Sunday, September 9, 2007

How To Turn Bookkeeping Drudgery Into A $175/hour Part-Time Job

For most self-employed people, bookkeeping is about as much fun as a root canal. But like it or not, it must be done, otherwise you'll end up overpaying your taxes big time.

Perhaps this article will help you see this tedious task in a new light. Follow along with me and I can turn your bookkeeping nightmare into the best paying part-time job you ever had.

First, a question:

How much money do you make right now -- per hour -- at your "regular" daytime job or in your business?

Is it $15 per hour? $25 per hour? $50 per hour? Make a mental note of that amount, ok?

Now, let's say by "keeping the books" this month, you record $1,000 worth of deductible expenses.

Let's also assume you are in the 35% tax bracket (15% federal income tax plus 15% self-employment tax plus 5% state tax).

So, for every $1,000 of deductions, you save yourself about $350 in taxes ($1,000 x 35% tax rate).

One more assumption: it takes you about 2 hours to properly record and document that $1,000 of deductions.

Hmmm. You spend 2 hours and save $350 bucks.

How much money did you just make for yourself -- per hour?

$175 per hour! Whoa -- now, compare that to how much you make per hour working in your business or at an employee job. Which "job" paid you more?

Even if it takes you 4 hours -- it's like having a job that pays you $87.50 per hour. Still a pretty good hourly wage, don't you think?

How does that make you feel about bookkeeping? Not such a bad deal after all, is it?

So here's a simple six-step bookkeeping system that will put thousands of dollars of tax savings in your pocket and keep the IRS out of your life.

  1. Maintain a separate bank account for your business or self-employment activity.

    Never use your personal bank account for business expenses. Having a separate bank account automatically creates the "shell" for the perfect documentation system.

    If you don't have a separate business bank account, now is the time to get one.

  2. Maintain a separate credit card account for your business. Same deal as the bank account -- pick one credit card that you use exclusively for business expenses.

  3. These 2 accounts (one bank account and one credit card account) should only be used for business! Never "co-mingle" business and personal financial information.

    The only income that goes into your business bank account is business income. The only expenses that are paid from the business bank account and business credit card account are business expenses.

  4. For each major income and expense category, create a simple filing system each calendar year -- one file folder for each major category. Every time you write a check or use the credit card for a business expense, you assign that expense to the appropriate expense category and file the supporting documentation (receipt, invoice, cancelled check, or whatever) into the corresponding file folder.

  5. Keep a separate file folder for all monthly bank account statements and credit card statements.

  6. Use a simple bookkeeping software program to record all deposits, checks, and credit card charges. Once a week or once a month, input all transactions and assign each transaction to the appropriate income or expense category.

The importance of this "categorization" process cannot be stressed enough -- it's the key to the whole system!

There are any number of software programs out there for this purpose. I've used them all: Quicken, Quickbooks, Money, etc. Spreadsheet programs like Excel can also be used to automate business record-keeping.

But my favorite bookkeeping program for the Small Business Owner or Self-Employed Person is InternetTaxHelper -- it is by far the easiest to learn and simplest to use. If your business grows, you can always invest in a more sophisticated program later. For any small business owner, especially if you're just starting out, this is the best program I've ever seen.

Using a software program is a tremendous time-saver. Once you've input all your individual income and expense transactions, and assuming you've assigned each transaction to the appropriate category and filed the paperwork, you've already completed all the work necessary to audit-proof your income tax return!
One final comment: If you aren't "computer-savvy", that's OK. You can still use good ole pencil and paper to categorize your business expenses.

I have clients who use nothing more sophisticated than a spiral notebook. Each year they buy a new notebook and label each page with a particular income or expense category.

Every transaction gets written down in the notebook on the appropriate page. At the end of the year, they add up the totals for each page, and presto, they give me an annual recap of all major income and expense categories. Get the picture? It doesn't have to be fancy. It just has to be in writing, accurate, and supported by actual paper documents.

Whether you use your computer or not, the end result is the same: Every single transaction has been assigned to the appropriate category, and every transaction has the corresponding "paper trail" -- every receipt, invoice, cancelled check and credit card charge has been filed into the appropriate file folder. Should the IRS question any income or expense amount on your return, you'll be ready!

About the Author:

Wayne M. Davies is author of 3 tax-slashing eBooks for small business owners and the self-employed. For a free copy of Wayne's 25-page report, "How To Instantly Double Your Deductions" visit

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