About Record Keeping and Taxes

Federal income taxes, state income taxes, city business license tax, sales tax, payroll taxes, wow!  Taxes and recordkeeping can be quite a load.

Your record keeping will make or break your business success.  Setting your books up correctly from the start will make everything easier when it becomes time to prepare your taxes.

Here are some keys to success:

  1. Open a separate checking and savings account for your business.
  2. Get a new visa card strictly for your business use.
  3. Keep all of your receipts, job invoices and bank statements.
  4. Purchase a box of file folders to store your receipts, invoices and bank statements.  Keep them in a file drawer or file storage box organized one folder for each month.
  5. Keep separate files for insurance, sales tax, business taxes, and licensing.
  6. Maintain mileage logs reflecting odometer readings and job names.
  7. Use a computer based bookkeeping system and set up your chart of accounts as shown below.
  8. Keep on top of your bookkeeping.  Don’t let it pile up!
  9. Be aware of the different sales tax rates you may have in your area.  In my immediate vicinity there are four different sales tax rates.  Because of this, I keep track of my sales by area. This helps tremendously when the time comes to complete the sales tax return!

I do all my own bookkeeping and file the returns myself.  I use Quicken® because it is inexpensive and easy to use.  Any bookkeeping system should help you successfully track income and expenses and easily complete your taxes.

Do I Need an Accountant and a Bookkeeper?

Unless you’ve had a lot of experience with taxes, you may want to have a tax preparer complete your first year’s tax returns.  In subsequent years you can often prepare your own taxes by following last year’s example.

I have found that after the chart of accounts has been set up properly your bookkeeping system simply requires maintenance. Bookkeeping software has greatly simplified this once difficult task and has made it possible for someone like myself, who has moderate bookkeeping and tax experience, to do it myself.

Alternatively, you may have a spouse or partner available to do the bookkeeping.  If their time permits, in addition to preparing the deposits and paying the bills, they could answer incoming phone calls, contact clients regarding scheduling and make follow-up calls.  Your time would be freed up to make estimates and complete more jobs.  This arrangement could ultimately translate into better customer service for your clients and more income for you both.

The most important thing is that the bookkeeping and taxes be prepared accurately and on time.  Accountants and tax preparers are called experts for a reason, bring them in if you need advice and to save yourself time and aggravation.

What Should My Chart of Accounts Look Like?

Since the 1040 Schedule C is your basic profit and loss statement, I set up my chart of accounts to match the Schedule C as closely as possible.  You should need very few categories that aren’t listed on the Schedule C.  If your state has a sales tax and you have differing tax rates in your area you should break down your sales by tax region.  Also, keep track of tax paid on materials purchases by tax region.

Chart of Accounts

Income Accounts

Labor Sales (Broken down by sales tax region)
Materials Sales (Broken down by sales tax region)
Sales Tax Collected (Broken down by sales tax region)

Expense Accounts

Car and Truck
Contract Labor
Equipment Rental
Legal and Professional
Non-Tax Paid Purchases  (Broken down by sales tax region)
Office Expense
Purchases: (Cost of Goods Sold)
Supplies (Not Cost of Goods Sold)
Tax Paid Purchases  (Broken down by sales tax region)
Taxes and Licenses

Employee Wages (If you have workers)

Federal Tax Withholding
SDI (State Disability Insurance)
State Tax Withholding

Do I Need to Keep a Mileage Log?

Yes.  At the time of this writing, IRS Form 2106 instructions (for 2008 returns) had this to say about record keeping for your vehicle: “You cannot deduct expenses for travel…unless you keep records to prove the time, place, (and) business purpose…of these expenses.”

I keep a small spiral notebook in the visor of my truck.  Each morning I list the names of the jobs I’ll be doing and the current odometer reading.  As I go from job to job, I record the odometer reading.  At the end of the month, this page is torn from the book and added to the file that I keep for each month’s receipts.  (Every month has its own folder.)  When matched with invoices these logs serve as my written record of mileage and business purpose.

In the same spiral notebook; record the money you spend for gas, insurance, registration, maintenance and repairs of the vehicle.  Save your receipts.  At year end you will decide whether to take the standard mileage rate or actual expenses on your taxes.  Check the tax codes for limitations and for the current mileage deduction rates.

About Invoicing and Billing for Handyman Work

To promote a professional image and set yourself apart from your competition, you must use a professional looking invoice.  Customers appreciate having a paid invoice and you will find that all commercial work will require it.  The invoice that I use carries my logo, name and address, and has a place for the customer to sign that they have accepted the job as completed.  I leave a copy with the customer and keep the signed top copy for my files.

