Your Money: Organizing your Financial Systems as a Creative Entrepreneur
guest post written by Janet LeBlanc of Paper + Spark
As the end of the year approaches, financial systems are probably far away in your mind. You’re probably more focused on peppermint mochas, packaging orders and perfecting your family’s holiday card pose than the upcoming tax deadline. However, this is also a great time to start getting your finances in order before things get too out of hand!
Whether you plan to DIY or outsource your taxes, you will need to have all your financial paperwork organized in order to know your business’ sales and expense totals for the year. You can start gathering and sorting these documents now to make tax time less overwhelming. There are two main reasons to gather up all your financial documents –
First, having them handy will make catching up on your bookkeeping and taxes a lot easier. Second, if the government decides you’re the lucky subject of an audit, you’ll need them ready (and in an organized form!) to back up your numbers.
What sort of receipts do I need to keep?
It helps to understand the official IRS requirements for your tax documentation. The IRS covers everything you need to know about record keeping in Publication 583. The following info is summarized from there.
Guidelines state that “proof of payment” by itself does not prove that an expense is deductible for your business. That means that if you don’t have a receipt or some sort of similar documentation for an expense, then technically, you should not deduct it for your taxes. What that boils down to is that a line item on your bank or PayPal statement is not good enough by itself to back up any expense on your tax return. A bank statement doesn’t give the IRS enough info about that expense if they audit you (like what exactly you bought, for example).
Receipts usually also give you an item-by- item breakdown of what you bought (unlike a single line on a bank statement), and this is important so you know how to categorize an expense. It is completely okay to have only digital copies of your receipts if you don’t want all that paper lying around. Some stores’ receipts are also notorious for fading, so you may want to scan or photograph your paper receipts for safekeeping. Now that you know more about what the government expects of you, you can start getting that stuff organized!
Here’s a great way to get everything organized before prepping your return, or handing things over to a tax professional:
1. Set up a physical file system and organize your financial documents.
I like to grab some fun folders and organize my receipts accordingly. You can sort by month or by expense category, or both if you’d like. This is what you’ll do with all your physical receipts, invoices, sales logs, etc. Time to go through all your nooks and crannies and find all the paper you’ve been stashing away throughout the year.
2. Organize your digital financial documents in a similar fashion.
For all the stuff on your computer, I suggest creating a folder for each month, with expense categories as sub-folders. As you find receipts and important financial files on your computer, you can move them to these folders. You can “print to PDF” or screenshot any emails that you want to save as well. It’s a good idea to save these folders to your Google Drive, iCloud, or some cloud based system in case your computer hard drive ever fails.
3. Print physical or digital copies of all your bank statements, PayPal statements, etc. and file them accordingly.
If you still need to catch up on entering financial transactions for the year, then having your bank statements handy can also jog your memory of any transactions you may have forgotten (and remember you need the corresponding receipt to deduct it on your tax return!).
4. Organize any other important business documents.
Receipts and bank statements aren’t always the only type of documents you might need to file. You should also set up a place to store any contracts, other legal documents, prior year tax forms, sales tax permits, copies of filed tax forms, etc.
5. Set up a system to stay organized going forward.
Once you’ve got your existing stash tamed, don’t let yourself relapse! Set a reminder in your planning tool of choice (Trello, Asana, your phone, Google calendar, whatever works!) once a month to file your financial paperwork. Make it a habit to immediately file away or label digital receipts and emails as soon as you get them in your inbox. If you’re a bit behind on your bookkeeping and ready to get up to speed, this pre-work organization will help make the rest of the work you need to do a little less stressful. You will have your folder system handy to turn over to your accountant or tax preparer if need be.
Do you need even more help getting organized when it comes to your money? Take this Creative Founders Class on Organizing your Finances which includes recordings for two live webinars led, along with worksheets to help you to keep your money organized! I’ll walk you through what you can add to your tool belt to make the financial side of being a creative founder easier.
We don’t only cover the cut and dry aspects of what a tax deduction is or how to open a bank account – I show you exactly how you can stop the endless cycle of procrastination and take control of your money. In this class, I share my top processes, checklists, and tools that will help you get your money organized...finally! Learn all about this class, here!