tax question

[Lothlorien]

Okay, so I've been an independent contractor this year...for the whole year. I keep an excel file that I made up, tho I'm not very adept at excel, at all. I've kept a running tab of all the jobs I've done and then highlight them when I get paid. So far, I've been paid for everything except for about 17 jobs that I did in December, which is not that unusual, because most of these companies pay 30 to 35 days out.

My question is....even tho I did the work in December of 2012, they are actually paying me in January of 2013. Which year should I claim this income? This is going to be an issue if I have to claim this in 2013, because I'm not really set up this way. I'll have to redo some stuff. Plllllluhh.

I just bought a job-specific software program to take care of all this for me for 2013 and started using this for my first job of 2013, so I won't have this issue next tax season.

 

[InsaneCdn]

I could tell you "our" rules... not that they are the same LOL.
But in general, accounting principles dictate that revenue is accounted for when billed, not when paid. There is provision for uncollectable receivables, but the assumption is you will get paid, so cash flow isn't the key factor. Unless you're in "fishing or farming" (two occupations here that "have" to do accounting on the "cash flow" basis)

 

[Lothlorien]

Ooooh, I was hoping someone would tell me that.

 

[Lothlorien]

But I just realized you are Canadian.....so, I will await the ruling from the Yankees

 

[DammitJanet]

There is a term....let me think. Depends on how you are setting up your business accounts. Oh dear, let me get my business head on straight, do remember I graduated in the dark ages...lol.

 

[DaisyFace]

There are two different accounting methods for small business - cash and accrual. If you are operating on a "cash" basis - you count the income when it is actually received and bills as they are actually paid. If you are operating on an "accrual" basis - you count the income when it is billed and the bills when you receive them.

Hope this helps!

 

[DammitJanet]

Ahhh...yes, cash method or accrual method. That is it...at first I was thinking FIFO which is first in, first out which is for inventory...lol. Not nice to tax my brain when I first wake up Loth!

Either cash or accrual is fine for a business as small as yours. Cash method means you count your income when you get it and your expenses when you pay them. Accrual method means you count your your income when you DO it and your expenses when they are incurred. This means you have to run Accounts receivable and Accounts payable.

 

[Signorina]

The accrual basis is the most widely accepted basis for small business. So, if you billed these customers in December, you claim it as 2012 income. But the same is true for any expenses you incurred before the end of 2012 that you will be billed for and/or pay in 2013 - phone, office supplies, postage, etc. And if you have customers who are lagging in paying their bills - don't forget to write them off as doubtful accounts allowance or bad debt. If and when they pay their bills in 2013; you can count it as 2013 revenue if you wrote it off in 2012.

 

[DammitJanet]

Accrual is most common for businesses but you are a sub. Most subs do cash. Do you get 1099's?

 

[InsaneCdn]

switching from "cash" to "accrual" is really difficult.
If there's any chance in the future that you need "accrual" - or if the software you are going to be using is "accrual" - then use the accrual basis now.

 

[Lothlorien]

I do get 1099d

 

[Signorina]

I would stick to reporting the income you received on the 1099's - and stick with cash. Just make sure you only report offsetting expenses and fees that were actually paid in 2012- and do not include anything you will pay in 2013 - (with the exception of taxes.)

 

[DammitJanet]

Yeppers.

Lordy...havent had to think like this in a LONGGGGGG time! Makes me miss it. LOL