Photo credit: Jonas
As a self-employed house cleaner, you often find yourself zipping from one task to another to keep your business running. You have to clean customers homes, market your business, schedule customers and keep track of inventory—all in the space of a day. Figuring out which taxes to collect from your customers, which taxes to hold and which taxes to pay—and when—can seem overwhelming at first.
That is why it’s important to create a tax payment system or roadmap which includes:
• getting solid information about the taxes you have to pay in your city, county or state.
• collecting and separating tax money you owe.
• funneling tax funds into holding areas like your bank or credit union so you have the full amount of tax ready to pay when it’s due.
• paying the taxes you owe in full and on time to the proper tax agency.
Rules of the (Sales Tax) Road
Sales Tax is a tax on customers. Sales tax is added on top of the amount you charge your customers. The sales tax amount is generally a percentage of your total sales amount. You are responsible for figuring out the correct amount of sales tax and collecting it from your customers. If you fail to collect the full amount of sales tax from your customers, you are expected to make up the difference. So don’t be shy about including sales tax on your invoices to customers.
Businesses collect sales tax and hold it for the state, county or city (sometimes all three). The collected tax funds are then sent to the state, county or city tax agency on a regular basis. That can be as often as every month, every quarter (every three months) or even once a year.
Knowing the rules about sales taxes you collect and hold in your state is vital. Not all states require house cleaners to charge their customers sales tax.
States Where House Cleaners Collect Sales Tax
Even if you live in a state that does not require house cleaners to collect sales tax, many counties and cities do require you to collect sales tax. The best way to find out which taxes are due in your area is to contact your local county or city clerk’s office. On the State Start-up Laws page, simply click on your state for links to your state tax agency. Some city and county tax information can also be found on each state page. Just click on the handy map below:
Packing For The Trip
Once you collect the correct amount of sales tax from your customers, it is important you separate those funds from the amounts you charged for your cleaning. Your customer’s sales tax amount should be listed on the invoice. Each day, total the sales tax amount your customers paid. Keep a running tally of the sales tax amount. If you use bookkeeping or accounting software, sales tax collected from each customer should show up in a separate column.
After you do your weekly deposit of checks or all of your credit and debit card payments are deposited into your checking account, transfer the sales tax portion of that deposit into a dedicated Sales Tax savings account or sub-account, at your bank or credit union. That way, sales tax funds are out of your checking account and can’t be “accidentally” spent on something else.
Setting up sub-accounts in your business savings account is a way of managing your money. As far as your bank or credit union are concerned, you only have one savings account. However, on paper, you can treat that one savings account as three (or more) sub-accounts to save for particular purposes like taxes, cleaning supplies and license fees.
When you make your weekly transfer to your savings account, keep track of the portions set aside in your savings sub-accounts on forms with columns that include:
• Date (when money is added or subtracted)
• Memo (a note to yourself about why the money was moved)
• Deposit (money you add)
• Withdrawal (money you take out for any purpose)
• Balance (what you have left each time money is moved in or out)
There are several ways to set up sub-account sheets. You can keep track of your sub-account amounts with a columnar pad that you can buy at any office supply store. Add a pen and calculator and you are good to go.
You can also create and keep track of savings sub-accounts directly on Microsoft Word documents or you can print out on the Word document on paper. You can keep track of your sub-accounts digitally on an Excel spreadsheet or your accounting software.
Whether you use pen and paper, a phone app or a computer program, it is important for to you to note every time you transfer money in and out of your tax savings sub-accounts. Also, each week, make sure the amounts in your sub-accounts are the same as the total amount in your savings account.
Savings sub-accounts are financial management tools. Transferring and holding the tax amounts weekly allows you to save for your tax bill in a slow and predictable way. Saving allows you to meet your tax obligations without stress and fear. You are managing money you owe instead of the money you owe managing you.
To get started with your tax savings sub-accounts, just download these simple forms created on Microsoft Word. You are free to change the look of the forms to suit your needs. You can print the forms out and write your amounts by hand or your can add your amounts directly to the form on your computer. Just duplicate the form before using to create a new blank sheets.
Special Tip: If English is not your first language, the download form can be translated into another language here.
On The Road
While it may be tempting to use collected sales tax for your business or personal expenses, don’t do it! That money belongs to the state, county or city. You are just holding it until tax filing time. Failure to pay sales taxes can have severe consequences, including fines, penalties and interest.
A week before you pay the sales tax to the state, county or city, double check your account or sub-account, to make sure the full amount due is available. If you pay by check and mail the amount to the tax agency, prepare the check a few days in advance. When making tax payments by mail, the postmark date is key. Mail your sales tax amount on or just before the due date. That same day, (or the day before) don’t forget to transfer funds from your sales tax hold account or sub-account, to your checking account to cover the payment. If you pay by credit or debit card, make sure the funds are available in your checking account before you pay. Tax agencies tend to get paid fast. Be ready.
The Use Tax Rest Stop
Use tax is a tax on goods you’ve purchased without paying sales tax. That includes equipment or supplies bought online or through the mail from out of state where the seller did not charge you sales tax for the goods. Use tax is also due when a business owner buys items wholesale, since wholesale purchases are usually tax free. If the wholesale goods are resold, your customer pays sales tax. However, if you use the items for your business instead of reselling them, you owe use tax.
For example, your cleaning business buys fifty (50) microfiber cloths wholesale to sell to customers. Your business sells thirty-five (35) cloths to customers. You add the remaining fifteen (15) cloths to your business supply inventory and use them for cleaning customer homes. Your business now owes the state use tax on the fifteen (15) cloths used by your business.
Since use tax has to be declared on your state tax form, you may be tempted to “forget” to list items that should trigger use tax payment. The problem with “forgetting” is if your business is ever audited by your state tax agency, you will get painful reminders in the form of penalties and interest. Believe me, those reminders will jog your memory for years to come. Avoid use tax drama. Declare all business purchases where you did not pay sales tax.
Since you may only have to pay use tax once per year, it is important you keep careful records of all business receipts. Especially receipts of purchases made online. One way to stay on top of what you might owe in use tax is to take photos of of business receipts on your phone.
Those receipt photos and emails should be kept in a dedicated folder on your phone or computer organized by month and year. If you prefer to keep paper receipts, keep them organized in an accordion file folder or check file by month. No more sifting through a pile of receipts trying to figure out which purchases you have to pay use tax on just before your tax deadline.
Just like sales tax, it is a good idea to figure out any use tax due each week. Also add those funds to a tax savings account or sub-account each week. Saving for use tax payments is not as painful as waiting until the end of the year and coming up with a large payment at the last minute.
Setting up and using a simple system on a weekly basis to keep track of your taxes keeps you from pulling your hair out at tax time. Use a clear roadmap when preparing for taxes. It is always easier to get where you are going if you know where you are headed. Safe travels!
Have you gotten lost with sales tax and use tax in the past? Share your experiences in the comments below. ⬇︎