How to Keep Good Records for Tax Time When Working From Home

by WorkFromHome on September 23, 2011

As someone who wants to work at home, it’s necessary to keep good financial records for a number of reasons. Aside from organizational purposes and accountability, you’ll want to keep records because it will allow you to maximize your tax savings and minimize your risk of getting on the bad side of the IRS. There are a number of things that you’ll need to track when it comes to the cash flow of your home business, but it’s also important that you keep smart backups of your information and that you keep all of your financial records safe. Here we’re going to walk you through everything you’ll need to know to keep financial records for tax purposes the smart way.

Tracking Income

The most basic aspect of your finances that you can track is your income. Working from home requires you to keep up with your own income, which is different than relying on your employer to perform this task. Whether you receive payments in person with cash or you use an electronic wallet like PayPal over the Internet, the critical thing is to create a paper trail that you can use to prove your income. This means you should have paper receipts for all income you receive in cash forms. You should also print out copies of all of your information from receiving payments online if you keep paper files. A summary of this income information can be kept in a spreadsheet for informational purposes, but the proof should be filed way and available at any time.

Business Expenses

Anything that you spend money on for your home business can lead to potential tax savings. However, if you don’t have good records like receipts and invoices, you’ll have a hard time proving that these expenses actually happened. A great way to capitalize on tax savings from business expenses is to section off a portion of your home where you work as your office. This home office will allow you to count portions of your electricity bill and Internet bill as business expenses, leading to tax savings. The key to making all of this work is to keep detailed records of everything you spend money on for your business. If you have an accountant, you’ll want all of these records ready for your accountant when tax time comes around.

Keeping Summary Spreadsheets

For both your income and your expenses, keeping a summary of all of your financial transactions in a spreadsheet is a great way to stay organized and on top of all of your financial paperwork. People who work from home have to manage this information for themselves, so it’s critical to keep it organized in a way that’s easily accessible. When you’re organized and keep good records, it’s difficult to make costly mistakes that the IRS will jump on when you file your taxes.

Protecting Your Paper Files

A good investment for anyone who is working from home is a scanner or a printer that has a scanner built in. The reason that owning a scanner is so critical for home business owners is that it allows you to keep digital copies of all of your paper receipts, invoices and other records. It’s much easier to keep computer files organized than it is to keep up with hundreds or thousands of papers, and it takes up less space. Additionally, it’s easier to make backups of computer files for safe keeping than to photocopy all of those papers and to have them in storage.

Backing Up Your Records

If your house burns down and all of your records are gone, the IRS will still want proof of all of your business income and expenses. In light of this, having a good system for backups has to include protection against fire and other natural disasters. If you have digital copies of all of your financial records, which you should, then it’s easy to make a copy of these records on a CD, DVD or flash drive. The media holding your backup files can then be stored in a small, inexpensive, fireproof safe that you can order over the Internet or find in a department store. For under $100, you can have a fireproof and disaster-proof digital backup system that will protect you and your business in the craziest of circumstances.

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