We all know what time it is … tax season.
Since I’ve been working for myself now for 8 years, I’ve perfected my tax document organization — I’ll do another post on that soon because today we have an actual accountant that specializes in working with creatives to give us some tips!
Amy Northard came to me HIGHLY recommended by a few creative friends. I actually have a local accountant I’ve been working with for 5 years in the DC area, but since Amy specializes in the details for creative people and she’s a woman, I wanted to feature her and share her amazing info.
I asked her a few questions that I thought some of you would be interested in learning about. Amy has a lot of super helpful posts on her blog that go into specifics and might answer all of your questions, but if not she also does consulting.
Instead of being scared of understanding your finances, it’s best to just dive in and understand them, so you can plan and work toward something and at the least feel somewhat organized. Personally I feel so much better when I have all of my financial and tax documents in order and regularly update them.
Now onto my interview with Amy!
Why do you think someone should use an accountant and/or bookkeeper versus trying to do those tasks on their own?
I think it’s a matter of how comfortable the person is with doing their own taxes and also how complex their situation is. I never want to scare anyone into working with a CPA, but sometimes mistakes can be costly and having several sets of eyes on your taxes before they get filed can generally prevent expensive IRS and state tax issues.
What made you specialize in accounting for creative businesses?
It took a little time to find my way into the amazing niche of working with creative businesses. I started out working at a CPA firm that primarily worked with clients who were making a lot of money and didn’t seem to care much about their employees. It was tough to get excited about working with them! After a couple years working there and finishing my CPA license, I knew I needed a change. I started looking for other jobs, thinking that the firm was the issue, but didn’t find anything that really excited me. Then I came across a CPA who specialized in working with bloggers. As a huge fan of blogs (dabbled in a few myself), I thought that was so cool that she could make a living doing that so I started making a transition plan to leave the CPA firm and start working with creatives!
If someone wants to use an accountant but do their own bookkeeping, how do you recommend they go about it? Do a consult to set it up properly? Reconcile daily, weekly, monthly?
I think the best thing is to figure out a system that you’ll use on a regular basis. Does the thought of a spreadsheet delight you or make you want to gag? Use that to help you decide which route to go. If the system you decide on is something like Quickbooks or Xero, I do think it would be a good idea to work with a bookkeeper or CPA who is familiar with your kind of business to make sure things are set up correctly and can walk you through what you need to do each month.
I’ve found that categorizing expenses regularly (like every few days) and then reconciling (similar to balancing a checkbook) each month makes bookkeeping less painful. You get to spread the pain over the month instead of spending hours on it once every month.
You definitely want to try your hardest not to skip several months because then it’ll be harder to make yourself catch up.
What about people who have a more sporadic income? How should they plan? Any tips for them?
I think it’s helpful to sit down and plan out how much money you need to live off of (rent, food, utilities, etc) for one month. Set up a pay day where you pay yourself and put what you need in your personal bank account. Then, look at your net profit (income left after expenses) for the month and put 30% of that into a savings account for taxes. The rest can stay in your business bank account to cover business expenses and a slow month’s pay day. The key is to not just transfer that huge client payment you just received right to your personal account and then proceed to spend it all.
Is it important for small creative business owners (makers, artists, etc., people who don’t have any employees or only contract out labor) to have things like a profit & loss statement (or income statement), and ongoing cash flow statements, etc? If yes, how often should they do them and why should they do them, and how?
It’s very important for small creative business owners to have a profit & loss report (also called an income statement). This tells you how much money came in and how much money went out for the time period you’re looking at. A profit & loss report can tell you if you have enough money left after expenses to start outsourcing, or whether you can go to that business conference.
A cash flow statement is also helpful in looking at the flow of dollars in your business. They are a little different than a profit & loss report because they the movement of every dollar, even when you pay yourself (not included on a profit & loss). You can learn more about cash flow statements and how to do one yourself here.
Any common mistakes or misconceptions you see consistently that creative business owners make/have?
I think the biggest mistake is ignoring the numbers and not saving for taxes. Every year around tax time, no matter how much I try to share how important it is to save about 30% for taxes, there’s always a few people who get big tax surprises because they didn’t even sit down to look at their numbers until it was time to get taxes done. Don’t put that stress on yourself.
Common red flags for getting audited people should know about?
A big one is having a large amount of expenses compared to income. Sure, in the first few years of business you may have some losses but if those in the 10’s of thousands, you’d better be prepared for the IRS to ask about them!
Another is claiming that half or more of your home is used for business purposes. Since a home office must be “regularly and exclusively” used for business, you have to be careful not to include that part of your living room couch that you watch The Bachelor on, but also work from.
Your best tips to make the tax process smooth each season?
Whether you work with a bookkeeper or DIY your business bookkeeping, get something in place so you aren’t doing an entire year’s worth of bookkeeping in April every year.
Save all your receipts. It doesn’t have to be a super elaborate plan but you do need to be saving receipts. You can’t rely on your bank statements if the IRS comes knocking. If you prefer the paperless life, scan and toss receipts. Just be sure you’ve got these backed up somewhere safe.
As tax documents roll in around January and February, put them all in one place. Don’t let them float around the house and then get lost. You may even make a list of the tax docs you receive each year so you know what you’re waiting on.
My last tip — if you find taxes to be overwhelming, consider working with a CPA. Ask your friends and fellow business owners who they love working with and start there.
Photo courtesy of Amy Northard