We’re well into January, which means that this week, we’re focused on simplifying the preparation that can make tax season feel so daunting. Tune in as we break down the forms and filing you can expect to use; share our favorite tools and trackers to ease your workload; and give our best tips to make next year’s taxes even more painless.
Time based notes:
- 1:49 “Master Your Money” challenge
- 3:05 Tax Time Worksheet
- 3:40 1099-NEC and 1099-K forms
- 5:32 Profit and loss statements
- 8:19 Year-end inventory
- 9:27 Tracking your mileage
- 10:07 Home office expenses
- 11:10 Filing your taxes
- 12:52 Setting up for 2023
Tips and Tools to Take on Tax Season
We are talking about how to master your money today! It’s the season of tax prep. You will likely begin to receive 1099s in the mail. And, you might be thinking about what you need to do to get organized this time of the year to make tax time a little bit less painless.
Now, I am not a CPA. I am not a bookkeeper. I am not offering official advice here. But, I am sharing a little bit about what I know based on running a direct sales business and getting ready for tax season. I know this isn’t the sexiest topic ever, but it is important. And, I know it’s top of mind here in the first month of the year.
So, let’s get started with tax prep information. We have an easy-peasy checklist for you to use to gather the information that you need to pass off to your accountant. Or, if you do your own taxes, you’ll have everything bundled together with a nice pretty bow on it. So, if you haven’t downloaded that Tax Time Worksheet, make sure you do so.
Once you’ve got that ready, it’s time to dive into the forms you’ll be seeing this season, starting with our 1099-NEC. As long as you made over $600 from your direct sales company—and that includes incentive trips, prizes, bonuses, anything like that—you will be receiving one in the mail. Now, you may have already received this. If not, companies usually have until January 31 to send those out, so it’s likely coming to you in the next couple of weeks. The 1099-NEC is a critical piece that you’re going to need for tax time.
This year, you may be getting a 1099-K form for the first time, as well. The 1099-K comes from payment processors, like Square or Paypal or Venmo for Business, and in the past, you only received one if you did over 200 transactions, or $20,000 in sales, where you’re actually processing that payment on your own. So, if you do a lot of vendor events, you might have already been in that category. Starting in 2022, they’ve lowered the threshold for this to just $600 in sales through these third-party payment processors. Now, it sounds like the IRS has made some adjustments, so you may or you may not be getting a 1099-K, but you definitely will be next year if you’re doing over $600 in sales.
Apart from tax forms, we want to generate a profit and loss statement. We really need to be keeping track of how much income is coming in and how many expenses are going out of our business. Maybe in the years past, you haven’t made that a priority. But I really, really want you to do so here in 2023.
A profit and loss statement is going to show you how much money you’re actually making. So often in direct sales, we focus in on sales volume, right? Personal volume. How much team volume. How much you’re actually selling. But, spoiler alert: That’s not how much money you’re actually making in your business. That’s how much the company is making. But, as a direct seller, you also want to make sure that you’re tracking your profit, to make sure that you’re in the positive and you’re making some good money from your business.
If you haven’t made your New Year’s resolutions yet, your goal this year should be to keep track of your profit and loss, and there’s a couple of great tools that we have to make this easier than ever:
- Modern Direct Seller income and expense tracker. This is a simple spreadsheet. Just input all the money in, all the money out, and it’s going to tell you how much profit you have in your business.
- Direct Sidekick. This is accounting software that is made specifically for direct sellers, and it will give a good view of the health of your business.
Another thing that you’re going to need to keep track of for tax time is calculating your year-end inventory. I know we’re a few weeks into the year, but you can still guesstimate how much inventory you had on-hand at the end of 2022.
Now, depending upon your business model, you might have zero inventory. So, that makes it really easy. Or, you may be in a position that you purchase a lot of inventory upfront, and you’re able to run big events. Regardless of your situation, you want to make sure that you have a good grasp of how much inventory you have. In that Tax Time Worksheet, we give you a formula that calculates what the retail value is of that inventory—because we know that the things are required in direct sales that are a little bit different than other businesses.
