Time Tracking for Service Businesses—Don’t Give Away Your Time!

If you have a service-based business, you most likely bill clients for your time. Even if you charge a fixed price, it is probably based on how much time it takes to do the job. So it's crucial to your success that you capture that information for effective billing!

Time is the one completely inflexible resource we all have. There are 24 hours in a day, and you can’t bargain with that fact or rationalize it away. So it’s important that you keep track of your time so you  capture all the billable hours. If you don’t bill by the hour, it’s still important to know where that time is going so you know what activities are most profitable, and if your prices need to be adjusted if an activity takes more time than you anticipated.

I charge for my time, and I wish I could say that I had the perfect system in place for capturing all my hours. Truth is, I don’t, but after giving away big chunks of time over the year, I have learned to be more disciplined in tracking my time, (especially the billable hours!). 

There are a lot of tools for time tracking out there, and I use a combination of those tools. One trusty tool is my daily planner. If I’m working at a client’s site, I’ll just make a note of the time I arrived and the time I left on my paper calendar. It’s portable and it’s easy.

I also have a free app (I useToggl) that is both on my smart phone and on my PC. It’s handy in that you can start and stop the clock, and even pause it when you get that phone call. Then it will spit out a report upon request. There is a paid version that I believe gives more complex reporting, but the free version works for me—when I use it. Truth is, I’m more of a paper-and-pencil kind of gal, and when I’m working at home, I tend to use a paper time log to track time by client and make notes about what I was doing that I can include on the bill (you can do this in Toggl, too).

There are also billing and accounting apps (FreshBooks, QuickBooks) that will capture your hours and automatically create a bill for them. I use QuickBooks a lot, and I do enter my time in the Timer in my own QuickBooks file to create invoices.  The QuickBooks timer can be used stand-alone, without my needing to be in my own company file, and then I could import the data using an IIF file, but for me it’s just as easy to enter it manually (although now that I’m writing this, I may try the import feature).

I recommend tracking your non-billable time as well. This can be revealing! You might want to set up a goal of having a certain percentage of your time be billable, and could even budget your time as you do your money (you do budget your money, don’t you?), with a certain percent being billable, another percent for business development, some for administrative tasks, etc. My personal goal is 80% billable.

As I noted, I use a wide variety of tools to capture my time while I’m working, but then I consolidate it all into the QuickBooks timer so I can run a consolidated report on all my time. There are lots of tools out there that will capture all of the activites I listed above in one place, create reports, generate bills, and even import into QuickBooks. I just personally don’t have the patience to set one of those tools up and then use it at all the places where I work.  I don’t always have internet access for some of the online tools, and I also find it awkward to use some of those tools while I’m at a client’s site. So you just have to explore the options and come up with the system that works for you. 

The important thing is to have a system that captures all your time, so you don’t miss billable hours, you get some history on how long it takes you to do the activities you charge for so you can set your prices effectively, and you know how much time you spend on non-billable activities.

Why You Need an Employee Handbook

Even if you only have one employee, you should consider preparing an employee handbook. Not only will this clarify your expectations of your employees, it will force you to anticipate and consider all the options available when putting someone on the payroll and make decisions about those options before the first paycheck is issued.

I administer payroll for several clients, and find that situations often arise that can delay payroll processing, and those situations can be anticipated and prepared for while writing the manual. Simple items such as what documentation should be obtained from the employee before start of work (W4, I-9, direct deposit information), when spelled out in the manual and put in a checklist, make onboarding employees systematic and painless.

Rate of pay, overtime policies (be sure they comply with state law!), vacation and sick policies, employee benefits are all considerations that should be documented.

Payroll administration is one reason for a manual, but in addition it will help to ensure fair treatment of all employees,compliance with state and federal laws and clarify expectations, all of which can contribute to a pleasant work environment, as well as potentially keep you out of court.

The Small Business Administration has good information on what should be contained in an employee manual (http://www.sba.gov/content/employee-handbooks), and the National Federation of Independent Businesses offers a model handbook (http://www.nfib.com/business-resources/business-resources-item?cmsid=28642) that can be used as a starting point.

Its' surprising how many things there are to consider when hiring employees. Planning ahead and establishing documented policies will help smooth the road.

Are You On The Payroll?

So you've started your own business.You're making some money, and now you're starting to pay yourself. You're calling it your payroll. But is it really?

Here's the deal: If you are a sole proprietor (you have not formed a corporation or LLC, or a partnership, and will file a Schedule C or F with your form 1040), then you are not an employee of your own company. The earnings of your company will be reported as self-employment income on your individual tax return, and you will pay Social Security and Medicare taxes on the earnings as well. Any money you "pay" yourself out of the company should be shown on your financial statements as a "draw" on the balance sheet, and not "Payroll Expense" on the profit and loss.

If you have formed a regular partnership, the same rules pretty much apply. The partnership will file its own return, splitting the earnings among the partners, and that will be reported on your 1040 and the applicable taxes will be applied.

If you have formed a corporation (either S or C), then you MIGHT be an employee. Just paying yourself from the company funds does not make you an employee. To be an employee, you must calculate and withhold taxes from your paycheck, deposit those taxes (plus the company's portion) on a regular basis, and file quarterly and annual payroll tax returns. If you are just taking money out of the company without doing those activities, then you have either a "distribution" (or "dividend"), or possibly a loan.

If your company is an LLC, then things get even more complicated. An LLC is a business organization recognized by states, but not by the IRS for tax purposes. The company will elect to be treated as a corporaton or as a partnership when it files its first tax return (a single-member LLC can be either a corporation or a "Disregarded Entity", meaning the owner will file a Schedule C as a sole proprietor). If the company is taxed as a corporation, then the corporate rules mentioned above apply. If it's taxed as a partnership or sole proprietor, then the owner(s) is not an employee.

Now, if your business is set up as a corporation, which means you are eligible to be an employee, should you do this? It does add paper work and complexity. BUT, generally speaking, it is a good idea. If you are pulling a draw or distribution from your corporation but are NOT on the payroll, the IRS is likely to take a look at that and tell you that it is actually payroll, and will retroactively charge you for the payroll taxes, plus penalties and interest, that you did not sent them. You should pay yourself "reasonable compensation" and comply with the payroll reporting requirements to avoid this. "Reasonable compensation" is a fairly squishy term and it depends on what your role is in the business and how much time you spend working in that business. But you will want to pay yourself an amount that you might pay somebody else to do the same job.

There are also some potential tax advantages to treating yourself as an employee of your corporation, and you will want to consult with your tax pro to see if your situation can benefit from some of those.

So as usual when it comes to tax issues, this question does not have a simple answer. And to tell the truth, the information presented above is a simplified overview. My usual disclaimer applies--this should be taken as general advice and NOT tax advice. As always, consult with your tax professional to determine the best course of action for your particular situation.