Whether you choose to take your online gig legit or not, please understand that there are already laws in place that require you to record all income you make – whether it’s from a job, from lawn mowing, babysitting, a hobby, or working online or offline in any capacity. If you earn a dollar, you’re supposed to report it.
Since you are required to record all income (revenue), you are also allowed to record all “ordinary and necessary” expenses, along with the proof you spent that money, if you consider yourself a business. Since you cannot deduct expenses for a hobby, why would you not turn it into a business?
The way it works is that you deduct the allowable expenses from your revenue to come up with your taxable income. When you are in business instead of running a hobby shop, you can even show a loss on your financial paperwork three out of five years.
In a nutshell, bookkeeping is simply recording all your income and your expenses, regardless of whether you think they are tax-deductible or not. You can use that information for taxes and as decision-making data.
Every single dollar that comes in should be recorded, and every single dollar you spend to generate that money should also be recorded. It’s best to use an IRS-approved accounting program, but you can also use a checkbook register or a spreadsheet. If you record it all and save your receipts, you’re doing great.
The best way to accomplish this is to use IRS-approved accounting software that works for the type of business entity you own as well as the type of business you run. For example, if you have inventory, you’ll need a more robust accounting system than if you are a service provider or blogger who is earning affiliate commissions.
A few choices are Go Daddy Bookkeeping, QuickBooks, Quicken, Wave, and there are plenty more. Just pick a solution that will work for the type of business you want in five years so that it can grow with you. The thing that helps with these programs is that they often already have the right chart of accounts set up for you so that it’s super easy to get your taxes done at the end of the year.
Keeping good records is not only for the taxman. With good records, you can determine which product or service is selling best. You can even set up your accounting software to add expenses to a specific product or service so that you know whether it’s really profitable or not. Knowing your financial numbers, what products or services are producing the income, and how much it costs to generate that income will allow you to boost your profits by working smart and doing more of what is working and less of what is not.
Even if you think you cannot afford a CPA or Bookkeeper yet, it is imperative to consider at least hiring someone who can help you set up the chart of accounts properly as well as advise you on the right software for your type of business. You may be subject to taxes you’re not aware of. For example, in many states, you do need to pay sales tax on digital products. A CPA can help you work that out.
You may be surprised to find out that it’s a lot less expensive than you thought to bring on a CPA and/or a Bookkeeper to keep this straight for you, due to automation and the ability to be location-independent that the technology allows.
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