Today is a great day to be an entrepreneur and I hope you are enjoying your journey as well. Welcome to another fantastic read to help bring your financial goals to reality. It’s your favorite Money Motivator – Growth Instigator, Erica Fields bringing you the keys to your financial house!!
Let’s talk about the equation to having proof of income. Yes, proof of income is a hot topic among startups and small business owners. They just don’t know it. You see, everything compliant surrounds proof: legal has evidence and financials have documentation. Being an entrepreneur doesn’t exempt you from this need to prove your financial worth. There’s a simple equation for Proof of Income and that is:
Formation + Bookkeeping + Payroll + Tax = Proof of Income
Formation – Legal Proof
Many of us have great ideas that could potentially lead to financial freedom, work-life balance or whatever your personal goals are. Often, if you’re anything like me, your mind is so wound tight around dotting the I’s and crossing the T’s before starting out. And if so, then business formation should a top priority before any business transaction occurs. You want to ensure your business entity is in the more advantageous business type for your protection and tax savings. Depending on your intent with the business, you may want to check with your secretary of state or county clerk’s office to properly apply to be a legally operating business where you live or work.
Bookkeeping – Reporting Proof
Bookkeeping provides you with transaction management, reporting, and planning tools to help you make sound business decisions. A process is also a proactive approach to tax preparation. Many of us wait until that dreaded time to gather receipts and account for income to meet the pressing deadline. Getting personal items together is burdensome alone, much less trying to do the same for a business. A bookkeeping system eliminates this nightmare by providing a day to day, month to month and annual solution to keep your business book sound and up-to-the-minute accurate.
Payroll – Personal Proof
Small business owners may feel that payroll is a medium to large company need but the minute you forget to pay someone, you are facing both legal and internal issues that could cripple your business. The labor laws are quite strict about paying employees in a timely manner and on regular basis. But there is another hidden compliance that a lot of new business owners don’t account for: how they pay themselves. Depending on your business entity type, the taxation of how a business owner is paid and which taxes are to be applied. The rate is not as simple as it seems and varies based on a number of factors.
Tax – Financial Proof
Taxes are everyone's favorite topic – NOT! But the more money you make, the more taxes they take… Maybe. And tax compliance changes with many factors such as business entity type, employees versus contractors or how an owner received his pay from the business. A business location will also determine other tax assessment such as franchise and state tax. Owning assets as a business may acquire the need to pay property tax. All of these factors contribute to the bottom line of a business income statement and influences how much of the EBIT, or earnings before income tax, are kept as retained earnings and how much of it should be allocated to business taxes.
When businesses form and expect to last beyond five years, there is a process to maintain proof of income the business itself, the owners and those that provide services to carry out the mission. You must form the business legally, account for all transactions, pay your employees and comply with tax laws. All of these items not only keep you compliant, but they provide you with a sound paper trail that is often referred to as a Proof of Income. Having these items in place will help further your goal of financial freedom.