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Are your finances organized? As we come to the end of the year, we start having an eye on tax time. Bookkeeping is the process of organizing both your expenses and income in an logical manner. Lindsey Roberts, owner of Harquin Bookkeeping, joins the show to break down common misconceptions of bookkeeping and what we should actually be tracking as a small business. Lindsey also shares what the different requirements are for services vs products, since many of us added products to our business in the last year.
Main topics:
What to be tracking?
Charging sales tax
Checking your numbers
Running payroll
Main takeaway: You STILL have to file zeros, even though that seems weird.
About our guest:
Lindsey is one of the nation’s top rated QuickBooks ProAdvisors and the owner and founder of HarQuin Bookkeeping. She and her husband, Jason, have seven children, enjoy working together and spending time as a family outdoors with their animals. HarQuin has been providing affordable, quality bookkeeping, consulting, payroll and sales tax services for over a decade and serves over 1,000 small businesses each year. Lindsey always welcomes the opportunity discuss the future of your business and how we can assist in helping you achieve your goals and dreams. Connect with us to see what makes HarQuin different!
Links:
Facebook: https://www.facebook.com/HarQuinBookkeeping
Email: admin@harquinbookkeeping.com
Give us a call! (636) 364-8260
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Email us at: feedback@petsitterconfessional.com
A VERY ROUGH TRANSCRIPT OF THE EPISODE
Provided by otter.ai
SUMMARY KEYWORDS
people, payroll, pay, expenses, business, irs, sales, bookkeeping, account, sales tax, state, s corp, categories, money, business owners, fees, tax, llc, products, called
SPEAKERS
Meghan, Collin, Lindsey R.
Meghan 00:10
Hello, I'm Meghan. I'm Collin. And this is Pet Sitter confessional and open and honest discussion about life as a pet sitter brought
Collin 00:16
to you by time to pet. Well, hello, everybody, and welcome back, we are approaching the end of the year, and many of us are now looking at our expenses. And our bank accounts and going couldn't be more organized. And so today we have on Lindsey Roberts, owner of Harlequin, bookkeeping, to talk all about bookkeeping aspects. And for those of us who have added products, in addition to our services, what it means to stay up to date on payroll, and sales tax, and all sorts of stuff today. So, Lindsay, thank you so much for joining us. Could you please tell us a little bit more about yourself and all that you
Lindsey R. 00:52
do? Yes. So my husband and I started her on bookkeeping, roughly 14 years ago, we were a brand new family, we had just gotten married, and it kind of grew from there. We did it as a after work thing, as I'm sure a lot of pet sitters do on the side. And it just grows until it's a thing. And then it just keeps growing. So we are entrepreneurs first. And then we just so happened to do bookkeeping, we love bookkeeping, it's very dorky. We love organizing data. And yeah, so it's our thing. And so we help small business owners and nonprofits from all walks of life. People that don't even break $10,000 in sales to people who have multiple millions of dollars in sales. So we've seen it all and all different ways. And we do bookkeeping, payroll and sales tax. And we also do some CPA consulting as well.
Collin 01:55
I want to dive into the bookkeeping aspect, because that's kind of the heart of what a lot of us do and struggle with. Walk us through some bookkeeping basics. And really, I guess what are some I want to start off by asking what are some common misconceptions about what bookkeeping is and what it isn't?
Lindsey R. 02:15
So some common misconceptions, I would say, Are people put a low emphasis on bookkeeping, or a high? It is very important. So I'll start with the low emphasis. We have here a lot of people just go to a h&r block or even to a CPA. And they'll take their sales report from their point of sale and say, I'm ready for my taxes. Here's my sales without even claiming any expenses whatsoever. Obviously, you would hope that a CPA would stop you and ask questions. But I'm sure if you've been on this earth for more than 10 years, you know that people aren't paid to care. And they'll just go with the flow they get they get they get a fee no matter what. And especially the h&r block type of places. So they'll just take their cell report in and file their taxes not knowing that they can even claim expenses. So bookkeeping is tying together your income and expenses into one report in order to file taxes on and so if you're only claiming your sales, your main your you're overpaying and income tax, basically, yeah,
Collin 03:32
that's that that's a key aspect of going we need to be capturing and categorizing these expenses. And I guess at the end of the year, saying, Is this legitimate? Write off what categories is this fall into? But you can only get to that step? If you've been keeping up with the categories all along?
Lindsey R. 03:48
Right? And I think that's where it's at. It's a panic, like, okay, there's a deadline, I gotta get this done. Who cares? I'll just do it. And it like I said, they don't get paid to care. And if you're, if you're just trying to get it done, they're trying to get it done. And you know, who cares? i Hey, I overpaid this the the IRS, they'll they'll say off my back. I won't get audited now. Because I threw all this extra money at the IRS is what sometimes you hear sound like well, good luck with that. But yeah, so there's an under emphasis. And then obviously, as human beings, we also over overkill things. Sometimes people are too meticulous in their bookkeeping, to where to where it comes, it comes so complicated, that they can't maintain it without investing so many hours, and then they just end up giving up. So it's not important to do. But you don't have to say, you know, categorize your clients by what size dog they have, you know, in your financial.
Collin 04:49
Yes, stuff like that. So when it comes to things like tracking, we're talking about accounting for these different categories. What kinds of things should we be be tracking or what are some common things categories that business owners should keep in mind.
