If you’re a geek like me, tax prep time is your favorite time of year.
Just kidding. I’m fairly certain I am one of the few self-employed music instructors out there who actually enjoys putting stuff together for my taxes. The reason I enjoy it is because I like to be organized and I have systems in place so that it’s really easy and doesn’t take much time!
So what do you look for in an accounting program? The simple answer is to do whatever your accountant tells you—you want to keep him or her happy!
But seriously, streamlining the administrative parts of your music teaching studio will reduce the non-billable hours you spend on things like bookkeeping. And this is one of the biggest things you can do to avoid burnout. Music teachers want to spend time teaching, not doing data entry!
Here are my big 3 “must haves” in an accounting program, from a cover-your-rear standpoint, and from an avoiding burnout standpoint: Data Entry, Taxes, and Audit Trail.
I hate data entry more than almost anything. Even more than I hate cleaning out the cat box. My accounting software (Quickbooks) and any other reputable accounting software, can download all my bank and credit card transactions directly from my bank. Then, it’s a very simple and easy matter for me to slot the expenses into the right category and I’m done! Quickbooks and some other programs even remember which categories certain vendors or payers tend to go, and pre-fills it for you! You also want to be able to generate your invoices automatically, both to save time and to ensure accuracy. My bookkeeping takes me less than 2 hours per month.
This is a two part item, because there are two main types of taxes: Income tax and sales tax.
You’ll need software that can track not only your music teaching income, but also your performing gig income and any other income you earn on the side. You want each tax return to be a complete picture of your income and expenses. The robust accounting programs will be able to download all your transactions directly from your dedicated business bank account. This way you never miss any income and you never miss a deduction!
Sales tax is due to your state in most states, and if you sell or resell books to your students (or anyone else), you are required to pay it. Talk to your accountant about the specific requirements in your state, and beware of Use (Excise) Tax! Use tax is essentially sales tax you have to pay on items you bought and DIDN’T pay sales tax on. If you order a lot of materials online, they will likely be subject to Use Tax. Here is a nice resource about Sales and Use Tax state by state. It’s from 2012, so be aware of recent changes in your state!
This one is intertwined with taxes and data entry, but merits its own mention. What is an “audit trail”? Basically, it’s the electronic or paper breadcrumbs that prove where stuff came from or where it went.
When the IRS audits your music teaching business, they are looking for anything that looks a little fishy. If they find one receipt where you made a data entry error, they will smell blood and look for more. If your books are disorganized or inaccurate in any way, they will question whether you have reported all your income and probably start digging deeper and further back. If you come out of an IRS audit with unfavorable findings, you not only have to pay back taxes and penalties, you’re probably going to be audited again soon.
If you have a good accounting software that gets information directly from your bank, and you have a separate account for your business, you are extra protected. You’ll have your paper (and sometimes electronic) audit trail of receipts, the electronic audit trail in your accounting software, AND the audit trail from the bank! If you put a $5 receipt in the wash, but Wells Fargo knows that it was paid to the City of Minneapolis for Parking, you’re covered. Losing big receipts is still a big deal, but the tiny ones are not as serious. Well-organized is well-protected.
How to Choose
Now let’s get a little more detailed. Here are functions to look for in an accounting program. They are huge time savers and they are also the rear-end savers if you get audited by the IRS.
- Ability to import or upload bank and credit card transactions
- Ability to track and report on sales tax (for multiple localities, if you teach in more than one place)
- Ability to schedule invoices to be generated automatically
- Ability to email statements or invoices en masse and/or automatically
- Ability to link specific payments to specific invoices, and track them all the way to the bank account.
- Reporting capabilities – such as profit and loss (cash basis vs. accrual basis), balance sheet, sales tax, and others you might need
- Easily give your accountant access to your books if needed
- Ability to process credit cards or integrate with a vendor who does
- Ability to track and report on customer data (active and inactive)
- Ability to track and report on different segments (or “classes”) of your business such as performing and teaching (if this is important to you)
Remember, an accounting program that will automate most of your bookkeeping will save you a TON of non-billable time–meaning more time to relax, a better functional hourly rate, and less burnout!
Next: (finally!) The Accounting Software Survey