Today, we’re going to take a few moments and share some bookkeeping and tax preparation tips for network marketers. This seems to be one of those taboo subjects that very few people in our industry ever talk about. People are just expected to figure it out on their own. I think that’s a shame.
I should start out by telling you that I am not an accountant or a financial adviser. Don’t let that scare you though. I’m not going to offer financial advice or specific tax advice in this article. Instead, I’m going to discuss how to get organized and how to file your receipts so you can save time and money at tax time.
While most people dread end of year taxes, I get excited about it. I get excited because (1) I am organized and, (2) I enjoy LEGALLY minimizing my taxable income! Doing my taxes is quite easy because I ACTIVELY manage my receipts and tax documents throughout the year. Come tax time, all I need to do is input my information onto my tax forms. I simply spend a little time to stay organized each month (about an hour) and I can handle everything with ease.
Some folks are taught to join network marketing because of the tax savings. Let’s face it; owning a home based business can save you a lot of money at tax time IF you are doing things legitimately and running a real business. Home business owners have lots of tax advantages that employees do not get.
Unfortunately, very few distributors are ever taught HOW to keep good tax records, what receipts to keep, how to get organized, and what they can and can’t deduct. I’ll dive deeper into these subjects in the rest of the article.
If you’re like most people in our industry, you’ve probably never owned a business before. That means that you don’t know much about the Schedule C, what things are deductible, and what paperwork you need to keep for tax time.
The first thing you need to do is educate yourself about what things you can or have to claim and deduct. To do that, you have two options. You can hire a CPA to help you get set up and organized. I think everyone should do that initially, even if they’re going to file their own taxes.
Have them explain what categories to use, what items are deductible, how to create a profit and loss statement, and what receipts to keep and file. This might cost you a few hundred dollars, but as I see it, it is money well spent.
In addition to hiring a CPA for a few hours, you can also read several books on bookkeeping. These books might not excite you initially, but once you learn what things you can legally write off, I’m sure you will be very excited.
Here are a few books that I recommend about bookkeeping and tax preparation.
Your next step is to get organized. I suggest you get a filing cabinet, a shoe box, a container or some designated space in your home office where you can keep all your receipts throughout the year. I simply use a drawer in my desk. Every month, I put all of my business receipts in that one drawer. At the end of the month, I sort the receipts by category, add up my totals, and update my profit and loss statement for the business. This lets me assess the health of my business and see what areas I need to improve.
The next thing you want to do is create your own profit and loss statement. I simply use a Microsoft Excel Spreadsheet. Other folks use QuickBooks. Your P&L statement is nothing more than a listing of your income and expenses. You simply add up your income and then deduct your expenses. You either have a profit or a loss. You track this every month to see the health of your business. You add up your monthly totals at the end of the year and have your yearly profit or loss.
Since you know what you can legally deduct and what you can’t deduct (from your CPA and the books), you will know what information to put on the profit and loss sheet. At tax time, all you do is input the totals from your profit and loss sheet into your tax return and BOOM, you are done!
Another good tip is to organize your receipts. What I like to do on each receipt is “hand write” the business purpose of the receipt. For example, if I go out to eat with a client, I write who I went out to eat with, when, where and what the business purpose was. When I make photocopies, I write down what I photocopied and what the business purpose was. This makes life easier for me if I ever get audited or have a receipt that is questionable about whether I can deduct it or not.
After I update my profit and loss statement each month, I take the month’s receipts, put them in a manila envelope (9 x 12 inch) and file it. I do this every month throughout the year.
When it comes to doing your taxes, this is what I recommend. If you ENJOY doing taxes and know what you are doing, by all means do them on your own. If you are clueless, or get overwhelmed by the thought of it, have someone else do them for you. Whether you do your taxes or not, you should still have a CPA Adviser that you can bounce ideas and questions off. Even if you just pay them “as needed” it is still a good investment. I personally do my own taxes, but I know it’s not for everyone.
In summary, these are my bookkeeping and tax preparation tips for network marketers. It might sound complicated at first, but if you educate yourself, get organized, and have a simple plan you can follow throughout the year, tax time will be fun, not a pain in the butt. Whether you decide to do everything on your own or hire someone else to do your taxes, you should still work with a CPA when needed and educate yourself about what you can and cannot do.
What are your thoughts about bookkeeping and tax preparation for network marketers? Leave a comment below to let me know what you think. I look forward to hearing from you.