Lindsey R. 05:03
So, with a service based business especially, I would say the the easily missed ones are your cell phone and internet. Most businesses these days are ran or solely off of cell phones. And so I think people forget about that. And their, their computers in their home offices. And then obviously, mileage, tracking mileage and also automotive expense separately. The reason why tracking separately is important is because some years one will give you a higher write off than the other. And CPAs asked for that information so they can determine you know, what's the better write off, you know, gas, or mileage. So, generally, they say, to keep track of both, there's a lot of really neat apps out there that you can download on your phone that keep track of Work, Work mileage versus personal mileage, and then you'd already have that information ready to rock for the CPA. Another common one too, is home office. People don't realize that that is a write off. I think there's a misconception that you have a higher chance of getting audited if you claim that expense. But I also I, I try to deter our clients from being afraid to take write offs, just because they're there for a reason. And as long as you're well documented, you're you're fine. I don't think there is anything that gets people, you know, a higher risk of auditing, other than missing expenses, or missing income. There's there are algorithms where they they determine who should be audited, obviously they don't just blind audit. But claiming a home office is not going to get you a higher rate of audit for sure.
Collin 06:58
Well, in that home office does does a lot for us, especially where we are working out of our homes there there are arrays and that that ties in beautifully with that mileage tracking as well. And see, because you once you have that home office now, anytime you leave on business, that's that's mileage that you can start tracking as you're departing from your office.
Lindsey R. 07:18
Yeah, especially with pet sitters. It gets a little tricky when you have a permanent office outside your home and inside your home. It can get tricky because it's you know, while you would have driven that anyway, if you were an employee, but when you're going to your different customers homes, it's 100%. Right off. So it's it's extremely important that you capture that.
Collin 07:42
Because again, we're we mentioned earlier about not being afraid to take these these write offs and not being afraid to look at these tax advantages as a business and going, what are my again, what are my requirements for meeting this so that I can take it and make sure I have that document to back documentation to back it up. There should be no as long as it's a legal process. Like you said, it's it's there for a reason.
Lindsey R. 08:04
There's another one that people are often afraid to use. And we could talk about this a little more when we get into payroll, but employing family members is also it's something that people have done for years. And that many people in this day and age like the newer business owners don't even realize is a thing employing your children is actually a huge tax advantage. theirs, they are not liable for any payroll taxes. So it's really it's a cool thing that is built into our tax law. And it's to encourage family businesses, but most people don't even know it exists.
Collin 08:43
So we've talked about tracking obviously, we're talking about tracking tracking expenses, something that is new to a lot of pet businesses are actually the introduction of selling products. That's not something that we are service based so some of us pay sales tax some of us don't but as when it comes to product based businesses are now we've added that to our to our companies. is distracting look differently for that or what things do we need to keep in mind now that we've added products to many of our businesses?
Lindsey R. 09:14
Yes. So I know that there's listeners all over the United States. So the first thing I'll say is that the sales tax laws are different from state to state, and that you should look into what your state how they handle services and products for that matter. And I live in Ohio, and in Ohio, we have taxable services and tax obviously taxable products. So So yeah, always, always know that and always get second and third opinions on that because some people, even when you call the state don't necessarily know the laws like they should so always get a second third opinion on that. So when we're talking about products in most states When you sell products, you have to charge sales tax, or what a lot of people mess up on is they will buy a product, pay sales tax on the front end, and then sell it and then charge sales tax again. And so the state ends up basically getting paid twice for the same product. That's a big one. Okay. Yeah. So the law is, is that the end user pays the sales tax. So if you are buying something to resell it, you are not the end user. So every state has something called a blanket, tax exemption, the form, normally, I just recommend people google it, and find it, just put your state in front of the you know, the word, Ohio blanket, state sales tax exemption form, and it'll pop up. But basically, you fill that out, and you hand it to the vendor that you're buying product from this could even be Walmart, or Amazon, mind you and say, Hey, I'm buying this to resell. I am not to be charged sales tax.
Collin 11:05
Again, this is one of those things of going, what are our options out there? And if we've never been exposed to these things before, sometimes you don't even know what questions to ask to move forward with the
Lindsey R. 11:15
right. And a lot of people will start dabbling into products and not realizing they should be collecting sales tax. And if the state catches wind, and then, you know, they notify them, hey, you have this obligation, you're not meeting. You could some people were like, well, I know that I shouldn't be but I already paid sales tax on the front end, so it doesn't matter. The state will come back and say, Well, you weren't supposed to That's not my problem, I still need my money. And then I've had also people say, Well, I paid sales tax for it, you know, in this other state. But you know, this, the state you live in, didn't get money. So they're gonna say, Well, I want my money, it's on you to go back and recover your money from the other state you paid. So they're very, there's no compassion there, it's very letter of the law. So you'll end up having to pay if you don't collect it from your customer. So either you're going to have to build that into your original price. Or you're going to have to, you know, print a bunch of those forms out and just have them on hand, or have it on your desktop of your computer and just email it when you you know, get a new vendor. And that's just your new way of life.