The next thing you’re going to want to gather is your mileage. So, hopefully you have a log somewhere stating how many miles you drove in 2022 that were related to your business. We love an app called TripLog, but I know there are a lot of other really good ones out there to track your mileage. (Even if you’re using QuickBooks for your accounting, I believe they have a mileage tracker.) At the bare minimum, you might need to look back through your calendar or your planner to see what trips you took that were directly associated with business, because all of that information is going to feed into getting your taxes ready to go.
Finally, we’ve reached kind of a fun one: As a business owner, you can write off some of your home office expenses. As long as you’re using part of your home as your primary place of business, and that’s where you meet customers, and that’s where you store inventory or samples, you are able to get some deductions in those areas.
There’s a couple of different ways you can look at this:
- Direct expenses. This includes things like repairs, or maintenance in your office, like replacing a light bulb.
- Indirect expenses. These you’ll need to calculate, and includes things like rent, or your mortgage, or your utilities, or your homeowner’s insurance.
In that Tax Time Worksheet, you can calculate what your home office expenses are, so you have that information for tax time.
Now, the last piece is actually filing those taxes, right? So, as you’re getting ready to file, your business income and expenses will be reported on a Schedule C, and your profit or loss will roll up in your Form 1040. Your profits from your business will be subject to self-employment tax, so it’s important that you’re setting aside some money throughout the year to make sure you’re covering those taxes and don’t have any surprises when taxes roll around. This varies, of course, based on the state that you’re in, but a typical recommendation is to set aside about 25% of your total profit from the year to cover your taxes.
Now, you may have a CPA or an accountant that is filing your taxes on your behalf, or you might be more DIY. If you are doing it yourself, a great tool for that is TurboTax Home and Business. But, as your business grows and evolves, you probably will want to outsource tax prep to an accountant.
That’s a little bit to get you started and get you ready for tax time. Really, if you’re keeping up with this throughout the year, it makes it so much more manageable at tax time, and so we want to make sure that’s a focus in 2023. Here are a few suggestions to help:
- Separate out your business and personal account. This doesn’t necessarily mean you need to go to the bank, and open up a business account, and establish yourself as an LLC. What this means is that you pick one credit card or one bank account, and all of your business transactions go through that one account. They’re not mixed up with your personal transactions. We really want to separate out our business expenses and our personal expenses, and those bank accounts keep things really, really nice and clean and clear.
- Keep track of your income and expenses. Not only is it going to make tax time easier, but it’s also just going to give you a better view of your business. These are metrics as a business owner that you need to track. You need to know if you are making money in your business. You need to know how much money you’re making. And, this is also going to inform what your income might look like in the future. So, don’t wait until the year is over to grab all this. You really want to be reconcile this regularly, like once a week or once a month.
- Think about how you’re going to record your mileage for the year. Are you going to keep a log? Are you going to use an app? How are you going to keep track of those kinds of things when they come up for you and your business?
- Keep an eye on sales tax—especially if you’re reselling inventory at a vendor event. You want to make sure that you’re keeping track of that tax, and you’re reporting everything to the proper agencies.
If right now you’re thinking, “I’m a little bit overwhelmed. That was a lot of content right there,” I would love to invite you to join us in the Modern Direct Seller Academy for our “Master Your Money” challenge, which is running from January through the first week of February 2023. We’re going to walk you step by step through everything that you need to really get yourself organized for your taxes based on your 2022 numbers, look at what systems we can put in place to make it easier in 2023, and make sure you’re not scrambling every year at tax season.
No matter which class, tool, or tracker you use, hopefully this put you in the mood to really master your money and have a good handle of how much money you’re actually making in your direct sales business—because I hope it is a lot!
Take Action: What methods can you adopt to prepare yourself for tax time?