Or, Do You Know What You Don’t Know?
I’m a really lucky girl. I have a really awesome mom and dad who were independent business owners for most of my childhood. My dad is also awesome because he has quite possibly the most meticulous and well organized finances that I know of. He is SO
meticulously organized, that when he was audited by the IRS in the 1980s, he came out unscathed. Unscathed apart from additional fees he had to pay his accountant and the hours and hours he wasted dealing with it, of course. When I started my music teaching business I promised myself that I would always be so well organized that I’d come out of an audit unscathed too. So here’s what I did:
1. I found a really great accountant (If you’re in MN I’d be happy to give you his name). Not just H&R Block, but an independent CPA who knows my name and takes the time to learn about my music teaching business. He gave me recommendations for how to do things so that tax time would be less painful and so I’d be well protected in case of an IRS audit.
How did I find the right one? I interviewed and checked references on several in my area. If you’d like more on interviewing and checking references on an accountant (or any other contractor), join my mailing list! Some of the exclusive content you’ll get delivered to your inbox are interview and reference checking questions and tips.
2. I opened separate bank accounts for my music teaching business, and I run ALL music business income and expenses through these accounts (including performance or other freelance income). At first it was a personal account that I used for business, but eventually I changed it to a business checking and savings account. The “business” accounts often cost something, but if you set it up right with the bank, they will waive the fee. My fee gets waived because I have a $100/month transfer from my business checking to my business savings account.
Why did I do this? When all the personal and business transactions are separated, the state of your business finances is much clearer. You can clearly see which expenses are business ones, and it is much less work be sure you’re taking all the deductions you can, while not taking any you shouldn’t. You are also more protected in case of an IRS audit because the IRS can see that you’re careful about separating business from personal. With a comingled account, how can the IRS auditor be sure that you haven’t deducted a personal expense? How can you be sure that you’ve caught and deducted all the business expenses? Having separate accounts makes this easy.
3. I got my accountant to help me set up my accounting software. He’s the one who has to figure out my taxes in April, so I want it to be as easy as possible for him. He got me started in Quickbooks and helped me set things up so that I would be doing things right for the long haul. This also allowed me to develop a relationship with him. I was able to figure out how he liked things done so that I can keep him happy at tax time. He got to know my music teaching business and could bring up things I wouldn’t have thought of, because I am not a CPA.
BEWARE: some accounting firms will charge you in 5 or 15 minute increments for their time IN ADDITION to your normal tax prep fees. You’ll be happier if you find someone you don’t need to pay to ask him a question.
Obviously, there is a lot more to accounting and finance than this. You’ll have to figure out your lesson rates, your billing cycles, your accounting software, how to label your expenses and income, not to mention training yourself to USE the accounting software. But these are 3 good first steps to get your money house in order!
When I started out, there was a lot I didn’t know. And even scarier, I didn’t know what I didn’t know! For me, the most important thing about retaining an accountant was that he could tell me what I didn’t know. That way, I could go out and fill those gaps in my knowledge!
For instance, I had no idea that I could deduct a percentage of my mortgage, utilities, home maintenance costs, and phone/internet service as a business expense for my music teaching business! In 2013, this was over $2000 in deductions for me! I also had no idea that I would be required to charge, track, file, and pay sales tax by February 5 every year—yikes!
As weird as it sounds, these first steps put me on the path to actually sort of looking forward to tax season.
If you liked this post, check out my online, self-paced class The Happy Studio, which will be launching as soon as I get it edited and recorded!
Next Time: choosing an accounting program!