Collin 12:36
Again, sometimes in business, we we commit to things without fully understanding the ramifications of now what are my obligations to seeing this through to its fullest? And this is definitely one of those people turned to products and went, Oh, well, my service business is down. So now I'm gonna go over to products so I can try and make some more money, but not knowing or knowing what questions to ask all of a sudden, now we're tasked with understanding all of these things. And I know sales taxes is pretty tricky. So do I have to account for the sales tax? You know, I'm sitting down start my bookkeeping process, or I'm doing that on a monthly basis. How do I categorize sales tax? Or do I just throw it into that kind of category?
Lindsey R. 13:17
Yes, so sales tax will generally be charged on the front end from the your point of sale. So if you sell something for $1, and they're 7.25%, then I'm gonna try to do the math. I'm sure it's $1.07. But I don't trust myself. I'm an accountant. I don't trust my own brain. But so that where do we account for the seven cents? Basically, is the question. So obviously, $1 would be sales, and then the seven cents would go into a category called sales tax liability. So you because you have the honor of having a business in the state of fill in the blank, you now have the the honor of collecting the state's money and paying it out to them. When you start to sell, the first thing you would do is get a vendor's license with that state. And then they assign you a schedule. Most states schedules are monthly, quarterly, and annually. Ohio has a special one called semi annual and then New York State has quarters that are off one month. So instead of March Yeah, it's not a big shocker, I'm sure but instead of your quarter ending in March, their quarter ends in February. So and then you just three months after that.
Collin 14:52
And that's that's the schedule Lindsay is for when you are reporting or when you are paying that to the state.
Lindsey R. 14:59
Okay, And there are penalties if you don't pay even if you don't owe. And that's another big thing. Someone like, oh, well, I didn't really sell anything this month, I'm not going to file, you still have to file zeros. They have non filing fees that they will charge you if you don't. So once you get that vendor's license, you are now obligated to keep up with it until your account is officially closed.
Collin 15:25
Hmm. Yeah, that's definitely one of those things of just because you stop selling means that now again, I've got to go back through and find all these other obligations. You know, it's one of the also reminded of many of us set up LLCs in our business, and now all of a sudden, I have ongoing obligations to that until I send forms and say this thing no longer exists. And that has a very legal process, becoming a right becoming a vendor has ongoing commitments that we need to be doing. And I'm sure most of us had no idea that I had to be Follet filing zeros because why would you do that? Right? Who would think you need to file
Lindsey R. 16:04
Yeah, so that's sometimes when we have somebody who like they had a small business and they're taking a break because of x y&z They had a baby or they got sick or whatever. We although we always say that in the people that don't listen, always come back and say, Hey, I got all these letters. The state normally will say, Oh, you owe $5,000. They just make up big numbers, just to scare you to take action and not ignore. But then they're panicking. They got like a letter in the mail. And so yeah, that is a common thing. Like, people like oh, well, I don't owe anything. So I'm good. It's like really soft to fall zeros. Yeah, yeah.
Collin 16:42
Again, one of those things we've committed to No, no, I know, there are lots of different ways of of tracking and keeping all these expenses as we go through that bookkeeping process, could you just list off a few and their their pros and cons of using them.
Lindsey R. 16:59
So everyone's favorite is probably Excel, I get it. I like Excel a lot. It's my, it's my second favorite program. The only problem with Excel is you are unable to easily manipulate the data over and over again. So yes, you have your list of expenses. Um, you might even have them categorized, but you lose your ability to reconcile. So reconciliation is important in the bookkeeping process, because it makes sure that you have every transaction in there, that you didn't transpose any numbers. Nothing's duplicated, nothing's missing. That's what reconciliation is. Some people, if you're not familiar, that term, balancing the checkbook, you can do an Excel, it just takes more work. I prefer QuickBooks, just because it's all in there. And I'll explain what the benefits are. So it has a reconciliation feature. So once you reconcile it, it's locked in time, you know, starting. So if you've reconciled through March 31, everything prior to that is locked in time. You're good to go. Now you're just moving April forward. So that's a benefit. Another another row, QuickBooks con to excel is the manipulation of reports. So yes, you can get good data out of Excel, it just takes a lot of effort. Each time you want to look at it in a different way. It's all on you to copy the data over resorted in different ways. And you can easily compare and contrast. So the cool thing about QuickBooks is that it's built with an Excel or a database that looks just like Excel in the background. So it still works like that. But when you enter a transaction, one time, it shows up on all the reports. So I can say show me this month's profit and loss statement. I can show me compare this month. This, let's just pick a month, October versus last October. How am I doing? How is this October? Trending this month trending versus the rest of the year. And I think that's really important when you're trying to see how you're growing when you're trying to make managerial decisions. And I know that that seems kind of overkill, maybe for some of you that you might not be really thinking of it into that regard. But a lot of comfort can come from your financials and I know that sounds probably like oh, you're just saying that because you're a bookkeeper. But when you see your percentages change and go the right direction. I always talk about when my husband officially joined Harlequin and our net income went up by 1%. I was like Thank you, Lord, I needed to see the decision. You know, because dollars don't mean a whole lot, but percentages do. Because dollars are missing context for most of the most people. But if you see your percentage, like, you know, my net income was 14% of my total sales, but now it's 15%. Wow, um, you know, that change I made last month is really making a difference. That's, that's why financials are important. So obviously, they're really important for the IRS filing taxes and, you know, meeting that liability as a business owner and American citizen. But then there's the on top of that, there's the am I doing well, it are these decisions that I'm making when I'm charging more, or I'm changing my structure, or I started adding products. Is it really helping? Because it's hard to see if you're just looking at your bank balance, because it's just a big blob of numbers. So yeah, so financials. That's why I like QuickBooks is because you can manipulate the data in multiple ways in seconds, and not really having to invest a lot of time and then introducing that human error aspect.
