Simple Accounting for Creatives
Being intentional with your business is another way of saying "managing your business well." Keeping close tabs on your business finances is key to having intentional control over your business. The Internet is saturated with accounting advice for entrepreneurs. Unfortunately, much of it is conflicting and based on pushing affiliate products. It's no wonder so many creatives would rather ignore their finances so they can get back to the creating they like best! But that's no way to run a successful business.
I've broken business accounting into five simple steps. (Plus a bonus step for you overachievers.) Your business finances could obviously expand to include much more than just five things, but these are the bare basics every entrepreneur needs to get started.
Disclaimer: The software I recommend is based solely on what I've used and liked myself, but I'm not getting any sort of affiliate kickbacks. The steps I mention below are based on my experiences as a freelancer in the US. And of course, I'm not an accountant and I'm not offering any sort of official tax/accounting advice (and therefore can't be held liable for any actions you take as a result of reading this post). Consult with a CPA for advice specific to your situation.
5 Steps to Simple Accounting for Creatives
1. Open a separate business bank account.
If you earn any sort of income that doesn't have taxes withheld by your employer, you're officially running a business. (Yes, even if your Etsy shop only brings in $20/month.) That income qualifies you to have a business bank account. Congrats!
Having a separate business account forces you to keep accurate records. Every single payment you receive from a client or customer goes into this account before it goes anywhere else (even if you're immediately going to turn around and transfer it to your personal account so you can buy groceries).
Why is having a separate account so important? Some creatives don't even know if their businesses are profitable because their business money is all mixed in with their personal money! It will also make things a million times easier at tax time. A separate account is the easiest way to know if your earnings outweigh your expenses, which will help you make smart business decisions down the line.
Many creative entrepreneurs procrastinate on this step because it's intimidating and it makes your business feel official. You'll have to do scary things like fill out paperwork and declare to your bank that yes, you are a business owner. Many creatives experience an emotional block about this . . . but it needs to be done. Worst case scenario: Your business doesn't work out, and you go back to the bank to close the account. No big deal.
Want to take this step even further? Give yourself a business savings and checking account. Use the checking account for regular transactions and the savings account to pile up money for taxes and plan for other big business expenses.
2. Choose your accounting software.
You've got your separate bank account, but you still need a way to keep tabs on your income and expenses. (And, you know, give your clients a way to pay you.) That's where accounting software comes in.
Accounting software makes it simple to keep track of your business' money. Most software will integrate with your bank to automatically import credits and debits. All you have to do is categorize your expenses and approve transactions. You'll be able to see at a glance if your business is profitable from month to month, who your highest-paying clients are, and where you spend the most money on your business. Accounting software also gives you a professional way to invoice clients and collect payments. (Trust me, you don't want to be the business that's still sending out invoices in Word and asking clients to mail you a check!)
There are plenty of great cloud-based options that are easy to use and offer professional invoicing options. My favorites are Wave (free) and Freshbooks (starting at $12.95/month). I've used both services in my own business and would recommend either of them. My favorite Wave feature (aside from being free) is its ability to store and categorize receipts so I'll never have to dig through my emails or hold onto a paper copy. My favorite Freshbooks feature is its Business Payments option, which reduces PayPal fees to just $0.50 per transaction. This can be a major money saver---more than enough to cover the Freshbooks' monthly fee!
3. Hire a CPA.
Let me guess: You think you can't afford to hire professional accounting help. Big mistake! A CPA who's well-versed in small business taxes is worth her weight in gold. A knowledgeable CPA will be your guide to running a professional, legal business. Taxes are stressful to begin with. Add in questions about if you can take a home office deduction or how much you need to pay in estimated taxes, and they're enough to give most creative entrepreneurs a mild panic attack.
Don't believe me? It only costs me about $250 - $300 per year for my CPA to do my business and personal taxes. That also includes the handful of times I call her with questions throughout the year. In the first two years of working with her, she saved me enough to continue paying her to do my taxes for the next seven years! And that doesn't even include the time she's saved me. Now that's a smart return on investment.
Spare yourself the worry and find a trustworthy accountant who can answer all your questions. You'll rest easier knowing that if the IRS ever comes knocking for an audit, your business is on the up-and-up.
