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Ask the EP Experts

Jan Zobel
Are you starting a new business with little to no experience in accounting? Ask Jan, author of Minding Her Own Business: the Self-Employed Woman's Guide to Taxes and Recordkeeping, for help!

 EP Recordkeeping/Tax Q&As

Q. work for a big company, for which my job at this point in time requires me to fly from my home on Mondays and return on Fridays, yet I still need to finish up paper work every Saturday and sometimes Sunday from home. I use my computer for roughly 60% business and 40% pleasure. I have one designated room in my home which I converted to an office for the sole purpose of taking care of the paper work I need to get finished. I'm paid a weekly salary yet not reimbursed for the things I do at home. Can you tell me does it sound like I can take a Home Office Deduction this year and if so, what are the rules surrounding this? Any help you can give me would be appreciated.
A. Although the office-in-home rules for self-employed people were recently greatly relaxed, employees can still only deduct a home office if it's for the convenience of their employer. So, no, it doesn't sound to me like you can claim it. However, you can deduct 60% of the cost of your computer as a miscellaneous itemized deduction on Schedule A.
Q. I am currently starting a general services business (billing, typing, laundry, post office runs, bulk mailing, grocery shopping and the like) in my home. I am wondering if I have to get set up through the SBA or if I can get a business license through the state of Mississippi and pay my taxes using my SSN? I had a home day care at one time in New Mexico and used only my SSN to pay taxes, but I am wondering if this is different and if I would need to carry other than basic renters insurance (I live in government/base housing). Thank you in advance for any help you may offer!!

Linette K. Hollandsworth
A. The SBA has nothing to do with business licenses or taxes. You would contact them for technical assistance in operating your business. You may or may not need a license (every city and county is different) but this will be something you do locally, not through your state. Call your Town Clerk to inquire. You may need to deal with zoning issues is you're operating out of your home but, again, this is through your local tax office. Yes, you can use your social security number for tax-related things unless you have employees.
Q. What if you haven't filed income taxes for over six years, but you never worked a whole year in the last six years and you support 3 and have gotten help from relatives... should you file, is it too late? Will you get penalized?
A. If your total income for the year was more than roughly $12,000, you needed to have filed a tax return. If you had independent contracting or self-employment income over $400 for the year, you needed to file, even if that was your only income. It's never too late to file. There will be penalties if you owe money but if you had taxes withheld from your income, maybe you're owed a refund (which you will lose if you wait any longer to file).
 Q. I'm about to pay some people a referral fee for everyone they get to sign up in my club. I'm not going to take out taxes, however I was going to report this to the IRS and tell them to claim it on their taxes. What forms would I use to inform the IRS & what forms should they use to claim it on their taxes?
A. Be sure to tell them in advance that you will be reporting it. Also, get their address and social security number at that time. You will issue a 1099 form to them by January 31, 2000 if you pay them more than $600 during 1999. You'll send a copy of the 1099 form, along with a 1096 form (transmittal form) to the IRS by Feb 28. They'll report the income on Schedule C as self-employment income if this is a business for them. If this is money they occasionally get, not in an ongoing way, they can report it on the miscellaneous income line of the 1040 form (not 1040A or 1040EZ).


Q. I just started my own business. I do cooking parties for kids. I am trying to get my Federal Tax number and have not gotten the correct number to call. How do I get a number?

 A. You can apply for a Federal Identification Number on Form SS-4 which is available at IRS offices or can be downloaded from the IRS website at However, unless you are operating as a partnership or a corporation or you will have employees or a Keogh retirement plan, you are not required to have this number and the IRS is resistant to handing them ou


