Two questions frequently asked by Network Marketers are "What kind of business records do I have to keep for the IRS?", And "What kind of record-keeping system should I use in my business?"
Operating a business without paying attention to record-keeping is a recipe for disaster. You may be thinking "who cares-I hate bookkeeping and tax details, and if my business takes in enough money, it will not matter anyway … I'll just pay someone else to clean up my record-keeping later!"
Not so fast, my friend! A good record-keeping system is critical for preparing your tax returns. And if you do not prepare your tax returns with care, you'll not only pay too much in taxes, but also increase the risk of a dreaded IRS audit. If an auditor finds insufficient records or significant mistakes in your books, it can disallow discounts, plus impute hefty fines and penalties, possibly forcing you out of business and wiping out your life savings as well.
The good news is that the IRS does not prescribe one particular system of keeping records that must be used. No two businesses are alike, so there's not one uniform fashion when it comes to record-keeping. Any system is okay, just as long as it paints a true picture of your income and expenses.
You can keep your records either manually, or with a computer.
The manual system works fine for smaller home businesses and cost only $ 10 to $ 20 a year for a ledger book and some manila file folders. I recommend a Weekly Bookkeeping booklet, where you can record your income and expenses on a regular basis, and then update the year to date totals, by expense category, at the end of each week. This way you always have an up to date statement of Income and Expenses, or "Profit and Loss" report, at your fingertips. In addition to the weekly record book, keep a check register, an adding machine, a mileage log, and an accordion file close by for filing receipts. Organize your receipt by category; Advertising, Travel and Entertainment, Cell phone, and so on.
A computerized record-keeping system works on the same principles as the manual system, however, the computer automates the process. You can use spreadsheets to record your residual income and bonus checks, and use separate columns to categorize your expenses.
An even quicker way to categorize your expenses is to use a software program such as Quicken or QuickBooks. These programs work like a checkbook register, with each income and expense transaction typed in as you go. A Profit and Loss report can be printed in a snap-assuming you do have some basic accounting knowledge. But beware. A software program is no substitute for a basic understanding of debts and credits. Often the year-end reports that I see produced from accounting software programs is best summarized by the statement "Garbage in-Garbage Out".
If you're comfortable at the computer and have basic bookkeeping expertise, good for you! But you do not need computer software to keep accurate records. At minimum, categorize your receipts (auto, office supplies, advertising, etc) in manila folders or an accordion file, and total them up by category at tax time. Staple the adding machine tape to each folder or stack of receipts. Either system is okay as long as it paints a true and accurate picture of your income and expenses.
Network Marketing business owners should get a copy of IRS Publication 583, "Starting a Business and Keeping Records", for more details on IRS record-keeping requirements.
Jim Flauaus, President / CEO of Anchor Accounting & Tax, is a Network Marketing / MLM tax specialist. He connects with Home Business owners and Network Marketers across the country and around the world via phone, email, and fax to help them plan and prepare their income tax returns.