Collin 21:15
Yeah, that human errors is huge, especially if we have lots of transactions, and most of us don't have that many, because again, we're service based. So we're getting, you know, the our payment processing companies are depositing the money from the services that we're collecting, and things like that. And that can be maybe confusing for some people too, because, you know, if we use stripe, or we use other payment processes, you know, they'll just dump a link lump sum kind of once a day in our in our accounts. And so how do we dive into that information? Do we need to also go into our, our payment processors and pull out client information there when we're going through this process, too?
Lindsey R. 21:56
So that's a great question. Part of the bookkeeping is recording the fees. So I think a lot of people also forget that they say, you know, $10,000, was deposit my bank account, well, let me claim that as income, but they're forgetting the fees that were charged. On the front end, most merchant processors will deduct the fees before the deposit. And a lot of them will even take out more than just merchant account fees. Because some, some putting sales will add apps, like time tracking apps and all of that, and they'll deduct those fees. So software fees from your payouts, so you're not really getting credit for those expenses? Yes, 100% of the sales will be claimed on the 10 9k that you get from your merchant processor. But if you're not going into that point of sale and pulling out those expenses, then you're not claiming all of your expenses. And they're the Forgotten expense, because they don't hit your bank statement. Yeah,
Collin 23:00
they do. They you never see those, right, those take out before that gets pushed to your account. And so digging back through that chain of sequence of events going, and that's, again, that's on us to understand exactly what hands is this passing through what's happening at each step so that I can go back and account for all of those little missing pieces.
Lindsey R. 23:20
Right? And so for, I would say the easy way to account for that, because obviously, it's hard to account for something that doesn't exist. That's I think that's where people are like, Well, what do I do? It's not in my bank. So how to record it. If you have a bookkeeping software, the the accounting term is called a general journal entry or an adjustment, but you just made basically make an adjustment for the amount of fees that were taken. There's always reports in your point of sale that will tell you how many fees were taking and they break down what they went towards, like software and merchant account fees, or whatever. So you just make a monthly adjustment for that amount so that your sales are accurate, and your expenses are accurate. But yeah, I do I, I remember when I was a brand new bookkeeper, and I thought about that, like, what do I do? It didn't hit anything. It didn't touch it? It is this is not a real transaction? How do I enter it? So yeah, so you do want to account for that. And if you are using a any type of accounting software, there's there's a few out there, you would just need to make a monthly adjustment for the amount of fees that were
Collin 24:29
withheld. Yeah. And we can go into each transaction and go, Okay, these are the fees that are withheld by this bank. So that would apply to I know a lot. It's very common with pet sitters to use things like PayPal, and when anytime you make that trip that that move, right, and we'll assume they have a business at PayPal setup, and they're using it appropriately like that there is a percent that PayPal removes through for you to transfer that money. Right.
Lindsey R. 24:49
Right. And that actually kind of opened up a can of worms a little bit in my mind that a lot of people forget that PayPal is more like a bank. count, and they'll accept money through PayPal. But you can also spend money out of PayPal. And those are also often forgotten expenses. That maybe you for you just because it didn't hit your bank account you kind of forgot about but but rest assured that PayPal is telling the IRS that you made money. So the sales are being recorded is is the expenses being recorded, that's an easily forgotten one too.
Collin 25:29
So that adjustment, I guess, for those following along here, that adjustment would be in the positive or negative for the fees based on our account.
Lindsey R. 25:36
So you would do a positive expense and a positive sales. So your sales would go up by the amount of the fees. And your expense would go up for the amount of the fees. Okay?
Collin 25:53
You're doing both both sides for both those.
Lindsey R. 25:57
Right. And I know that gets a little bit tricky when you're dealing with accounting because of debits and credits. So if you're, if you are, if you do write this down, if you have a software, you're going to debit your expense and credit your sales. Okay? If you're doing an Excel, you would just put a plus in both columns, your expense column and your sales column. Okay.
Collin 26:21
Right, going back and writing that down credit sales. Okay. And I think that gets into a lot of this to Lindsay is just, there are so many terms when we dive into bookkeeping and sales, and well, how can we start wrapping our brains around them? And maybe what are some some common terms that we need to have lodged in our brains as we start this process?