 Q. How much money must you make before you have to report earned income for an at-home business?
A. All income needs to be reported. That doesn't mean that you'll necessarily owe tax; if you have as many expenses as you have income, your net profit would be zero. Net profit (your income after you've deducted your expenses), is what you pay tax on. As soon as your net profit is $400 or more, you'll have to pay self-employment (social security) tax. So, even if you don't have enough income that you'd normally have to file a tax return, if your total self-employment income is over $400, you'll need to file to show income and expenses.
Q. I'm putting together a brochure entitled "Surfing Your Way Through Pregnancy," which I plan to advertise in major publications for $3. What type of bank account do I need to set up to handle the money when it comes in? I know the advertising end of it but the financial end is what is stopped me from going ahead. Can you help me?
A. Most business advisors will tell you to open a separate business bank account. It's my belief and experience that this isn't necessary and may make your recordkeeping more burdensome. I'm not saying that you shouldn't open one if it would make your life easier but the IRS doesn't require it. However, if your business name is something other than your name, you may want to open one in the business name (or, if your bank will allow it, as Jane Smith doing business as Pregnancy Pointers) so that you can easily cash checks from your customers. If you were to operate as a partnership or corporation, you do need to have a separate business account. In any case, whether you have a separate account or not, make a notation in your check register or keep some other record of what makes up every deposit you make to each bank account. The IRS will expect to know this if you get audited. And if you choose to have a separate business account, all business income should be deposited into that account.
Q. I have saved enough money to now buy an IRA to use as a retirement source. My parents are constantly encouraging me to get this done. I have inquired with all the local banks. (I live in a small town). One of my neighbors suggested that I use a broker. Any suggestions as to the right direction for choosing the best IRA?
A. Congratulations on getting the money together. This is not an easy answer. You need to discuss this with a financial consultant regarding your risk tolerance, etc. It's a very individual decision.
However, if it's going to take you awhile to decide where to invest the money, a bank IRA is fine temporarily. Then you can roll it over to a mutual fund or other fund where you'll get a higher return on your investment (bank IRAs will barely keep up with inflation).
See if there's a large brokerage house in your town or the nearest large town to you (i.e., a Merrill Lynch) and go in to talk with someone about your options. There will be no fee for the consultation but there will be larger fees on any investments you make.
As you learn more about investing, you can choose to stay with that brokerage house or use a discount broker like Charles Schwab which will cost you less to invest but won't provide you with investment advice.
Q. Dear Jan,
I am in the planning/starting phase of my new business. What are the records, restrictions, limitations on start-up expenses as far as the IRS is concerned? Information about what has to be depreciated, etc. would be helpful. Is there a certain time limit involved? In other words, if I start purchasing my equipment, etc. now, but don't have clients for several months, is that a problem?
Thanks in advance for your advice,
Tina Medlin
A. Tina,
You should start, from the beginning, to keep the records the IRS would expect to see in an audit (i.e. all receipts for expenses and all sources of income). More information about recordkeeping can be found in IRS publication 583 (Starting A Business and Keeping Records) or in my book, Minding Her Own Business: the Self-Employed Woman's Guide to Taxes and Recordkeeping.
If you have start-up expenses in the same year that you have business income, you probably can get away with deducting those expenses in that year. However, if you have start-up expenses in the year before you start having income, you'll need to amortize (similar to depreciate) those expenses over 60 months, beginning with the month in which your business starts. The definition of when your business "starts" is not clear. It definitely means that you've gotten necessary licenses and permits, set up an office or store, and have told the public that you're open for business. What's not clear is whether you have to have received any money before you can consider your business started. In any case, if you file a tax return with just business expenses and no business income, you can expect an audit.
Good luck with your startup,
Q. My name is Mary Carter. I've been working in accounting for the past two and half years. I've taken some accounting classes at the local community college. I've done pretty well in both learning in class as well as taking everything I can from working.
Now that my son Andrew is here I want to stay at home. I'm feeling a little insecure about doing the work at home. I suddenly feel as though I have no clue about accounting. Am I qualified to do bookkeeping?
A. Without knowing what your skills are, it's hard for me to answer this one. What is an "accountant"? Some companies call someone an accountant if they write the checks, or enter the payables, or do any one of a number of tasks. That doesn't mean that person could do what's called full charge bookkeeping, particularly if they're working on their own. Classwork doesn't equal skill level.
Q. How do you keep your records on your sales?
A.  Every deposit you make to your bank accounts (both personal and business accounts) should have a notation in the check register or on a duplicate deposit slip, indicating where the money that makes up that deposit came from.
In addition, you should have some kind of invoice or sales receipt. A copy should be given to the customer while a copy is kept for you. These (receipt books) can be purchased inexpensively in office supply stores and rubber stamped with your company's name, or you can print them up on your computer.
In the event of an audit, the IRS will want to see those invoices and your bank statements, and they will make sure that they match plus that the total of them matches what you've reported on your tax return.


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