Is this how you feel whenever you start researching the topic of taxes or accounting?
You're not alone.
That's why we teamed up with the professionals at Bench; to help cleaning business owners approach this complicated subject with more confidence.
They sent us two of their best bean-counting professionals, even smarter than Oscar.
After 3 years of being a bookkeeper for a wide variety of small businesses, Brendan switched his attention to writing about financial topics to empower the very business owners he was helping. He currently writes about a wide variety of tax, accounting, and bookkeeping topics for Bench's blog.
Garrett is a part of the Bench Tax Compliance team and runs a Canadian tax preparation business in his spare time. With 2 years of experience in personal banking and 5 years of tax filing experience, Garrett supports Bench's clientele in becoming financially proficient business owners.
Enjoy our wide-ranging conversation where we cover the most taxing (pun intended) questions that growing cleaning businesses struggle with every tax season.
Cleaning Business Taxes
When establishing a brand new, home cleaning business what entity do you recommend?
If you're just one person running your cleaning business and you want to get started as quickly as possible, then a Sole Proprietorship is your best option.
With a Sole Prop., you can immediately start running your business under your own name, claim business expenses, and still be eligible for all the deductions and credits as an incorporated business.
However, one of the major fallbacks is the lack of liability protection. Keep this in mind as your net income starts to grow.
Pro-tip: When you do decide to incorporate there are certain benefits that come with every entity as a result. Finding a CPA or attorney is really important to figure out what is best for you and your business.
Choosing your business structure isn't like selecting a long-term, life insurance plan that you're stuck with. It's more like car shopping. As your business grows you can recalibrate and change your filing structure at any time.
This is exactly what my wife and I did when we started our first cleaning business. Now, after hiring some subcontractors and growing our customer base, we operate as an S-corp.
Is there an equation that cleaning business owners should use to figure what amount they should be "putting away" for Uncle Sam?
A safe rule of thumb is to set aside 30 - 40% of your business income for federal and state taxes.
You can calculate this easily at the end of every month. Simply take your gross profit, subtract all your expenses, and then multiply that number by 30 - 40%. That sum is the amount that should be “put away” for tax purposes.
For example:
Let’s pretend you just had your best month in business. You made $4,500 and had $900 in expenses. Bringing your income for the month down to $3,600. If we’re using the 30% rule, then we would set aside $1,080 for federal taxes that month.
Now you can go spend that $2,520 on whatever you want.
How should cleaning business owners calculate and pay their quarterly taxes?
With Bench's free estimated tax calculator you can easily determine your quarterly tax liability in a few minutes.
The Bench team can walk you through this process, step-by-step on their blog post here.
Once you determine your quarterly, estimated tax payments then you'll need to submit those payments by their quarterly due date.
- April 15th
- June 15th
- September 15th
- January 15th of the following year
Payments can easily be submitted to the IRS by filling out Form 1040-ES and snail mailing it to an IRS office near you.
Late payments or underpaying is like forgetting to Windex a bathroom mirror - the government will notice and penalize you for it.
You can avoid late payments with a simple iCal or Google Calendar annual reminder and can avoid underpaying with a safe harbor estimate.
A safe harbor estimate means matching the same amount of quarterly tax as you paid the prior year. However, if your self-employed income is more than 150k then you must put away 110% of what you did the prior year.
Don't worry about accidentally overpaying your quarterly taxes. It's not like Venmoing the wrong Uncle Sam. You'll get that money back if you overpay.
What are some steps cleaning business owners can take to minimize their tax liability?
Step One: Organize Your Books
Clean books and organized records allow us to maximize our deductions to ensure we're not paying more taxes than we should.
Step Two: Make a Creative Purchase
When you're starting to approach the end of the year, then take a look at what you're making. If you have a high profit, it might be a good idea to make some big business purchases to reduce your tax bill.
For cleaning businesses, this can look like investing in a corporate car, that backpack vacuum you've been lusting after, or buying your cleaning products in bulk.
What are the tax categories cleaning businesses need to pay?
Most of this depends on the state you're doing business in and the entity you're operating as. Below are the most common taxes that cleaning business owners can expect to pay:
- Income tax - any money that ends up in your personal return is what you pay taxes on. This is based on your personal income tax rate and depends on the tax bracket you land in.
