Last week, CPA Jessica Jones got into the nitty gritty of business finances in our third B-Side course, The Money Game: Finances, Accounting and Taxes.
Jessica started her career with a degree in Studio Art from UNC. After undergrad, she quickly realized what was missing from her education: the business side of being an artist. Since then, she’s earned a Masters in Accounting from the University of Texas and dedicated her professional life to applying that knowledge to the creative world.
What is Accounting?
Jessica defined accounting as “a way of talking about financial info that is standardized across industries.”
There are three different types of accounting:
- GAAP (generally accepted accounting principles)
- Cost (or managerial) accounting
- Tax accounting
Bookkeeping is defined as the process for recording accounting information.
Where Do I Start?
To start the accounting process for your business, you first have to figure out what you have. This assessment is a constant, ongoing cycle:
- Set a personal budget
- Create a business plan
- Assess your business reality (what actually happened)
- Assess you personal reality (how does it compare to your budget
- Back to step one
Your personal budget is very important because it factors into what you’re able to do with your business.
- Income statements – Also referred to as profit and loss or statement of activity. This document shows a snapshot of your finances over a fixed period of time. (What happened)
- Balance – Also referred to as a statement of financial position. This document shows your balances at a single point in time. (What you have)
Double Entry Bookkeeping:
- Assets = Liabilities + Equity
- In more conversational terms, what you have minus what you owe equals what you have.
- Equity is also referred to as your net value or net worth.
In double entry bookkeeping, debts are recorded on the left and credits on the right. Balancing your books means the left and right sides equal each other.
Bookkeeping is just the beginning:
- Make sure your records are accurate.
- Look at those records and make good decisions about your business. Where are you doing well and where are you struggling?
- Don’t forget about step two!
Payroll as an Employee:
- You will either be given a W2 (for employees) or a 1099 (for independent contractors).
- FICA taxes: As an employee, the business pays half of these taxes. Independent contractors are responsible for extra half (about 7 percent).
Payroll as an Employer:
- You will either issues a W2 (for employees) or a 1099 (for independent contractors)
- Responsible for the employer portion of FICA taxes
- Responsible for federal withholding, state withholding, FUTA and SUI
Sales and Use Tax:
- Tax amounts vary by state.
- Taxes are paid by buyer and remitted by seller.
- Some taxes are origin based (you pay based on where the good came from) or destination based (you pay based on where you obtained the good).
- Sales tax is only assessed once.
- Important: In NC, digital files are sales taxable if a physical form of it would be taxed (e.g. music files)
- Important: Effective March 1, labor is taxable for any service that results in a tangible object. This law applies to MOST graphic design services.
- Apply for sales tax withholding number
- You charge, they pay
- Include a sales tax line item on invoices
- Pay sales tax back to state quarterly
Type of Entities:
If you remember the business entities discussed in the first course, most of this information is review.
Sole Proprietor (will fill out form Schedule C)
LLC (will fill out form Schedule C)
Multi-member LLC (will fill out form 1065/K-1)
Partnership (will fill out form 1965/K-1)
Independently Taxed: (separate from personal taxes)
Corporation (will fill out form 1120)
S Corp (will fill out form 1120S/K-1/W2)
You can always take the standard deduction on your taxes instead of tallying all itemized deductions. This deduction is an arbitrary number from the government that estimates total deductions.
Important: Don’t lie on your taxes (Duh!)
What kind of professional can help me?
- CFA (for more personal finances)
Where can I get more information on my obligations?
If you missed Jessica Jone’s short session, don’t forget to sign up for her all day course on business finances. Registration is open here.
Be sure to join us June 15 for our fourth B-Side session, Taking Care of Business: Procedures, Paperwork & Project Management, with Karl Sakas. Registration is open here.
See you there!