If you’re a small business and receive funds via credit cards online, or other online payments from your clients, you can anticipate receiving a 1099-K this coming tax year. The 1099-K is the IRS’ latest tax form for small business, which is provided directly to the IRS from your online payment provider (such as PayPal). You will also be receiving a copy, so you can match it to your own record of online payments (always important to double check). Essentially, this form is a record of your revenue from your online payment provider that will be directly reported to the IRS. The form will look like this:

Since your payment processor will be reporting your revenue directly to the IRS, it will actually cut down on your paperwork. You will not need to report it in the other 1099 forms (make sure you don’t double-state your income, as that would mean more taxes.) The most important thing to do is to record all your expenses (write-offs and deductibles) and file your return quickly to ensure you do not over pay your taxes. Also, make sure to report your PayPal or other merchant fees as a separate expense, as they will not be included in the 1099-K.

Clarification update: The income on your 1099-K still needs to be included on your Schedule C, as per usual.

Essentials:

• Payment providers may ask you for your Tax ID Number (TIN), Social Security Number (SSN) or, if you have one, an Employer Identification Number (EIN). You can get an EIN here. An EIN is a great alternative and preferred by many people doing business online to protect their SSN number.
• Only businesses that do over $20,000 in online sales and 200 transactions will receive a 1099-K
• The form only reports your business name, address, tax id number and gross credit transaction (not deductible merchant fees).
• If you have multiple merchant accounts or PayPal accounts, one 1099-K will issued for the same SSN/TIN/EIN, following the policies above.

In short, you do not need to do anything, other than make sure you do no overstate your income in other tax forms, and be sure to deduct all your relevant expenses, especially your merchant/PayPal transaction fees.

If you need more information, as always, talk with your accountant/bookkeeper, as they’re the experts. And, there is always the IRS’ 1099-K instructions. PayPal also has written a FAQ.

Your client does not want to expect to finish the project with duct tape

When freelancers know they’re competing with others for work, there may be a tendency to provide a lowball quote to secure it, but freelancers need to keep in mind the old saying “you get what you pay for.” Clients certainly are.

Although it may seem like a good idea to offer a very low quote, unless the client is the type who looks for the lowest bid, a quote that is too low might be as bad as pricing too high. In fact, it might be worse. A lowball quote suggests inexperience, lower value and desperation (or a combination of the three).

Stick to your rates

Freelancers set their rates for specific reasons (see How to determine your hourly rate: Yearly salary method for one way of determining your hourly rate), and it represents the value they have placed on their work. If the rates are priced accordingly, it’s also a good representation of the value clients place on the freelancer’s time and skills. After all, they’re paying those rates, aren’t they? (If they’re not, you might want to readjust your pricing, but that’s a topic for another time.)

Rates take into account costs, time and profit margin, and for the most part, freelancers should provide quotes based on those rates. Although it’s okay to offer discounts (a lot of freelancers offer “small business” discounts of 10 to 15 percent), those discounts should be reasonable and still reflect their standard rates.

Don’t under-value yourself

Trying to under-cut other freelancers to win work sounds like a good idea, but after awhile, freelancers are likely to find they are making a lot less money than they would be if only they were charging more.

Not only are such freelancers under-valuing themselves, but they’re creating an environment where clients will begin to under-value them, as well. One story I recently heard is about a freelancer who actually saw his amount of work increase once he raised his rates.

Think of it this way: When you’re buying a pair of shoes, do you expect the $10 pair to provide the same comfort and quality as the $100 pair? Now look at the number of people who spend $100 on shoes.

Pricing sets expectations

As Freelance Switch points out, a price sets certain client expectations, and it’s fair to say most (if not all) clients would prefer high-quality work. Although some clients are not in the loop regarding standard prices, everyone is skeptical if a deal seems too good to be true. The last thing freelancers want is clients who are concerned about their ability to provide good work, but a price that is too low might make a client wonder.

Most clients expect to pay for quality work, and as this article from WorkAtHomeIndex.net points out, the lowest quote is not necessarily the best quote for the job. Sure, clients want to keep their own costs down, but they also don’t want to hire an amateur to do professional work – and a lowball quote reeks of amateur hour.

