How to Manage Accounting for Your Small Business (Sole Proprietorship)?

What Are the Obligations of a Small Business? What Must You Declare as a Sole Proprietor?

When you operate as a sole proprietor or single-member LLC in the U.S., you’re responsible for tracking all income and expenses. You’ll typically file taxes through your personal income tax return (Form 1040) along with a Schedule C to report profits or losses. If your net earnings from self-employment exceed $400 for the year, you’re required to pay self-employment tax (covering Social Security and Medicare).

You’ll also likely need to:

• File quarterly estimated tax payments with the IRS if you expect to owe more than $1,000 for the year in taxes.

• Keep up with any state and local tax requirements, including potential sales tax or licensing obligations.

Do You Need to Pay Sales Tax or Other Local Taxes?

Sales tax in the U.S. is determined at the state (and sometimes county/city) level. Whether you need to collect and remit sales tax depends on:

• Your state’s rules on the types of products or services you sell.

• Whether you have a nexus (significant presence) in a given state.

Some states apply sales tax to services; others don’t. Make sure you check the rules in your specific state. You may also need to register for a sales tax permit once your business activity surpasses a certain threshold.

How to Issue Proper Invoices?

Even as a sole proprietor, it’s important to issue correct, professional invoices for each sale or service:

• Include your name and address (or business name if you have one).

• Provide your EIN (Employer Identification Number) or Social Security Number (SSN) if required.

• Add the date, a description of products/services, and the total amount.

• Show applicable sales tax if you are required to collect it.

• Include your payment terms and accepted payment methods.

Many freelancers or small business owners rely on accounting or invoicing tools (e.g., QuickBooks, FreshBooks, Wave) to automatically generate and store invoices.

How to Keep Your Accounting Organized as a Small Business Owner?

Maintain a Record of Income and Expenses

Every U.S. small business owner should keep an up-to-date record (often called a “book” or “ledger”) of all money coming in and going out. This ledger typically includes:

• Income ledger: Dates, amounts, client/customer names, and payment methods.

• Expense ledger: Dates, amounts, vendors/suppliers, and nature of expenses.

This is easier to do if you use a spreadsheet (e.g., Excel, Google Sheets) or specific accounting software. In case of an audit, you’ll need clear and transparent records.

Keep Supporting Documents (Receipts, Invoices, Bank Statements)

You should keep a digital or physical archive of:

• Client invoices.

• Receipts for purchases made for the business.

• Bank statements for a dedicated business account.

The IRS typically recommends retaining records for at least three to seven years, depending on the type of document and potential audit windows. Storing them in a cloud service like Google Drive, Dropbox, or a project-management platform (like Notion) is a convenient way to organize everything and ensure nothing is lost.

Day-to-Day Management of Your Small Business Accounting

Accounting for a small business can be simpler than for larger corporations, but it’s still essential to track everything accurately to:

• Prepare quarterly and annual tax returns (IRS Form 1040, Schedule C).

• Keep an eye on your revenue and watch for state or federal thresholds that might affect your tax obligations.

• Forecast expenses and manage cash flow so that you’re never caught off guard by large bills or seasonal dips in income.

Most self-employed individuals choose tools like Excel, QuickBooks, or FreshBooks. If you prefer an all-in-one solution, you can also integrate Notion with your bank statements and receipts to keep contracts and supporting documents in one place.

Should You Open a Dedicated Bank Account?

While it’s not always legally required for sole proprietors to open a separate business bank account in every state, it’s highly recommended for clarity and professionalism. A separate account helps:

• Prevent mixing personal and business finances.

• Simplify end-of-year tax filing, since you’ll have a clear record of business-only transactions.

• Automate certain tasks (many modern banking apps auto-categorize expenses).

In some cases, if you register as a single-member LLC, your state might require or strongly advise maintaining separate accounts to preserve your “corporate veil.”

Extra Tips to Keep Your Accounting Clean as a Freelancer or Small Business Owner

1. Keep to a Monthly (or Weekly) Routine Dedicate time each month (or even each week) to update your ledger, categorize expenses, and create/send invoices. Consistency prevents a giant backlog.

2. Automate Where Possible Tools like QuickBooks and FreshBooks can automatically sync with your bank account. This reduces manual data entry and the risk of errors.

3. Watch Out for State Thresholds Different states may impose additional requirements once you surpass a certain revenue level. This might include collecting sales tax, registering with your state’s department of revenue, or acquiring a local business license.

4. Keep Personal and Professional Funds Separate Even if it’s not strictly mandated, always keep a distinct checking account or credit card for business transactions. This makes tax time infinitely easier.

5. Store Both Digital and Paper Copies The IRS allows digital record-keeping, but having redundant backups (both electronic and paper) helps in case of technical issues or audits.

6. Track Tax Deadlines Missing a quarterly estimated tax payment can lead to penalties. Mark your calendar for the IRS’s quarterly due dates (usually around mid-April, mid-June, mid-September, and mid-January).

Q&A Summary

• How to Manage Day-to-Day Accounting? Use a spreadsheet or an accounting tool. Keep thorough income and expense records, schedule regular check-ins, and store all receipts.

• What Do You Need to Declare as a Sole Proprietor? You must declare your net business income on your personal tax return (Form 1040 + Schedule C). If you owe over $1,000 in taxes, pay quarterly estimated taxes.

• How About Sales Tax (U.S. Equivalent of “TVA”)? Sales tax is regulated at the state level. You may need to collect it if you exceed specific thresholds or sell certain taxable goods/services.

• When Do You Need to Pay Self-Employment Tax? If you earn more than $400 in net self-employment income, you’ll pay self-employment tax (Social Security and Medicare) via your federal tax return.

• Why Issue Professional Invoices? Invoices establish a clear record of each sale or service. Include your business name, address, EIN/SSN, invoice date, details of services/products, and the total amount.

• Why and How to Keep a Separate Bank Account? It’s crucial to separate business and personal finances. This helps you manage cash flow, track expenses, and avoid confusion during tax season.