Lindsey R. 26:45
Well, I will go ahead and confess openly that I failed my first accounting course. My, my professor started with day one saying debit and credit. And I was like, Okay, I got it and minus and plus, we're good. But debit and credit are actually Latin terms. And they just mean left and right. So for our bookkeepers, we normally make a cheat sheet of what type of accounts go up on the left side and what type of accounts go up on the right side. So if you see debits and credits, just know that it's not automatic minus and plus, minus and plus, if you are in quit, if you have QuickBooks Online, especially they have really done a good job of making it non accounting professional friendly. Like, here's where you enter your expense. And here's where you enter your sales. And it used to make it really easy, and they have gotten rid of almost all accounting terms. So that's, that's good. Um, yeah, I can go over some accounting terms or some financial more or less, more or less financial terms that would help you familiarize yourself so when you're talking to a CPA or an accounting professional, you know what they're talking about. So sales and income are just basically are gross sales. gross sales are just money that you've earned before any expenses were taken out. So again, the scenario where you've earned $100 and Stripe took $3 You're in yet $97 deposit in your bank account, your gross sales are the $100. So your sales before any expense. The next category that you would see on a financial statement would be cost of goods sold. I'm sure you don't have a lot in a pet. If you're 100% service based and you don't have any team members on your team, you probably wouldn't have anything in that category. But basically a cost of goods sold is something that you had to buy in order to make money. So say you are that person that is selling products. And let's just make it easy and say you bought you you have sparkly leashes that you sell and you buy them off Amazon and resell them so when you buy those leashes you pay Amazon money and where it's categorized is a cost of goods sold. So this is what I had to buy in order to resell that product. Another one is merchant account fees we often will put that there because in order to make money you had to pay a processor to process it. If you have team members on your team. When you pay them that would be a cost of goods sold so or cost of service you could say but it's the same term stuff that you that went directly into you making money. The next categories are just regular expenses. And what I generally tell people are those are universal depending on not really depending on what type of business you are. Harlequin as well as a pet sitter both have software costs and we both have gas expenses. and fuel and office supplies and you know, insurance, we all have those categories. So those are just regular business expenses, not special to your type of industry. So that's what expense means. So their cost of goods sold. And expenses are both write offs. They're just different types. And they're a way to when you're looking at a financial statement, basically see how much am I making off of my service or product? And then how much am I making as a business as a whole. And so they help you determine profitability, and all of that, or manage more more managerial purposes than just tax, right? Tax wiser and expenses. That makes sense.
Collin 30:49
But as you mentioned earlier, that's where all the power comes in here, right? When we can drill that was, I hear this phrase a lot, only to drill down into my, into my numbers, right? Well, you can only drill down as deep as your categories go, and then you run out of abilities. And then you have to start branching out more so that you said, Oh, this is only for managerial Well, a lot of solopreneurs. Right? That's what we do. Right? We are we making those decisions for ourselves for our business, we are trying to see, are my decisions making an impact? Or are these correcting me more money? Or how do I adapt to these new changes, and we only know that when we have these things set up,
Lindsey R. 31:26
right, and it's no fun to find out. Wow, six months ago, I really could have changed some things and made it a lot better.
Collin 31:34
Have you heard of time to pet duck from bad to the bone pet care has this to say
Meghan 31:38
time to pet has made managing my team and clients so much easier. Our clients love the easy to use app and scheduling features. And our sitters love being able to have all of their information organized and easily accessible. My favorite feature is the instant messaging by keeping conversations on time to pet we are able to monitor our team and ensure nothing ever falls through the cracks.
Collin 31:58
If you're looking for new pet setting software, give time to pet a try. Listeners of our show can save 50% off your first three months by visiting time to pet.com/confessionals. For that, Lindsey, how often should we be running these kinds of reports? And looking at these looking at these these numbers? Is it a daily thing? Or should we you know, I guess it might depend on just what kind of business we operate?
Lindsey R. 32:22
Yes, I would say monthly is the minimum. I think if you ice, like I said early, if you make it too complicated, then it tends to be this burden on your back that you try to avoid at all cost. And so um, monthly, I think is great because you're you're not dealing with a ton of transactions. And it's doable and manage, manage manageable. And you can do it in a few minutes. And your another perk is your extra remembering what you purchased. And I think that can be really tough. Especially if you do cash withdrawals. It's like, what did I do in March? Why did I buy that? You know, and it's really hard to recreate things, especially Amazon, if you buy a lot from Amazon, it's just tons of numbers. It's like, you know, it's awful. When I look at my own it, I have to set that aside. And this is like my Amazon de and I know that sounds bad. But this because I have a lot of things on Subscribe and Save. And it just, you know, and every little piece comes out its own as its own transaction. And sure it's convenient on the front end to have paper towels delivered automatically. However, I have to go back and you know, through my Amazon to see okay, what was this $20 for? So if you keep up on it monthly, you remember? Yeah, that's when I bought the computer. And that's what I did you know. So it's a lot easier. And
Collin 33:52
you have that faster turnaround time to make corrections, right? If you're waiting to do these quarterly or annually, right, you've already gone three months, making the same mistakes over and over and not been able to course correct back to where you were trying to get to.
Lindsey R. 34:08
Right. And obviously there's also the subscriptions to maybe you did a free trial and didn't realize that they weren't charging you $10 a month. And then you find it later and why well, there weren't $60 and I'm the only one to blame because I'm not the one I didn't do my bookkeeping, you know, I didn't know they were deducting it. And I know it's just six months can go by really quick.
Collin 34:31
Especially Yeah, especially when we are as pastors, you know, we're doing daily visits. We're doing seven days a week, we're going from sunup to sundown, and we look up and we go Where did the time go? Right and I and it's one of the things going well, I don't have time right now, but kind of we don't have time to put it off. Because the longer we put it off, the more transactions I've got to skim through the more I've got to go dig through my receipts the more I've got to go figure out these categories, the more I have to remember. So actually in the end ends up taking us a lot longer if we put it off frequently,
Lindsey R. 35:05
right? I mean, I can tell you at least two or three times a year, we have to we have clients, we have to go five years back. Because even five years went so fast. It's real, it's for real, it doesn't go away.