Affecting the market

Another consideration in pricing too low, especially if the price is well below industry standards, is that freelancers aren’t just devaluing themselves; they’re also devaluing the work in general. Check out the freelance jobs sections of your local Craiglist, and note the number of angry posts made in response to businesses (or individuals) ask talented professionals to work at incredibly low rates.

Average freelance rates have gone down because of online sites seeking high-volume, low-cost content, but professionals don’t have to play that game. Let the amateurs take the low-paying jobs. Settling for lower rates will help to contribute to the overall under-valuing of the work all freelancers do. Freelance work shouldn’t be seen as a commodity — not if you want to make a living doing what you love, anyway.

There will always be people who buy cheap work, but the average freelancer’s goal is likely to be able to make a living and, in time, raise rates to adjust to their growing skills and abilities.

Turning down work is okay

One freelancer told me that turning down work feels like the old euchre saying of “turn down a bower, lose for an hour,” but that’s just common fear talking. Although you may want to try as hard as you can to win a project, there’s nothing wrong with turning down work if you don’t feel comfortable or can’t meet the client’s budgetary needs.

There will be more work right around the corner. Trust me on that.

Note: For United States based businesses

(click to make larger, available in PDF here)

What’s just around the corner? Taxes!

However, this year, you’ve decided to check out the IRS Small Business/Self-Employed Virtual Tax Workshop (about 9 Videos). It’s a great way to find out about tax regulations and tips for your business, especially if you’re new to the world of business ownership.

In a word, this workshop is amazingly convenient (okay, that’s a few more words, but good ones!). You can view what’s relevant to you, start and stop as you please, and go back when you need a refresher (or when your business grows (and maybe you hire your first employee!) and you need updated advice).

Lessons:

1. What you need to know about Federal Taxes and your new business
2. How to set up and run your business so paying taxes isn’t a hassle
3. How to file and pay your taxes using a computer
4. What you need to know when you run your business out of your home
5. How to set up a retirement plan for yourself and our employees
6. What you need to know about federal taxes when hiring employees/contractors
7. How to manage payroll so you withhold the right amount from employees
8. How to make tax deposits and file your payroll taxes using a computer
9. What you need to know about Federal Unemployment Taxes (FUTA)

Getting to the good stuff:

The first lesson on starting up a new business is full of useful resources, even for those of us who’ve been at things for awhile and just want to make sure we’re on track.

In terms of record-keeping, the IRS recommends that you keep the following documents for tax time:

• Receipts
• Sales slips
• Invoices (handy to pull from FreshBooks!)
• Bank deposit slips
• Cancelled checks
• Other documents to substantiate
• Income
• Deductions
• Credits

It’s important to work out a way to keep organized so that come tax time, you’ll have everything you need to get the job done quickly, and pass on to your tax preparer, if you’re using one (that’s also covered in lesson 1 as well).

One of the most important parts of setting up a business is deciding which form to classify your business under. The webinar goes through each of the forms (sole proprietorship, partnership, limited liability company, S corporation, and corporation), the pros and cons of each, giving advice and guidance to business owners.

The other section most relevant to small businesses is Lesson 4: What you need to know when you run your business out of your home, one of the common questions at FreshBooks.

Here are some highlights:

To deduct business expenses in regards to working from home, there are some specific guidelines based on what type of business you are running. To qualify for a deduction of part of your home (or one of the many other deductions), you’ll need to make sure the following points are met:

• Exclusive
• Regular
• For your business
• Principal place of business
• Separate structure

Within each section, there are also links to the forms they’re referencing in that section of the video – very convenient (and many of which you can fill out online as well).

Need to hold onto these

Want to send a group of freelancers running for the hills? Easy – just tell them it’s tax time.

If your freelance career doesn’t involve accounting (or numbers, really) in any way, shape, or form–or you managed to get away with skipping all of your econ classes during college–then this guide to write-offs is definitely for you. And as always, an accountant can really help get you your largest write-offs.

Home Expenses

If you have space in your home that you use solely for work, then you can deduct it for tax reasons. You’ll have to prove, however, that it is really a work-oriented space (that means no deducting the TV/La-Z-Boy room, kitchen, or rock-climbing annex.) Just make sure to multiply the space of the office by your rent/mortgage, then deduct that amount. Additionally, if you can prove that your cell phone is used for business, feel free to deduct (home phone lines are usually never subject to write-offs and cell phones might be only partially deductible.) A portion of your insurance and mortgage interest might also be available for a write-off.

