Living in the United States, you are probably familiar with the mountain of receipts for taxes you receive throughout the year. When tax time comes around, you'll need to keep records of those receipts so that you can get your tax returns and maximize your tax deductions.
With that in mind, how do you know which receipts should stay and which ones should go? Do you have to keep all of the receipts, or should you only hang on to a select few? In this article, you will be able to find out more.
A business tax receipt is a receipt that you get after buying anything for your small business. For example, let's say that you purchase a desk for your new office. In this case, you might want to keep the receipt, as it can be deductible when you are filing your taxes.
Receipts are very important when you are filing for tax returns. They act as proof that a certain expense was actually business-related. When the day comes, if they're used accordingly, you should be able to obtain your tax returns.
Note: If you want an app to automatically organize and store all of your receipts for tax deductions, sign up for Bonsai Tax today. On average, users of our receipt organizer saves ~$5,600 from their tax bill. Sign up for a free trial today.
There are other essential documents that you might want to keep as a backup as well. These include the following:
If you keep these documents at hand, they may be useful if the IRS attempts an audit of your records. These can be fairly stressful for anyone, but as long as you provide the right documentation, there should be no need to worry.
Here is a good piece of news for you: not every receipt you get is a receipt for tax return. Therefore, you do not need to hang on to every slip that gets in your hand.
As a general rule, you don't need receipts for payments under $75. The only exceptions to this are costs for lodging - but let's face it, who books a place for less than $75?
With that in mind, several costs may be deducted from your gross income, including:
By the time the deadline for tax return comes, you might want to save the receipts for medical expenses. Not only should you hang onto yours, but onto those of your spouse and children as well.
The IRS provides several deductions for medical co-pay and premiums - exempting you from federal tax. You can even receive a standard deduction for things such as contacts, glasses, and breast pumps.
With that in mind, here are some expenses that are tax-deductible:
Keep your documents at hand for at least six years. They might be able to prevent any unpleasant tax situation from occurring.
While it is not technically a tax deduction, you may be able to receive credit for childcare costs. These expenses are only provided if both you and your spouse depend on them so that you may go to work.
Here are the costs you may receive credit for, as long as you can provide the receipts:
Both parents need to earn income, unless one of them is disabled or is a student following courses full-time. Also, this does not include education costs; it's limited strictly to caring for the child.
Even if you are self-employed, it does not mean you are not eligible for tax deduction. Self-employment, as long as it is recorded, is considered a legal business - which means you may deduct your taxes.
For example, if you are self-employed, then you'll likely have to pay for supplies, materials, office costs, utilities, and many more. Some of these costs are considered tax-deductible and can help you save money by the end of the tax year.
As a result, if you are self-employed, you might want to hang on to all the receipts concerning your business. This can include gross receipts, purchases, necessary payments, assets, as well as gift and entertainment expenses.
Even something as simple as canceled checks and deposit information should be kept for tax purposes. Make sure you don't throw them away from the very start.
You may have donated food or clothing to a local shelter. Or perhaps you donated cash for veterans. In that case, you should know that your taxes for those contributions are deductible.
However, there is a catch here. You can only get a tax return if you make a contribution to a tax-exempt charity organization. An organization with a 501(c)(3) status is certainly deductible.
That being said, other organizations may be exempt from tax as well, even if they have another status. To be sure on the matter, you might want to check with the IRS.
Travel costs can also be deducted - but once more, there is a catch. It has to be work-related for you to get your tax return. For example, if you decide to take a trip to Disneyland with your family, you cannot deduct that expense from your taxes.
However, if that trip to Disneyland happens because your boss told you to go there, or because you are meeting a business partner, then you may be eligible to deduct the costs from your taxes.
In this regard, we recommend you use a trip expense tracker to automatically keep all of the receipts concerning your trip. When the time for viewing your tax records arrives, you may use them to have your taxes deducted.