Collin 35:18
Some of us are sole prop. Some of us are LLC, and we even have some listeners who are like s corpse. Does do my tracking obligations differ between my, my, how my company is set up and organized?
Lindsey R. 35:35
Yes and no. So I can kind of explain some of the common misconceptions of the sole prop to LLC. So an LLC is the state designation, the IRS does not recognize an LLC as its own business type. So it's, you know, the LLC is limited liability corporation. So therefore, it does have some protection for the business owner. But as far as the IRS concern is concerned, tax wise, you are automatically still considered tax wise, a sole proprietor. So if you're an LLC, or a sole proprietor, your net income for your business goes right onto your personal taxes. So it goes on a schedule C, and on your personal taxes. So in order to turn your LLC into an S corp, it's called an election, you have to tell the IRS, hey, I would like you to view me as a S corp, and not as a sole proprietor. And then you have to approve it. It's a quick little form on the IRS website. It's actually not very hard at all to do. But once you become an S corp, now you're saying, oh, officially, we are doing two separate tax returns. Now. There's mine. And then there's the businesses. So it does get more for real for real. When you're an S corp. Now you have two tax returns, right? Yeah. So that's a big deal. And so not only that, but here's where it gets tricky with the Escort is now you are required to pay yourself a reasonable salary. And it's very ambiguous that on purpose on what reasonable means I would, if you were watching me now I'd probably do some air quotes. reasonable salary. So where some people really, really mess up. And they end up paying so much more in taxes than they should have is they end up paying themselves over? Or almost all of their net income. And so they're like, oh, yeah, so I made you know, I netted 50 grand this year, so I'm gonna pay myself a W 250 1000. The whole point of an S Corp is that the small business corporation does not have to pay self employment tax. And I think people have it all backwards. So the really, the point of becoming an S Corp is to pay yourself as little as possible on the W two. And whatever's left over as your net income of the business is not subject to self employment tax like it would be if you're a sole proprietor or a LLC, taxed as a sole proprietor. That's it over 15% self employment tax is when you have that tax bill, that's majority of what you're paying, you're not paying federal income tax, you're paying Social Security and Medicare for you, the employee, and you're also paying the employer share. Um, so it's over 15%. So that's where the big tax bill comes. When you're paying the federal government, you're paying self employment tax, s corpse are not subject to self employment tax. So there's 15% savings on your, your taxes, that's significant, that's like almost everything you pay. The problem is, is when you pay yourself all of your net income on a W two, you're now paying self employment tax on your W two. So you're now you're even paying more than you would have paid if you just want to remain a sole proprietor. And so people have it totally backwards. So I would highly recommend that if you are an S corp that you look at your how much you're paying on your W two before you get too close to your end, because you might have to stop paying yourself and just start taking the rest of it as owners drawls because, like I said, there's so many people that I've seen, when I'm doing their year end financials and their s corpse and they they had negative net incomes because their payrolls were so high. I'm like, Well, you guys just paid way more than you would have. And now you're paying for two tax returns, and a payroll service that you wouldn't have to pay for. So that's the biggest misconception and that's not that's not just any like the service based energy. That's all. All business singers, for the most part have that upside down.
Collin 40:02
Yeah, I guess when we say reasonable, we tend to think larger numbers, right? Oh, yeah. Oh, I'm gonna pay myself $120,000. But really what that is trying to get around is people paying themselves $1. And then only then taking everything else to the owners draw and not having to pay taxes on it.
Lindsey R. 40:17
Bingo. Yep. So, so and I think they're like, Well, it's a write off. I want to pay myself as a write off. And it's like, that sounds really great. But it's kind of missing the entire point. So, so yes, that's exactly right. Because everyone pay themselves $1. And I always go back to that people when people want to buy a car in December, like, why is that? If you could really write a whole car off in one year? Why wouldn't everyone? Yeah, because they could just return it. January 1. Exactly. And we're here we are.
Collin 40:51
So we've mentioned payroll a couple times I do want to dive into payroll, because as we grow as business owners, we tend to bring on a member or two. And but a lot of people are put off from hiring because of the big bugbear that is payroll and in the insanity that that is so walk us through some payroll basics. And really how do we know if it's time for me to get a service? Or how do we make sure it's manageable by ourselves?