You can find handyman invoice templates here.  Print out the template; paste your logo at the top left and your name and address into the top right box and take it to your local full service copy store.  Have them create 2 part NCR (no carbon required) forms.  You should end up with 200 invoices for around $50. This is a real bargain when you consider the level of professionalism you just added.  If you will be doing commercial work, you should consider having the invoices printed with sequential numbering.  The numbering can be done at the time the NCR forms are printed.  Aluminum invoice boxes can be purchased at office supply stores to hold your invoices.

Will I Get More Business If I Accept Credit Cards?

I haven’t had a single customer ask if I accept credit cards. I don’t think they expect me to.  But I do offer the option and I think it brings me more business.

There are some compelling reasons to invest the money it takes to have a merchant account.  People will often have you do more work if they know you will accept their credit cards.  It is also great to be able to offer the credit card option to the rare customer who, after the work is done, says that they don’t have enough money.  If you have a merchant account you can let them charge it.

Secondly, by letting your customers know that you accept credit or debit cards you will set yourself apart from your competition.  Every advantage helps!

Here is the least expensive way to accept credit cards.  Open a Paypal business account.  Your customers can pay with their charge cards even if they don’t have a Paypal account.  The fees charged to you are minimal and are strictly on a per transaction basis.  There are no monthly service fees.  Your customers could also pay with their Paypal account.  Visit the Resources and Helpful Links section on this website for more details.

What About Billing Customers for Completed Work?

If it brings you more business, just say “Yes.”  This has come up in three different situations.  When I’ve done commercial work, work for a property management company or while doing pest repairs for real estate agents.

The problem with billing customers on account is the time delay in receiving payment.  Commercial accounts often take up to 90 days to pay and require extra paperwork when requesting payment.  Completed pest work is often paid through escrow when the house is sold and can take 30-45 days for receipt.  In all cases, the submitted bill has proven to be as good as money in the bank but you must allow for the extra time.

What About Preliminary Notices and Mechanics Liens?

Here is a definition for you:  A Preliminary Notice contains language which describes the details of the contract and who the interested parties are to the transaction.  It also makes a statement to the property owner that a mechanics lien could be placed on the subject property, what the consequences of such a lien placement are, and what their remedies would be.  The placement of a Mechanics Lien helps to ensure that you receive payment for your services.  The owner of the property will not have clear title until the lien is released.

I’ve never filed a Preliminary Notice or a Mechanics Lien for work that I’ve done as a handyman.  Would I be sorry that I hadn’t?  Yes, if I’d done work for a homeowner or a contractor and never got paid!

As a handyman, we continually work under the assumption that we will be paid for the work that we do.  If payment is never received, the homeowner has great leverage against us.  It is usually impossible to repossess the work that we did.

A Mechanics Lien is our way of insuring that we receive payment.  The Preliminary Notice is the first step in the process and it lets the homeowner know that a Mechanics Lien could be filed.  This in itself is often sufficient to prompt the homeowner to pay for the work making the actual filing of the mechanics lien unnecessary.

Check your local authorities for details.  Each state has its own filing requirements, time restrictions and laws.

Should I Incorporate My Handyman Business?

What legal business structure should I choose?  The three most commonly chosen legal business structures are Sole Proprietorship, Limited Liability Company (LLC), and S Corporation.  Because I am not a lawyer or a tax attorney I am not qualified to recommend one structure over another.  I can only tell you what I have done and strongly recommend that you consult with an attorney and an accountant before making your final decision.

I chose the simplest and most basic structure you could set up, with all of its benefits and pitfalls – the Sole Proprietorship.  As a Sole Proprietor income is reported on the individual income tax return (1040, Schedule C) so there is very little additional paperwork.  If you choose this option you represent the company legally and fully and you are personally liable for all debts and actions of the company.  If something went drastically wrong with a job you completed your assets could be at risk.  This makes it very important to carry sufficient liability insurance.

I suggest you seriously consider forming an LLC, particularly if you have a lot of personal assets and/or will be hiring employees.  Since the handyman trade could be considered a high risk industry, many handymen choose this option.  This structure affords the members (owners) the liability protection of a corporation.  Unfortunately, this liability protection may not be complete as you could still be held personally liable for your actions if you have signed a personal guarantee.  Personal guarantees are often required by banking institutions if you get a business loan.

A third option, often chosen by contractors is the S Corporation (Small Business Corporation).  This structure allows the profits to be taxed in a way similar to a Sole Proprietorship avoiding the double taxation problem inherent to the corporate system.  As with the LLC, the presence of a personal guarantee would leave the owners personally responsible for debts.

For inexpensive legal advice I became a member of Pre-Paid Legal Services.  This is an extremely low cost legal service that I have found to be a great asset.  For less than $20 per month you have legal advice that is just a phone call away.  It’s a lot like having a lawyer on your payroll!  Pre-Paid Legal associates are easy to find and they will be glad to sign you up.

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