15 percent to whatever you think there is because your employer in addition to paying you as an employee also pays all these other expenses on you like Social Security or Medicare, Medicaid, that if you do it yourself, being self-employed, you have to pay those yourself.
On the first hundred thousand or so of income I make a year my tax rate is something like 35 or 40 percent. It’s high and what’s funny is if you look at my income this year, a year to date, I’ve got a negative 1,527 and QuickBooks expects I’m going to make a lot of that income over the year based on previous years.
QuickBooks still says I ought to pay six thousand in estimated taxes even given the current situation.
Now, if I continue to do this all year, I would not need to pay any taxes.
However, I imagine I’m going to make a whole lot more money during the year and you always want to be keeping up with those estimated taxes.
So, these estimated taxes, QuickBooks calculates are based on how much income you have earned and it tries to err on the side of making sure you have paid enough, and at the end of the year, if you have overpaid, then you won’t just make anything for that last payment, and then you can even get a refund.
Estimated tax is a method of paying basically four times a year and this is on everything: business earnings, interest, rent, dividends. Anything you make money on, the IRS typically expects four installments.
Now, if your income is up and down, which it might be with a business online, they might not be equal. You just pay it in proportion to what you get.
So, for example, I’ve had months where I’ve made ninety thousand dollars in one month online. I make a big estimated tax payment after that. Then, when I have months where I lose money, given however that fits into the whole year, that modifies my estimated tax.
So, if I continued the next several months of 2019 losing money, this number would continue to go down and down. When I start making money, I imagine I will have months in 2019 that there will be a huge profit, then this number goes up at the rate based on what I earn.
So, estimated taxes, you basically make four estimated payments a year. As a general rule, if your tax liability is a thousand or more for the year, you are expected to make estimated tax payments.
That means if you have made a few thousand, I would say three to five thousand dollars total in one year, that is the tax liability of probably at least a thousand dollars.
If you owe taxes, it means too little was withheld. This is a flag to the IRS that you should be making estimated tax payments.
So you want to make sure you pay your tax on time. That’s how you avoid getting into trouble.
Now, the nice thing with QuickBooks, you can sign up and pay your estimated taxes online. You can even do it directly out of your business bank account if you want to and it will all calculate and put all of that in for you. You can see how much you have paid for the whole year and it’s really simple.
Now, there is one more thing I will add on to this to consider, which is health insurance because if you have got your own job it may come with health insurance, however, if you are full time on your own, your health insurance can be deductible if you get certain plans and if you are not qualified for any other type of health insurance.
The health insurance is a whole subject in and of itself.
So, if you can get on, it can be very easy.
Ricky, like if he has got a partner, he can get added on their plan and that might be really easy.
I pay for self-employed health insurance for the entire family. It costs me almost $1,200 a month. It has a twelve thousand dollar deductible for the year.
Six thousand a person or twelve thousand for a family, which worked good for having a baby last year.
I didn’t have it.
My wife had it.
And the nice thing is all of that is deducted pre-tax.
So, when I looked through last year on my business and it says that I made a hundred and eighteen thousand income, well before I even have to pay tax on that, we subtract the twelve thousand or so that I paid on health insurance, then I subtract the five thousand or so I put into my health savings account and that takes it down before my tax is even assessed.
So, if you have got your own business and you need health insurance, you can use the health insurance marketplace and get it right there, and the smaller amount of money you make, you can even get some payments or even credits towards the health insurance payments.
The more money you make, you will not get any of those credits and it’s important then to be able to deduct your health insurance off of your income on your business.
So, I’ve went through this for 43 minutes now.
I’ve tried to cover a lot of the things I wish I would have known when I started my business. I went through and did this very halfway.
The best thing I can say is that I didn’t spend any money getting anyone to help me, I just spent a lot of time doing it myself, learnt the hard way on several things like the “1099-K” form. That one got me good one year.
One more thing.
Some employers or some places that are having you receive money will ask for a social security number or an employer identification number.
Now, before you have your own business and your own EIN, you just are stuck using your social security number.
But you might be tempted after you have got your own business to use your employer identification number.
I’m going to suggest against doing that because I got triggered on the automated under reporting one year for having all of my stuff screwed up.
According to the IRS, if you have got a single member LLC, basically you are self-employed, you have got your own business online, you just set it up the simple way with an LLC, now the IRS doesn’t care about your LLC and as far as they are concerned the income comes straight to you.
Therefore, I put everything under my social security number now because I did it reporting straight to the business EIN, which triggered three different entities in the IRS’s mind.
I had two companies at the time plus me as an individual.
So, the IRS got some income reported to one business, I didn’t report any income to that business. Some income reported to another business, I didn’t report any income to that either. Then, I reported all the income to myself.
So, as far as the IRS was concerned it looked like I had two businesses I under reported the income for, and then they didn’t notice or have it trigger that I reported a ton of income that wasn’t reported to them on my own social security number.
So, when you get that EIN, I recommend don’t put that out there in terms of whenever you sign a W-9 for someone to pay you or when you are putting in with your payment processor.
Keep your social security number.
Keep that money coming to you unless you have made a corporation that will be getting the money, and if you have done that, you probably didn’t bother watching this whole video or reading this whole post or listening to this whole podcast anyway. You probably would have just stopped.
So, keep reporting it under your own social security number is my advice and that way the IRS gets all the incomes reported directly to you, and you report it all back out directly to them.
There is no confusion as to why this business earned this much and that business earned that much, and then you as a person got that much.
The EIN is very helpful for establishing a bank account, but you don’t need it for much more than that depending on what you are doing.
All right. I’ve talked long enough.
Thank you very much for watching this self-employed accounting for online entrepreneurs video.
I’ve shown you how to start from zero, how to go through the basic steps to set up your LLC, get your business bank account, get set up with QuickBooks Self-Employed, get your bank accounts connected, then you have got all of your bank account transactions and credit cards going straight into QuickBooks.
I’ve shown you how to use all of that within the context of estimated taxes and reporting your income accurately to the IRS, then not having any surprises about how much money you have made, how much money you have spent, and how much money you owe or are due back.
I love you.
You are awesome.
I’m grateful for the chance to have a business here with you today and I imagine if you want to read anything specifically, links are included in this post or the description of the video, you will use those for further reading.
Edits from video transcript by Michel Gerard at www.michelgerardonline.com.