Sunday, January 23, 2011

Getting Ready for Tax Time, Part 1

**This is a re-post from We Sell on eBay

Don't be afraid. It's not scary and overwhelming if you do it a little bit at a time. Of course, if you haven't kept up with your paperwork for 2011, it's a little late to do it a little bit at a time for this year, but hopefully this series will help you be better prepared for 2012!

I so often read posts where people say, "Oh, I only made such-and-such on eBay" or "I just sell part-time" or "I'm just a hobby seller" so they think they don't have to report their income to the IRS. Well, guess what. Income is income. You DO have to report it, whether you made $1,000 or $100,000. The only difference is, Paypal won't be reporting your income to the IRS if you had less than $20,000 (all incoming funds, not just the actual sales amount - this includes shipping!) AND 200 transactions. You still have to report it.

So you want to get that number as low as you possibly can, by saving receipts and taking every deduction you can think of. But we'll get to that in a later post. Today's post is about keeping a daily record. If you do this every day, or even every 2 or 3 days, it only takes a couple minutes, and at the end of the year, you will be totally prepared for tax time!

To start with, I highly recommend a pencil and paper approach. I know that sounds archaic, but who do you trust with your money numbers? A computer program (with proven glitches), or your own records? I personally prefer my own records. So I use a Dome Record-Keeping Book. I used a monthly book for 2011, and that's what I've linked to, but I'll be using a weekly book for 2012. I really have a LOT of transactions over a month, and reconciling my books every month was taking a long time. I'm going to try the weekly book this year, because I'm hoping reconciling my books weekly instead of monthly will be quicker.

The Dome book is great! It's got everything you need right there. There are sections for all your deductions (shipping supplies, inventory purchases, shipping costs, fees, etc...) and there is a section for all your payments received. It's broken down monthly, so at the end of each month, I print my reports and double check the numbers. After any given month in the year, I know exactly what my net income has been for the year. It's a nice way to keep tabs on your business and not be totally shocked and unprepared at the end of the year.

I try to do this daily, but more often than not, I end up doing it every couple of days. (I do have a life outside of eBay, you know...) Each morning, I go into my Paypal account and write every transaction in my book. Some of them I combine, like all the shipping I paid. I write that total down under expenses. I add up all my payments received (I separate out the shipping for state sales tax purposes) and I wrote those numbers under income. I also enter any receipts into my expense section as soon as possible after I get home. I have a 13-section divided portfolio that I drop those into immediately, so they don't get lost. A lost receipt is a lost deduction :(

I keep a small calendar in my purse, so every time I go to Goodwill (or yard saling, or wherever), I can quickly jot down my mileage on the correct day in my calendar. Mileage can add up to a HUGE deduction at the end of the year! My miles will be a really big lifesaver this year.

This post feels like it's all over the place, but it's just an introductory post. A brief overview. I'll elaborate more over the next few days. But for starters, get yourself a Dome book, study the pages, familiarize yourself with the setup. Over the next few days, I'll teach you more specifically how to use it.

Upcoming Posts in This Series:
  • A Sample Day in My Dome Book
  • Printing Reports from Paypal
  • Monthly Reconciliation
  • Allowable Deductions
  • Putting It All Together on Your Schedule C

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