4. Save 20 - 30% for taxes.
Ever heard of estimated taxes? They're a pain for most small business owners, but planning ahead makes them much less painful.
When you work for an employer, your state and federal taxes are automatically withheld from each paycheck. When you work for yourself, you're responsible for submitting your estimated tax burden each quarter. (If you wait until the end of the year to do this, you'll most likely face late fees.) You don't want estimated taxes to catch you off guard. Saving about 25% of everything you earn should ensure you have enough to pay the tax man.
Does that number seem high? That's because employers kick in a portion to match what their employees contribute for Social Security and Medicare. Self-employed people don't have an employer to match their taxes, so they're responsible for both halves of the tax. It's called, appropriately, self-employment tax.
How much should you send in for estimated taxes? Only your CPA can tell you that for sure. The good news is, you don't have to submit taxes quarterly during your first year in business. Save 30% that first year to be on the safe side when April 15 rolls around. Your CPA can then use your income from your first year to help you determine how much to pay each quarter going forward.
5. Form good habits from the start.
Accounting is like laundry: it's not so bad if you stay on top of it, but let it pile up, and you'll find yourself drowning in dirty socks paperwork and receipts.
Get in the habit of doing your accounting on a regular basis. Send invoices as soon as work is completed (or scheduled), balance your checking account every month, and categorize transactions and receipts once a week.
If you're really organized, you can even set aside paperwork you'll need for taxes so you don't have to dig them up at the end of the year. For example, if you take the home office deduction, you may want to set aside paid monthly utility bills that are partially deductible. I keep a file folder labelled "tax stuff" that saves me hours of digging each year!
Bonus: Create a budget and pay yourself.
You run your business to help others and because you enjoy your work . . . but you also need to get paid. (If your business isn't profitable for several years running, it's a hobby, not a business. The IRS says so.)
A business budget will help you save for future expenses and decide how much to pay yourself. My favorite budgeting tool is EveryDollar. It's designed for a personal budget, but it works just as well for small businesses. Here, you can plan for recurring monthly or yearly expenses so they never catch you off guard. You can also set up a savings fund for big-ticket purchases and tax withholdings.
Once you've subtracted taxes and expenses, you're left with profit. You can take as much or as little of this as you want for your income. Some solopreneurs pay themselves all the profit that's available. Others set aside a certain amount each month for upcoming purchases or to use as a rainy day fund if upcoming months aren't as profitable. You may also want to think about setting a portion aside for retirement since there are no employer programs encouraging you to save.
This will look different for everyone, but here's the basic breakdown of my solopreneur budget:
- 20% for taxes
- 15% for retirement
- 10% for recurring expenses
- 10% for big-ticket, one-time expenses
- 5% for rainy day fund
- 40% for personal income
I reevaluate this budget every few months. For example, I might bulk up my one-time expenses fund if I realize my computer is approaching its fifth birthday. Or I might pay myself a "bonus" one month if business has been steady and I haven't needed to dip into my rainy day fund.
Ready to set up smart business systems?
Setting up an accounting system is one step to intentionally managing your business, but it's not the only thing entrepreneurs need to worry about. Protecting yourself legally, building a website, designing attractive graphics, and setting your prices are all part of being an intentional business owner.
These behind-the-scenes business tasks don't have to be overwhelming. Thanks to resources like the ones in the Solopreneur Success Bundle, you can simplify the business side of things so you can get back to the creative jobs you enjoy most.
Purchasing the Solopreneur Success Bundle through the links here will result in my business receiving compensation. I appreciate you trusting my opinion on the products that will help you better your business!
This year's bundle includes 20 resources valued at more than $1,000---but you can get them all for $99 through Friday, September 16. Some of the products you'll get include:
- a course on setting up automated email funnels
- a PDF guide to help you create a year's worth of social media graphics
- a digital guide to walk you through every aspect of a successful launch
This $99 bundle is a great deal for any creative who's ready to get their business running smoothly---which will free up hours of your time! The Solopreneur Success Bundle is only available this week. It all disappears at 11:59 p.m. ET on Friday, September 16. Don't wait to grab your bundle resources and get your business on track!