Travel/Transportation

Travel from your home office to and from business conferences, meetings, and for research is definitely a tax-deductible expense–even if you’re just running to the store to buy paper (as long as the paper isn’t an afterthought once you’ve picked up your midnight Doritos meal). Keep meticulous records of your gas mileage, receipts, and toll payments; you can also deduct a reasonable amount of your car payment and insurance if you use a car for a significant percentage of your business travel.

Memberships

If you’re a part of a membership-only organization that provides networking services (like your community Chamber of Commerce or Lion’s Club), and you need to pay dues, then you can also deduct that as a business-related service.

Health Insurance

If you purchase your own health insurance (which you probably are, unless you have the lucky distinction of being named a freelance doctor) you may be eligible for a deduction. As of 2010, you, the self-employed individual, can deduct 100% of the amount paid on health insurance premiums for you and your family.

Payment to Subcontractors

Subcontracting work is a good way to make extra money, free up the ability to take on new clients, and get a tax write-off. Make sure you explicitly document this arrangement so that it’s purely a contract agreement and not technical employment, or else you’ll be subject to extra taxes. Also make sure you get an invoice from whomever you’re working from, as well as track invoices on your own.

Research/Job Hunting/Site Fees

Sometimes, freelancers need access to job hunting sites–and sometimes, these sites make you pay. (Other sites compel you to buy leads on new opportunities, or bid for the opportunity to work on a particular project, as well.) And whether you’re a writer, a designer, a part-time clown, or anything in between, you’ll probably need to pay for research. Some deductible expenses may include the following: magazine subscriptions, book purchases, the cost of career-related software, printer/ink, web hosting fees, the cost of the computer itself, etc. And, if you use Paypal or other sites to collect payments from clients, you can deduct the merchant fees as well.

Unpaid Invoices

One of the downsides to freelancing? Often times, clients don’t feel obligated to pay you your work’s worth. Luckily, the IRS has a solution: Self-employed businesspeople can write off unpaid invoices as “bad debts.” IRS Publication 535 has more information. You need to have first recorded the invoices as income (if using the cash basis of accounting, you never would have and therefore cannot write unpaid invoices off).

*Sung

Not these type of cogs

COGS is not just another complicated accounting term that’s on your tax forms, they’re actually fairly simple to understand (and you can record them in FreshBooks).

What are they?

COGS stands for Cost of Goods Sold, which essentially explains what it is. This means that for something you sell, COGS is the cost that directly went into that revenue. This is more easily explained for a product, as COGS are the materials and costs needed to create that product, such as the iron needed to make steel and the cost to get that iron to your factory. For a service, it’s a little more complicated, but it the same logic, as they are the items or services you resell (or re-bill) to your clients. For example, if you hire a contract web designer to help you design a website, and then re-bill their hours to the client, this is a COGS for you.

What are not COGS?

Every other expense is not a COGS. For example, the salary you pay to your marketing or administrative employees, as they are paid at a fixed rate that does not vary based on how much your business sells, is not a COGS. Same as rent, utilities, and marketing. Say if you sold nothing (bummer), what expenses would you still have? If you still have to pay for them, they are likely not COGS. However, if your staff directly contribute to revenue, that part of their salary can be a COGS (always best to talk with an accountant in specific cases).

Why do they exist?

COGS eliminate the value that your business did not contribute, which in turn allows for your statements to only show the additional value you or your company is adding. In the above case, the value to the end client from you is work you did above and beyond the contract web designer. Therefore, only the incremental value counts towards your revenue, not the COGS of your revenue.

Why are they important?

COGS are important to be removed from your revenue so you are not taxed on them or added in to misrepresent your margins. This is why on taxes forms and financial statements, they are a separate line item and “reduce” your revenue. You also cannot be taxed on them as it would result in double taxation (the web designer you hired will be taxed as part of their income).

What about COGS in FreshBooks?

FreshBooks handles COGS in two ways. First, any expenses you log and re-bill to your clients, such as the contracted web designer above, is recorded as a COGS.

