You started a small business to make money. However, neglecting your bookkeeping duties can mean less in your pocket. Some mistakes can even cost your business dearly.
Unfortunately, you don’t get a crash course in managing your books in high school, and even a college degree doesn’t fully prepare you for every detail. Here are four crucial accounting mistakes small business owners can’t afford to make.
1. Forgetting to reconcile bank statements
Bank reconciliation allows you to identify and address discrepancies between your records and those of your bank. This avoids potentially embarrassing mistakes, like missing pay because an extra zero led you to believe you had more in the prize pool than you actually did.
Reconciliation performs additional business functions beyond balancing your checkbook. It allows precision follow-up of accounts payable and receivable make projections about future growth. It also identifies potentially fraudulent charges, protecting your security by alerting you to scammers who may have hijacked your account. It allows you to count bank fees and charges as an expense, reducing your tax burden.
2. Use employee withholding for other purposes
If you have employees, you have an additional accounting burden. You are responsible for withholding Social Security, Medicare, and income tax portions from your staff members and filing them with the IRS depending on the size of your organization. Although larger companies may face bi-weekly or weekly requirements, many small companies are quarterly depositors.
This is where many business owners have tax issues that could shut them down. An unexpected expense arises and you dip into the funds you need to file with the IRS to cover it. You may have good intentions of making money on your next scheduled date, but when that doesn’t happen, you fall further behind, ruin yourself. penalties and interest each day of the missed payment.
Many business owners who adopt an LLC or S-corp structure mistakenly believe that their status protects their personal assets from the IRS. Although an individual cannot sue your business and take your home, the IRS holds those responsible for withholding and accounting for payroll taxes personally liable for a trust fund recovery penalty. As a landlord, authorities can force you to shut down your business and even attack your home or car if you fail to make federal tax filings. The problem has to get worse before such action happens, but it does happen.
3. Neglecting tax planning
As a business owner, you have a lot more leeway to write off your expenses than you ever did as an employee. You can save a lot of money, but it takes careful tax planning to get the most out of it.
For example, you may be looking for a new company vehicle. You can amortize the cost of a fixed asset by depreciating it over time.
However, going green by investing in an electric vehicle can save you even more. Theirs allows a tax credit of $7,500 to the people and organizations who make this sustainable choice. Think about the benefits. You get a nice bonus when you deposit and you can broadcast your green choice, establishing your business as one that cares about the planet.
4. Missing deposit requirements
Failure to file penalties is just one of the methods available to the IRS to correct small business owners who fail to meet their legal and financial obligations. You must also meet all quarterly and annual filing requirements to remain compliant with tax authorities.
Unless your business is small enough that you expect to owe less than $1,000 in total taxes, you should file a quarterly tax return. Those with employees must file Form 941, Quarterly Employer Income Tax Return, in which you report the amount of Social Security, Medicare, and income tax withholding for your workers. .
Otherwise, you may incur a penalty for failing to produce 5% of the unpaid tax for each month or the percentage of the period remaining unpaid. Since you have to file quarterly reports four times a year, these can add up quickly.
In addition, you will have to file your annual return. Sole proprietors and single-member LLCs report their income on Schedule C of their 1040 personal tax return. Partnerships file 1065 and S-Corps file a 1120-S, generating a Form K-1 issued to shareholders to report on their individual statements.
Accounting Mistakes Small Business Owners Can’t Afford
Accounting errors can devastate your small business. At best you lose money, at worst you can lose everything.
Learn about these four accounting mistakes small business owners can’t afford. Meeting your legal and financial obligations goes a long way to ensuring your continued viability and success.