- Withholding or "estimated tax" - these are the quarterly taxes we determined above. If you expect $1k or more in tax liability, then you're required to make a quarterly tax payment.
- Self-employment tax - the taxes that cover Social Security (6.2%) and Medicare (1.45%).
- Sales tax - only required by certain states for service businesses.
As a service business, should cleaning business owners charge sales tax? Or does it depend on where we live?
In most cases, the answer will be, "no."
Most states charge sales tax on retail products and will exempt services from sales tax. Some states do charge sales tax for services - check with your state.
Learn more: Simple guide to sales tax
If I’m a newer, small business owner without a CPA how do you recommend I file my own taxes?
"Making assumptions on tax returns is a dangerous place to be"
Depending on the scale of your business and the confidence you have in yourself to file accurately, we typically recommend seeking professional advice before filing.
If you're just starting out (still operating as a Sole Proprietorship) and really want to torture yourself, then check out our Guide to Sole Proprietorship filing.
How has COVID changed the tax landscape for small business owners? Are there any tax credits that cleaning businesses can take advantage of?
Recently we've seen a lot of business owners reporting net losses.
While nobody likes to see the red on their income tax you can take these losses and carry them forward to future years and experience some tax savings when you start making some money again.
Below are some of the credits and stimulus packages that were made available to small businesses:
Pro-trip: Stimulus packages, PPP loans, reporting loans, and re-payments can be very tricky. It's best to contact a professional to help you navigate these new, pandemic measures.
Cleaning Business Accounting
For anyone doing their own accounting, do you have a specific accounting software you'd recommend?
When you're considering accounting software, there are a couple of questions you should ask yourself:
- What are you willing to spend?
- You can find a bunch of free/cheap, rudimentary Google Sheet template with a simple Google search. Unfortunately, that will take a ton of manual pointing and pecking.
- What's the most frustrating part of the bookkeeping process [for me]?
- Some processes, like copying over business transactions, can be painful. When that pain is too much and you're ready to get these monotonous steps automated, it may be time to consider software.
- How fast are you anticipating growing?
- You can get by with those free templates when your business is growing at a slow to a reasonable pace. Once your business transactions become too much to handle on your own that's where robust accounting software can relieve some stress.
Once you've clearly answered these questions, then you should review Bench's Top 12 Accounting Software Options in 2021 to help you make the best-educated software decision.
Any tricks or apps you recommend for managing receipts?
"Whatever you do, just be consistent."
Dropbox, Google Drive, a digital album on your phone, or even a shoebox of physical receipts are all ways to manage your receipts and keep track of your expenses.
Don't try to force something that you're not going to be consistent with. Simply choose a method that's very intuitive for you and stick to it.
To all those app nerds, here are a few more digital ways to manage your receipts.
At what point should a cleaning business owner consider outsourcing their tax/accounting needs?
How much time are you spending on your bookkeeping?
The great thing about a service business is you, most likely, already have a monetary value attached to every hour you spend cleaning a home (i.e. $45 per person, per hour).
This month, track the time you're spending on your bookkeeping and then multiply it by your own hourly rate. If that sum is larger than what a local or virtual bookkeeper would charge, then it might be time to outsource.
Other signs you may need to hire a bookkeeper can include your level of confidence in keeping accurate numbers and how complex your bookkeeping is.
How much is a fair cost to expect to pay for an accountant?
According to a survey in 2017, small businesses are spending anywhere from $1k - $5k in taxes/accounting fees annually.
The difficulty is that accountants typically charge hourly rates. So how much they're going to cost is dependent on how prepared and organized your books are.
That's another reason why it's so important to keep clean books from the beginning.
Coming to an accountant with messy books is like asking for a deep cleaning with 4 shedding dogs, multiple kids, and no energy put into cleaning in months.
You're going to pay a premium if your house isn't in order.
Pro-tip: Accountants will charge their hourly rate and then outsource it to a bookkeeper to clean it up. Clean them up yourself before going to the accountant.
What are some time-consuming tasks that an accountant can cover for a cleaning business owner?
The 2 major time sinks that a professional can help you with are...
- Bank Reconciliation - taking all your transaction history and making sure it's categorized properly.
- The Review Process - ensuring all categorized transactions that you're unsure about are accurate and within the current tax law.
