How should I account for retainers and deposits?

As a liability when received, then as revenue as the work is performed. Cash-basis books record them as income on arrival, which overstates good months and understates the months where the work actually happens.

Should my service business be an S-corp?

It depends on consistent profit, what you draw, and payroll costs. It is often worthwhile once profit is steady and meaningful, and can cost more than it saves below that. The calculation is specific to your numbers.

Do I need to collect sales tax on services?

In many states most services are not taxable, but some are, and the rules vary by state and sometimes by city. If you sell into more than one state, it is worth checking each rather than assuming.

Who I work with

Accounting for service businesses

Consultants, agencies, cleaning companies, landscapers, salons and other service businesses sell time and expertise, so the numbers that matter are utilization, collections and what each client is really worth. Accrual books make those visible.

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What the books need to handle

Revenue recognized when earned

Retainers, deposits and prepaid packages held as liabilities until the work is delivered, so a big month of deposits is not mistaken for a big month of profit.

Receivables and collections

An aging that is reviewed and acted on, because in a service business unpaid invoices are usually the largest single drag on cash.

Profitability by client or service line

Seeing which clients and services actually earn their keep once labor and delivery costs are included.

Owner pay and entity structure

Salary, distributions and the S-corp question worked out from your real numbers rather than a rule of thumb.

Numbers worth tracking monthly

Utilization

Billable hours as a share of paid hours, by person and team.

Effective rate

Revenue divided by hours actually worked, including write-downs.

Days sales outstanding

How long invoices take to collect, trended monthly.

Client concentration

Share of revenue from the largest clients, and the risk that carries.

Balance sheet accounts I keep workpapers on

Each of these is supported every month by a workpaper that ties the balance to a source document, so the number can be trusted and followed by anyone who reviews it.

Accounts receivable

Aged by client and reviewed monthly, with an allowance for balances unlikely to be collected.

Unearned revenue

Retainers, deposits and prepaid packages held until the work is delivered.

Unbilled revenue

Work performed but not yet invoiced, recorded so the month reflects what was earned.

Prepaid expenses

Annual software, insurance and licenses spread over the months they cover.

Month-end close for service businesses

Unbilled work recorded as revenue earned
Retainers and deposits released to revenue as work is delivered
Receivables aging reviewed and a follow-up list produced
Contractor invoices accrued to the month of the work
Subscriptions and insurance amortized from prepaids
Owner draws and reimbursements separated from business expense

Tax

Tax considerations

S-corp and reasonable compensation

Owner salary must be defensible for the work performed. Distributions above it are not subject to self-employment tax.

Qualified business income deduction

Many service businesses qualify, though specified service fields face limits at higher incomes.

Home office and vehicle

Legitimate and commonly disallowed for lack of records. Mileage logs and exclusive-use space make the difference.

Retirement plans

A SEP, SIMPLE or solo 401(k) can shelter meaningful income. The right one depends on staff and income level.

General information, not advice for your specific situation. Call 239-896-6799 to talk through yours.

How I help

Common questions

How should I account for retainers and deposits?: As a liability when received, then as revenue as the work is performed. Cash-basis books record them as income on arrival, which overstates good months and understates the months where the work actually happens.
Should my service business be an S-corp?: It depends on consistent profit, what you draw, and payroll costs. It is often worthwhile once profit is steady and meaningful, and can cost more than it saves below that. The calculation is specific to your numbers.
Do I need to collect sales tax on services?: In many states most services are not taxable, but some are, and the rules vary by state and sometimes by city. If you sell into more than one state, it is worth checking each rather than assuming.

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