The second workflow is to assign certain categories of expenses as COGS, especially important if you’re not re-billing all your COGS. To do this, set-up some completely separate expense categories, such as “Contractors”, or a category called COGS. You can do this in the “Expenses” tab in the Sub-Tab “Categories.” The next time you log an expense that is a COGS, you can assign it to one of these new categories.

However, you need to do one more quick step. You need to assign the categories to Cost of Goods Sold (COGS) on your Profit and Loss report in FreshBooks.

1. Open your Profit and Loss in the “Reports” Tab
2. Click “edit” beside “COGS” under Sales/Income
3. Assign the categories you created to “COGS”
4. And you’re done!

Now, if you’re using FreshBooks to record your COGS, you can easily deduct them for next tax season (or scramble to assign them all in this year via the CSV Expense Import).

Contributed by FreshBooks customer Mariette Knoblauch. For a Canadian perspective, please read ThatBookKeeper’s post on FreshBooks and Taxes.

As you’re getting ready to file taxes this April, you’re probably running into a few frustrations, especially around deductibles and write-offs. One easy way to avoid this is to use expense categories in FreshBooks, so you can fill in forms in minutes.

Expense categories in FreshBooks can be added at the click of a button, and tax time will be a breeze if you set them up to match the categories that you use on Schedule C (the tax form for U.S. sole proprietors).

First, look at your Schedule C from last year. What expenses did you have? There are the standard listed expenses, some of which are commonly used by most people (Advertising, Office Expense, Supplies) and some that no one has ever used (Depletion?).

A few of these categories merit special treatment in your FreshBooks setup. Contract labor is the category for people who provide services to your business.  You can use FreshBooks Time Tracking for your contractors and have a complete record of all your contract labor expenses for the year. When you hire a contractor for your project in the US, send them a form W-9. The irs.gov website provides a fillable pdf form that you can email to your contractors. This gives you all the information you need to do the required 1099-MISC for them at the end of the year.

Mileage may seem like a small amount at 51 cents a mile (for 2011), but it can add up to big savings. How many miles a week do you drive for business purposes like meeting with clients and vendors, going to professional networking and educational events, picking up supplies, and delivering finished projects? If you drive an average of 50 miles a week, over the year that’s 2,600 miles, which would be a $1,326 deduction – not too bad!  The IRS does require that you keep contemporaneous records of where you went and why it was business related. You can make an expense category for Mileage in FreshBooks, and record all the necessary information in the notes section. You can even get the MiniBooks iPhone app and record your business trips on your phone as you go!

Keep your business meal expenses separate using the Meals & Entertainment category.  Unlike other business expenses, you can only deduct half of what you pay for meals, even while travelling. After all, you’d have to eat anyway, no matter what you were doing. As with mileage, you can use the notes field to record who you were with and the business purpose for the meal.

There are all kinds of deductible expenses besides the standard ones, and you can make as many custom categories as you like. In your List of Categories on the Expenses Tab, just click “New Category”. Each business will have its own individual expense categories.  You can deduct any expenses that are “ordinary and necessary” for your type of business, and that will be different for every business. A cat-sitter can deduct feather dangly toys and kitty treats.. A cupcake business could have sprinkles and cute pink boxes.  An exotic dancer has even successfully deducted her extra-large implants (after a tax court case – the IRS was not initially sympathetic).  Every day people are inventing new types of businesses, and they will have unique expenses, so don’t feel you have to be limited to the standard categories.

With all your expenses sorted into their tax categories in FreshBooks, and your income from your invoices already there, the Profit and Loss report will have much of what you need for doing your US Schedule C at the end of the year. You may have other items such as home office that will have to be added, but most of the information you need will be there in a convenient format to make doing your taxes quicker and easier.

Mariette Knoblauch specializes in individual and small business income tax filing at The Ballard Beancounters.

Certified Public Accountants (CPAs or CAs) can be beneficial to your company in many ways you may not have considered. Your accountant will serve as your primary source of financial guidance for your business, offering assistance in a variety of areas that your business may or may not need. Before you begin to work with your new accountant, it is important to have an idea of what duties you will primarily need them to perform in the short term, keeping in mind that you can always ask more of them in the future.