Keep any receipts concerning flights, fuel, accommodations, meals, and parking. Other travel-related costs may also be exempt from tax, which is why you might want to get a tax advisor to help you. They will know more matters concerning taxes than the average person would know.
The IRS suggests that, in order to avoid any issues at tax time, you may want to keep receipts for taxes for at least three years. With that in mind, you shouldn't hurry to throw away the income and expenses receipts immediately after that time passes.
For example, let's say that, at some point, you appear to have underpaid your taxes by at least 25%. It might be true, or it might be an error. However, should that happen, the IRS can track your tax records as far as 6 years.
The receipts you keep for taxes don't have to be stashed into mountains of paperwork. Are credit card statements sufficient for the IRS? Well, paper receipts used to be a standard, but not anymore. These days, the chances are very high that your records are just one click away.
For example, the IRS may mine your bank account and your credit card for any potential expenses. This is why it is recommended you keep a separate account for your small business; you'll know that every expense there was work-related.
For safety purposes, if you wish to close a business-related checking account or credit card, you may want to save your bank statements. This way, you won't risk losing valuable information. A PDF document does not take as much space as a file drawer, so it should not inconvenience you in any way.
When you have taxes to file at the end of the tax year, you might be overwhelmed by the number of receipts that you'll have to present. With so many around, it can be very difficult to keep track of them.
By being organized with tax receipts, you should be able to make your job much easier for you in the long run. Here are some tips you could follow:
The first thing you should do when organizing your receipts is to keep them in the first place. You might be tempted to throw them away, but keep them for at least 6 years.
That's right, if you only keep the receipts for one year, it won't be enough. If they ask for proof of expense, you need to be able to give them at all times. Whether it's a digital receipt or a hard copy one, hang on to them for as long as possible.
We recommend you try Bonsai's 1099 expense tracker to automatically organize your purchases and save all your important deductions. The software will categorize and organize all your
Many people, particularly new business owners, use the same account for both personal reasons and business transactions. Still, it's easy to lose track of it when you can no longer tell which is which. If you mistake a business transaction for a personal one, you'll be missing out on returns you are actually entitled to.
By having a different account and credit card for these expenses, it should be much easier to keep track of them. Plus, when those accounts only have business expenses on them, you might be able to get more benefits and returns.
As you probably know by now, entertainment and meal expenses for business purposes are deducted as well. However, it might not be easy to remember which meal was personal and which one was for business.
To make it easier for you to keep track, you might want to write down on the receipt the details of the meeting. Who you met, why you met, things like that. This way, you'll have an easier time staying organized.
Very often, most of the difficulties in tax organization appear because you lost a receipt, it faded, or other reasons like that. Plus, when there are too many of them, eventually they begin to take too much space. This applies mostly to receipts you've been hanging on for years.
This is why a good piece of advice would be to go digital with your receipts. In fact, many tax deduction tracker tools are digital. Rather than packing a couple of boxes in a drawer, you can simply keep them in a folder from your computer. Just make sure that you back them up on an external memory stick or a cloud account, in the event that something happens with your computer.
When organizing receipts for taxes, think of yourself as a student who is getting ready for an exam. If you do all the studying and reviewing on the night before the exam, the chances are that you won't remember much of it when you'll have to present your idea.
The same thing applies to receipts. If you just stash them randomly in the receipt box and just leave them there for months, you won't know what receipt goes where. At some point, your memory of the details can fade.
This is why you may want to review your expenses once a month. On average, it'll just take about 30 minutes of your time. Review your receipts, put them into categories - and when the tax year is over, you'll already know where every receipt is supposed to go.
Tax calculations can be fairly intimidating, especially if you are still new to this world. Still, as long as you stay organized, it should not be that complicated either.
Before throwing away potential receipts for taxes, think about whether they qualify for tax deduction or not, and whether you held on to them long enough or not. It might seem to you that it's taking drawer space, but it's better to be safe than sorry. if you have any questions about how to organize receipts, deductions or documentation, contact a tax professional.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?