Categorizing your income correctly
Greetings business owners and money makers!
Let’s have a little chat about our income and how to properly account for it.
When tax season arises, you will want to make sure that you’ve claimed the correct income. This could be the difference in you owing more or less in taxes for the year. It could be the qualifying difference in being approved for a loan or persuading investors etc.
Let’s take a moment to discuss the different types of income and how you may want to categorize them:
Sales Revenue
This is your normal income made from the sale of a service or product that your business offers. Make sure this categorized as Sales or Sales of Product.
Earned Income
This is non-business related income earned from your 9 to 5 employer(s); both part-time and full time. This income should be categorized as W-2 Income. Be sure to keep your W-2 income separate from any business income. Make sure you file the correct tax form for the correct type of income.
Interest Income
If you have a savings account for instance, every other month or quarter you may earn $.01 cent — lol. That one cent is not sales revenue, it should be categorized as Interest Income.
Refunds/Credits
Those moments when we are not happy with our purchases and send them back. A few days later our account balance goes up. This as well is not sales revenue for your business and should be categorized accordingly — I categorize my transactions as simply Refunds / Adjustments.
Cash Back Rewards
Most banks are participating in this feature. When you swipe and use your card at certain restaurants, they give you back a percentage of the sale. I categorize this specifically as Cash Back Rewards.
Transfers
This is one I come across more than often. Transfers between accounts being counted as income. If you use QuickBooks, then you have the capability to identify transfers accordingly. If you aren’t using any system or software, just make sure that you exclude these transactions as revenue. Funds from your personal account to business are Owner Investments. Funds from your business account to personal are considered Owner Withdrawals.
Loans
When you receive a loan deposit, it’s imperative to identify this properly. You don’t want the IRS thinking that your business made $10k when it didn’t — As well, you’ll want future underwriters to be able to identify your sources of income. I categorize loans as Loan Income or Gifting if the loan was given by a personal acquaintance. If you are using a software, you are able to identify that it is a loan and it will show on your Balance Sheet.
Dividend Income
Are you an investor? Are your investments making money while you sleep? This is great, but make sure that you categorize this correctly. Dividend Income is a good way to categorize this type.
I want to be clear that being transparent within your bookkeeping ensures that your business and your personal finances are tracked correctly. This will make it simple for your accountant, bookkeeper or tax prep agent to assist you without any discrepancies as well as be able to identify what’s going on on paper.
Also, to claim incorrect revenue is illegal… so there’s that.
Onward and upward good folk!
Other types of deposits to be sure to track properly:
Winnings from gambling and lotto
Paybacks
Inheritance
IRS Refunds
Student Loans
Gifting / Love Offerings
Alimony / Child Support
Disability / Pensions