Advisory Services

Your accountant will soon come to know your particular business very well, and can advise you on all manner of financial decisions. Entrepreneur Magazine reports that an accountant can bring a fresh perspective to common business problems and uncover money saving opportunities you may not be aware of. According to Entrepreneur Magazine, “Accountants can offer advice on everything from insurance (do you really need business interruption insurance or is it cheaper to lease a second site?) to expansion (how will additional capacity affect operating costs?).” Depending on your needs, your accountant can become more than just a bookkeeper, they can help guide you toward sound financial management and make a meaningful contribution to your bottom line.

Preparing Business Plans

We're hoping you're not using a pen and paper

If your company is looking to acquire funding for expansion, an accountant can help you prepare a professional financial business plan to give to a bank for a loan. Whether you want to grow your current business or launch a new product, a bank is primarily concerned with making sure that they can get their money back. Some entrepreneurs choose to cut costs by trying to exclude detailed financial projections, but this can be off-putting to someone with a lot of money to invest. On the contrary, having a certified professional who knows your company, and the industry you service, construct a dynamite plan that speaks to a bank in their own language can go a long way to getting you the funding you require.

Make Sure All of Your Books Are Accurate

Who uses a calculator?

Before you call your accountant in for tax preparation, you need to prepare a your financials for the accountant to work with. The biggest and most time consuming part of this process is ensuring the accuracy of your books. This involves getting full bank statements for every month of your business year, and comparing them to your own independent records and receipts to make sure there are no big, unaccounted for charges that can not be explained.

The reason for this step is that an accountant can only work with the numbers you provide. If you have thousands of dollars in expenses but no documents or ledger to account for what they are, you may miss out on important tax breaks and end up paying much more to your government than you would have. As mentioned above, if you have not been keeping up on your books, an accountant can put one together for you but keep in mind that it will require more work and result in a higher bill.

Prepare Your Write Offs In Advance

Do you always ask yourself is this a business expense or not? And is it deductible? It’s a common question, especially as tax resources can be a little vague with definitions or by using obscure examples not relevant to your business. One tip is to use the business expense categories, hopefully offered by your local tax body, to categorize them as they incur. This allows you simply to evaluate them once the come in, saving you a lot time by avoiding the hours of documenting boxes of receipts.

What makes an expense deductible?

If the expenses can be attributed to you doing business, it most likely is deductible (at least partially). That’s essentially what the IRS states as deductible business expenses as they….

…must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

Do understand that? In normal language, ordinary expenses are fairly simple, they’re the business expenses typical of your industry, and that you probably think of business expenses. Necessary expenses would be better defined as costs required for your business to succeed, such as traveling to a client or tools used (such as FreshBooks) to make your business a success. They need to be both of these for them to a be a tax deductible expense.

Sample categories

The Canada Revenue Agency (CRA) gives an example list that helps get you started (workable for businesses in other countries as well or US Expense Categories here). If you can easy qualify them into one of these categories, they’re likely an ordinary expenses and necessary so you should be able to deduct them. If you have your own sample list, please link them in the comments below.

• Advertising
• Allowance on eligible capital property
• Bad debts
• Business start-up costs
• Business taxes, fees, licences, dues, memberships, and subscriptions
• Business-use-of-home expenses
• Capital cost allowance
• Current or capital expenses
• Delivery, freight, and express
• Fuel costs
• Insurance
• Interest
• Legal, accounting, and other professional fees
• Maintenance and repairs
• Management and administration fees
• Meals and entertainment
• Motor vehicle expenses (automobile)
• Office expenses
• Prepaid expenses
• Property taxes
• Rent
• Salaries, wages, and benefits
• Supplies
• Telephone and utilities
• Travel
• Other expenses

These may not all be directly applicable to your business and you may have some of your own specific categories, but these are fairly exhaustive. Also, if you can quickly determine an expense to be attributable to your personal use, such as that trip to the tropics (Travel), they’re not a business expense. Here are a few examples for a service based business:

Office expenses - No matter what your business is, you have office expenses. They’re typical products or services you use in your office, such as pens and paper that use you every year.