Lindsey R. 41:20
Yes, pero can be a bear. And I think the reason it's a bear is because of employment laws. So I would always recommend you understand what the law of the land is, because that's where normally, the biggest hurt comes from, like we had a client that started a restaurant. And we're we're from Columbus, Ohio, and it was it was very wildly popular. And he was paying tips. Out. They had collective tips, and they were giving them out and the law and Columbus, Ohio, is that if you're a manager, you're not allowed to get tips. And he didn't know that and somebody took him to court. So it's something silly like that, who would have thunk it? And first of all, I would say why isn't the guy? Why didn't the guy just say, Hey, did you know that was really mean to do that. And I know this is a weird scenario, but knowing that your labor laws, especially if you're in California, or New York, your your labor laws are significantly larger than other states. So knowing that on the front end, it's going to help you tremendously, just to know how to talk and communicate with your employees, and what your how you're allowed to communicate. As far as sale or payroll taxes. And abs, there are a lot of them out there. I know a lot of people probably use gussto, or they'll use something connected to their point of sale, which is very, very convenient. It really is. You can start pretty quick, and get it going. The only thing that when those apps fail you is that if something goes wrong, it's in the fine print that you are responsible. And actually I see it quite often on emails that I get for on behalf of my clients that into it, or gusto in the fine print says you are the employer, you're obligated to make sure that we paid your taxes. Yeah, there's a very large document that the IRS would say that you're required to read in order to be an employer. It's called the circular II, you could Google IRS circular II, but that's basically what it says. And it makes sense from their their standpoint, somebody's got to be responsible. And if you could just blame a payroll company. Wouldn't everybody do that and not pay their taxes? Somebody has to be you know, the ultimate responsibility. So I will say I mean stuff that goes wrong. It doesn't happen very often. So I don't want to be afraid. Bakey to afraid however, if you do get a letter from the IRS or from your state or local government, some of us have local tax. Ohio has a lot of local tax, but not every state is like Ohio. That you should take it seriously and follow up. If you ever get the pleasure of talking to a human being at gussto Make sure you get their number because you might have to, you might have to call them specifically I know some people complain with different apps that they have a hard time talking to a human and when it comes to letters from the government. You're gonna want to make sure you have some kind of resource In an arm's reach that can answer your questions. And like I said earlier with the wholesale faxing, you know, if you don't, if you don't pay if you don't file that zero, you get a letter saying we've estimated your tax to be five grand, you know, you want to make sure that you know how to respond. And I want to do, I will tell you, we get tons of letters on behalf of our clients, because we're normally the, you know, we get a copy of everything our clients get, and a lot of them are fluff, or an error in the system or whatever. But still, it's your responsibility to take it seriously. And if you have a buddy who is a CPA, or a friend, who knows payroll stuff, try to get that try to get one of those buddies. That way you have someone to bounce ideas off of, or like I said, if you talk to anybody a human, so you are getting started with gusto, I would, I would request to to know a human's direct number. So that way, when, if something does happen, you don't have to go through and wait on hold and hope that someone gets back to you. And all that, that would be my biggest thing is that you have a human to reach out to, When
Collin 46:15
should I start thinking about getting getting help and looking for a service and somebody to run payroll for me,
Lindsey R. 46:22
payroll really doesn't take very long to actually run it where most people run into a wall, and they want to get out of it is the due dates of the taxes. So I would imagine most people aren't going to hit the monthly requirement for the IRS, but some people do. So the minimum is quarterly, once a quarter, so we're now we just ended the third quarter, we're heading in the fourth quarter. So right now, everyone who has payroll is doing something right now to send to the IRS, their state of their city, their unemployment office. They're doing something Yeah. If you withhold or collect $2,500, within a quarter, you the IRS will say you're now obligated to do monthly for them. Everyone else is still quarterly. But now the IRS requires monthly payment.
Collin 47:21
That's for withholding taxes, right for our for our employees that we're putting on payroll.
Lindsey R. 47:26
Right. And this is federal, so that would include federal income tax, Social Security, and Medicare, NSC, employee and employer share. So when you add all that together, if you've hit $2,500, and a quarter, you're now required to switch to monthly. And it really depends on how much you pay yourself or those other people. So if if it's really not indicative of how many employees you have, but how much payroll is being paid out, and I think that's what really throws people off is like, Oh, I have one, I'm my only employee. But if you pay yourself a pretty penny, then you've hit that limit, and now your monthly. So um, so yeah, so that that is where people normally like I'm out. I'm not, it's like, I can either try to do this myself, or, and get like a $500 penalty or pay someone $200. To not deal with it, it makes make sense to not deal with it. That's where normally people it's the it's the remembering of the of the due dates, and all the requirements. Now one thing that you reminded me of is another requirement that people forget is say, I'm, I'm a pet sitter, who had an employee in February, and that employee quit, and I'm going into my slow season or whatever. And I don't really want to hire somebody right now, or I'm done with him. I've dealt with payroll for a while, you still have to file zeroes. And even if you don't pay someone for the rest of the year, you still have to have a payroll company all the way until January, when you do their W two. That's the big one that people forget, especially if they're closing their business down, say, say they started they went into 2022. And they closed their business on February. Well, we still have up until next January until you know, you saw I send a W two and you can't do it until January. Well, that's that's a thing that people forget. I think that's one of the biggest things as small business owners that we just have a lot going on like an in one day. We're thinking about our families, Christmas birthdays, marketing strategies, accounting, a certain customer, like all of that is in there at the same time. And so it's all in this big pot of information. And then oh yeah, I have to do that. thing that I don't even like to do, and I owe money, you know, it just so from left field. Because normally small business owners, we're more of the creative types than the rigid checklist type people. And so we're, we're thinking philosophical things, these big pie in the sky things. And it's like, this is so unpleasant. I just stop all of that to pay this bill.