Pro-tip: When you're working with an accountant try to think of it as a paid education. Take that time to learn and replicate the process so you can do it yourself.
Do I need to open a business bank account?
I was told I really need to open a separate business bank account. Now the question is, because I need all of the money I'm making for bills, do I just transfer it out from my business account to my personal account every week? Do I need to track that something special or is it fine because the business is just me? - Michelle | Maid Fresh
Think about all the transactions you make on a daily basis. This morning I filled up my corporate car's tank ($68.97), grabbed a cup of joe ($3.15), purchased some cleaning supplies from a local supplier ($49.89), and got my Giant Schnauzer groomed ($75.00).
That's just in the morning and it doesn't even take into account my pregnant wife hitting Amazon's "buy now" button like a teenager hitting their snooze button.
Without separate bank accounts, it'd be impossible to keep your business and personal expenses separate - you'd need to compare receipts with every transaction.
A business bank account gives you an idea of your expenses at a glance. This makes your life so much easier - especially as you grow and have more business expenses.
Learn More: Do I need a business bank account?
How does an owner pay themselves?
Sole Proprietors can transfer their money from the business to personal at any time as an “owner’s draw.”
When you incorporate that's when you must pay yourself a structured salary.
This can get complicated and will vary depending on business structure and industry. Seeking an accountant’s professional advice to help you determine a reasonable salary to pay yourself is key to avoiding any future penalties.
Once you’ve determined how and how much to pay yourself, then you’ll need a comprehensive payroll solution to smoothly distribute your hard-earned cash.
Cleaning Business Compliance
How can I avoid an audit?
To better understand how to avoid an audit, we need to determine what would bring about an audit?
- Statistical anomalies. The IRS has developed statistical norms for every industry and if your company's tax return flags as "outside that norm" too many times then that could raise suspicion for an audit.
- Inconsistent records. There's a mismatch between what you're reporting to the IRS and what you're reporting on your tax return
- Other people's tax returns. An issue or discrepancy that's showing up on someone else's tax return that involves you or your company can flag you for an audit
If I do get audited, what can I do to mitigate its impact?
The IRS website is a great resource for what an audit looks like and the steps you need to take when being audited.
Hopefully, you won't ever have to deal with an audit, but if you do, here are a couple of pro-tips to keep in mind:
- Be aware of the audit's due date so you find a resolution by that date.
- Use a professional and get a second opinion
- Call the IRS or State Department that gave you the notice. Speak with the representative to better understand the nature of the notice and how you can resolve it.
- Dispute notice and its findings, if necessary. Use the IRS or State Department website to better understand how to dispute this properly.
- Use ordinary deductions - when you're looking to write off certain expenses it has to be directly related to your business
- Don't force a write-off where it shouldn't be. Accountants can help clear up any blurry lines
- Ensure you have a thorough record of your business expenses and ensure they are ordinary deductions.
- Review your tax return for any mistakes
What advice would you give cleaning companies that operate solely with Independent Contractors?
First and foremost, know the differences between an employee and a contractor. Too many small businesses (and even larger businesses) have misclassified their workers and paid hefty fees for their negligence.
Take Uber for example. They made an uber-mistake in 2017 when they were found guilty for misclassifying their drivers in CA as contractors.
Second, if you pay a contractor more than $600 over the course of the year you're responsible for maintaining and filing their W9 and 1099-MISC forms at the end of every year.
Depending on how many contractors you're using this can become a full-time job.
Pro-tip: Using a good payroll company (like Gusto) will file these for you and alleviate hours of tedious paperwork.
Conclusion
Garret and Brendan's most common response to the majority of my questions was, "...it depends."
With so many constantly changing variables, it's hard to determine exactly what will benefit your unique business. The tax landscape is constantly changing and your cleaning business might look completely different from where you first started.
Having a team of experts that can help guide you is an essential aspect to avoiding simple mistakes that could cost you your business.
How can cleaning business owners get started with Bench?
Start a free trial with Bench today and they'll take a previous month of your books, do all the bookkeeping, walk you through their platform, show you how their reporting works, and how they can automate all your bookkeeping processes.
It's a small taste of what it looks like to have all your bookkeeping taken off your plate.
As a token of our appreciation for reading all the way to the end...here's a magical link to give you 30% off your first 3 months with Bench!