Capital expenses - Capital expenses can vary greatly for each industry, but for a freelancer or agency, these are products, and maybe even services, that you use overtime such as a computer. How you deduct it will depend on how your accounting is setup, so these are best calculated by an accountant / bookkeeper as you receive the benefit from your computer over a few tax years.

Maintenance and repairs - If you’re providing a service based on your time, you likely have very little “maintenance and repairs.” These are mostly related to long term assets that require repairs every year, such as a factory. But if you use your car in your business, than you can likely deduct part of it assuming you use it for personal errands as well.

Bonus: Setup expense categories in FreshBooks

Setting up expense categories in FreshBooks can help you quickly decide whether that expense is a business expense or not as you incur them. This will make tax time reporting really easy as you tracked them all year. You’ll also know where all your money/profit is going – great for going deeper into your business’ financial health.

How do you set up these categories?

1. Go to your “Expenses” tab
2. Click on the sub-tab “Categories”
3. Then click on “+ New Category”
4. Write in the Category
5. Click “Add Category”
6. Repeat until all the categories are in

Special thanks to @adelorenzo for the tip!

Guest Blogpost by Eric Mathews, author of thatbookkeeper.com.

During the 34 years I’ve been around, I have come to the realization that I am an anomaly. When I was 14, and my friends were sleeping in or going to the pool, I spent the mornings of my summer vacation at my mom’s office. They needed a clerk since someone had just quit, and I was hired on for the summer. I spent hours pouring over ridiculously large printouts, recalculating each column and looking for errors. If that wasn’t enough of a deterrent, the $4/hour I made should have been. Yet somehow, I loved it.

It turns out that most people don’t find accounting interesting. In fact, it’s usually the part of running a small business that owners hate the most. Despite this, many entrepreneurs begrudgingly toil over their books for hours on end, often coming out with no better understanding of their business than when they started. Does this sound like you? Have you been putting off outsourcing this work? Maybe it’s time to delegate this task to someone who actually enjoys it. Here are 3 reasons to consider hiring a bookkeeper.

1. Lack of time

No matter how hard we try to extend it, a day will always contain 24 hours. If a petition ever went around, asking for the day to go to 30 hours, I’d be the first to sign it. Until then, there are just so many things we can accomplish each day. If you are trying to juggle sales, marketing, shipping, and bookkeeping at once, something is going to suffer. There is nothing more important to an entrepreneur (especially when they are the only employee) than effective time management. Spending 5 hours doing a bank reconciliation that would take a bookkeeper 30 minutes just doesn’t make sense. Sure, it’s an extra cost each month, but how many more sales could you have made in those 5 hours? Which scenario is really costing you more money?

2. Lack of knowledge

I’m sure most of you wouldn’t attempt your own dentistry in order to save some money. If debits and credits are as confusing to you as differentials and tie rods (I think those are car parts) are to me, you could be doing yourself more harm than good. At best, you’re not getting an accurate picture of where your business is at. At worst, you will be getting a call from Revenue Canada (or IRS, etc.) that include words like “audit” and “jail time”. The costs I’ve seen people spend on late fees, interest, and penalties are breathtaking. Once again, is doing it yourself really saving you money?

3. Lack of interest

On a less serious note, bookkeeping is really boring (for almost everyone). I’ll bet most of you would much rather be selling, or reaching out to new clients than printing out trial balances and income statements. I know you want to have that data available to you, but wouldn’t you rather just have it show up like a gift every month. Although business isn’t supposed to be all fun and games, filling your days with tasks you hate makes it hard to get motivated. Don’t worry, you’ll still have angry customers, shipping delays and software bugs to drive you crazy.

I completely understand the desire to do everything yourself. I’m equally stubborn and cheap, so the idea of admitting I can’t do something, and then paying someone else to do it usually ranks up there with root canals and Katy Perry. At the end of the day, you need to make the most of your time, money, and expertise. Bookkeeping is a very important aspect of your business. It can give you a very good picture of where you’ve been, which will help you make informed decisions on where to go next. If you don’t feel like you have the time, knowledge or desire to do it yourself, there are thousands of us out there that would love to help.

Eric Mathews is the author of thatbookkeeper.com, a blog dedicated to helping small businesses get the most out of their resources, with a focus on Bookkeeping.