Organizing your payments requires setting up an accounting system and retaining proof of each payment. By doing this for your at-home business, you can better understand your expenses and save time when you need to file your taxes. Also, you'll have at your ready proof of your business deductions should the IRS audit you.
Payment Accounting System
Decide on your Accounting System
Choose a tool that helps you keep track of payments you need to make and the payments you've already made. Fundera notes that a spreadsheet is a good tracking tool for home businesses that don't make many payments.
If you have a high number of expenses and lots of vendors, though, you're better off investing in a full-fledged accounting system like QuickBooks or Xero.
Recording Bills and Payments
In your accounting system, capture the following information:
- Vendor name
- Invoice number
- Account number
- Expense Type
- Invoice date
- Payment due date
- Current payment status
- The account or card you used to make the payment
If you're juggling a lot of payments, follow the accounts payable method. To do this, enter bills as soon as you receive them and mark the payment status as unpaid. Once you've made a payment, mark the bill as paid.
If you don't have many expenses and you tend to pay bills right away, just enter the bills into the spreadsheet when you pay them and mark them as paid.
In addition to accounting for payments, you also need to retain proof that you made each payment in case you're audited. According to the IRS, supporting documents you should retain to justify expenses include:
- Credit card receipts and statements
- Bank account statements
- Canceled checks
- Petty cash slips
Keep a physical file of invoices you receive, sorted by vendor name. If you receive invoices electronically or have a scanner, you can keep the file on your computer instead.
You can include a receipt for payment with each invoice if you'd like. However, as long as you're diligently noting how you made each payment in your spreadsheet and the date you made it, it should be easy enough to pull up your bank account record and find proof of each payment.
Making all your business payments on a dedicated credit card makes it easy to track expenses and find proof of payment.