Collin 50:24
So what? Yeah, what should somebody expect to pay for a service to run payroll for us for morning to just get started in and enter into that to run for two or three employees that we're paying bi weekly,
Lindsey R. 50:37
I would definitely run it multiple ways, like, Okay, how much? Does a bookkeeping firm cost a CPA firm, an app? And then what am I going to get for my money? So one of the things that we, we offer with our payroll, we use Intuit Payroll as our processing platform, but you get a human being. And most people don't care to have a human being, like, that's cool and all but until they get the letter, and then they're like, Oh, I wish I had. That's why I really push human like, think about that part of it. Because you'll have to, that'll be your lifeline. When something, you know, scary comes in the mail. And the IRS is so great at working there. They're lovely. They're lovely letters on how they're going to come and take their your property. Like that. I mean, that's like, are you serious, this is my first letter from you, and you're gonna come take over, it's just to get people to do like, they want you to act, they want you to call. So they're gonna put scary words. I mean, there's even a local tech tax agency in central Ohio, that will actually put the word subpoena on the letter, like, you've been subpoenaed to talk about your tax bill. It's so good. It's just to get human beings to move I get it. We don't like dealing with that stuff. But so I will say the prices are things going up. So I would really do your due diligence and compare and contrast, what the cost is, How convenient is it for me as a business owner to turn my hours in? And then what am I getting? What's what's valuable to me? In regards to that, so some of them will look, they'll say, it costs, you know, $14 a month to process your payroll or whatever, $40 a month plus your payroll, but there's always a end of year charge that people don't really don't remember how and then how much are you charging for W twos. And so there's that. Plus, the one thing you also have to consider when you're getting a quote is how frequently you run your payroll. We, for instance, I would say are fairly competitive. But we because we charge our time, if you have a weekly payroll, we're automatically going to be the most expensive one, because you're running for payrolls, right? And sometimes five. So take that in consideration is if you're getting charged per payroll run, but you have if you have some people think they have to file for pay weekly, because they're, maybe their employees won't accept anything otherwise, they can take that in consideration. Are you getting charged a flat fee? Or is it a flat fee per payroll run. And I always try if you're a brand new employer, I say try to do bi weekly, bi weekly is the best, because it's every other week, fill in the blank every other Wednesday, every Monday, if you're trying to float, if you have a 15th. And the first of the month, you're like, okay, the 15 falls on a Saturday, so therefore I have you know, then you're always having to calculate what that date is and it and it makes you just not want to do anything like, oh, I can't go on vacation now because you know, all these things. And I like the pace of every other Wednesday, I have to do this thing. And it's just locked in. And then like I said, weekly is a pain in the rear end, because it's constantly happening and for really little to no benefit. To have to constantly be doing payroll. I think most people have gotten rid of that. And then also there's the cheque versus direct deposit. Most people don't really pay via cheque anymore, because it is a pain in the rear. People lose their checks. They don't cash their checks. And then they're on your books. And there's all kinds of laws about people's uncashed payroll checks. So direct deposit is definitely the way to go if you can get away with it. Some I know some people in some regions, it's hard to find people who will work with direct deposit. But I would say it's such a standard thing. For most of us that I would just I would don't even offer otherwise,
Collin 55:01
live the I want to thank you so much for joining us today and walking us through the essentials of bookkeeping, some common terms and really tackling some misconceptions around payroll as well and really what to look for to help get our time back as small business owners. I know this is kind of a big topic, there's maybe some more stuff that we didn't touch on. So if people are interested in in following along with Harlequin, getting in touch with you and starting to ask them some questions for how to make sure that their business is set up, well, how best can people do that,
Lindsey R. 55:33
you could email us at admin at Heartland bookkeeping.com. Or you could message us through our Facebook page that works really well. We have a couple of Facebook groups that are more specific to different types of industries. But like I said, you can just message us and ask questions. We love helping entrepreneurs. That is, like I said, from the very beginning, we I love entrepreneurship, I've been an entrepreneur since I was five years old. I love it. I love the thought, I love the thought of families working together, it's just the coolest thing ever. And so we would love to help you at no charge. Um, just message us you can use this as a sounding board to bounce ideas off of we give, we can give referrals. We are We love small businesses. And we actually it's our T shirts. It's so it's true. It's in our it's in our email signatures and our T shirts. So it must be
Collin 56:28
perfect. And Lindsey I'll have those links on the show notes and on our website. So listeners can get clicked right to those. Again, I really appreciate you coming on and helping us tackle this topic. It's super important as business owners that we understand what we've committed ourselves to. So thank you for your time. And for all the great information today, Lindsey, it was a real pleasure. You're very welcome. Are your finances organized? How are you keeping track of all of your expenses and making sure that they are categorized effectively more than just an end of year kind of ritual. Keeping organized means staying up to date with everything throughout the year. So we don't have to scramble. And it's easier for us to make decisions not just at the year end. But for month after month and all year round, be more organized with our finances means that the borrower has those powerful decisions that we can make in our business come from knowledge of how our business is functioning at its core. And when we make business decisions about adding services or products or anything along those lines, we need to be able to sit down with ourselves with a CPA with a trusted financial advisor and make sure that we understand all of the obligations that we are setting ourselves up for the quarterly reporting the sending in sales, tax receipts and all of that stuff comes with the decision to go into those new areas of business. Yes, they can help us grow. Yes, they can help us smooth over some of the downtime when petsitting takes a dive. However, there are obligations that we have now committed ourselves to. And we need to make sure that we understand the entire breadth of all that before we dive in. We want to thank our sponsor today time to vet and we want to thank you so much for listening. We hope you have a wonderful rest of your week and we'll be back again soon.
