Small Business Bookkeeping (Dear Teenager – 2 of 4)

Dear Teenager,

Congratulations on your decision to go into business for yourself! Whether it’s babysitting, dog walking, lawn maintenance, or any of the multitude of ways you’ve decided to monetize your unique skills/abilities – you’re bound to have a few questions on how to report your income to the IRS and your state, if applicable. To help you along your journey, I’ll discuss the nuts and bolts of small business bookkeeping. I’ll also walk you through the Schedule C (Profit and Loss From Business) which you will file with your annual income tax return.  

As you embarked on your journey developing your new company, you probably heard many accounting terms you’ve never heard before.

In case you didn’t have an opportunity to ask, here’s what a few of them mean: 

• Income: Money received for labor performed, products sold or investments held.  
• Gross Receipts: The total amount of cash received during the year. This can differ from income depending on your accounting method.
• Expenses: The money spent on the operation of your business. This includes supplies, advertising, etc.
• Accounting Method: The chosen method of presenting your company’s financial information. There are a variety of approved methods of tracking/reporting your accounting records. The two most prevalent methods are the Cash Method and the Accrual Method.
• Cash Method (also called Cash Basis): This accounting method reports income when cash is received, regardless of when the service is provided, or the sale occurs. Similarly, this method reports expenses when paid, regardless of when the debt was incurred.
• Accrual Method (also called Accrual Basis): This accounting method reports income when the service is provided or the sale occurs, regardless of when payment is received. Similarly, this method reports expenses when incurred, regardless of when the debt was paid. This method utilizes these Balance Sheet accounts: Accounts Receivable and Accounts Payable. They account for the timing difference between the issuance or receipt of cash and the related transaction.
• Self-Employment Tax: This consists of Social Security and Medicare taxes. In W-2 employment situations, these taxes are split with the employer paying half and the employee paying the other half. The full amount is assessed as self-employment tax for self-employed individuals.

As you begin operating your business, you will start generating income and paying expenses. It will be very important to keep careful track of the money you receive and the expenses you pay. When you file your tax return, you will use Schedule C to report your income and expenses to the IRS. Here are some of the various types of deductions which can reduce your taxable income and help keep more of your earnings in your pocket after tax time!  

Schedule C

• Office Supplies & Equipment: Computers, printers, and other office expenditures are generally deductible.
• Vehicle Expenses: If you use your car for business purposes, you have a choice to make. You can deduct either the actual expenses (gas, repairs, insurance) or use the IRS standard mileage rate. You will need to keep careful records of the date, miles driven and business purpose of the trip in order to substantiate this deduction if you choose to use the standard mileage rate, which is $0.70 per mile in 2025.
• Employee Salaries & Benefits: If you hire employees to assist with the operation of your business, employee wages, health insurance, and other benefits are generally deductible.
• Professional Services: Fees paid to accountants, lawyers, and consultants are deductible as business expenses.
• Supplies: If you need to buy supplies in order to make a product to sell, this is deductible as ‘Cost of Goods Sold.’

You must keep accurate records and receipts to back up any deductions you claim. In the unlikely event of an audit, you’ll need to provide proof of the expenses you’re claiming. It is recommended to scan receipts and save electronically. The IRS generally has up to 3 years after you file your tax return to request proof of certain transactions. Receipts can lose their legibility over time and an ounce of prevention in scanning these documents can go a long way to protecting your right to claim the deduction down the road!

Navigating the accounting and tax considerations of your small business can be overwhelming. With some upfront mindfulness and careful recordkeeping, you will save yourself a mountain of work come tax time. And remember, you’ve always got yourself a friend in finance if you have questions, just reach out and ask!

Congratulations on your small business and may your venture be successful!

Best,

Your Friend in Finance