Running a business is no simple task, especially when it comes to finances. When you’re operating independently as a small business owner or entrepreneur, getting those figures right is crucial. But why? Here are all the reasons why accounting is king for your small business — and how you can get started on the right path.
There’s a reason that employees and business owners alike grumble during tax season. It’s no fun sifting through paperwork, calculating and recalculating, or sitting on the phone with the IRS. With a small business model, the responsibility falls on you, the entrepreneur, to handle the basics of business taxes. And in a 2021 survey by Statista, small business owners ranked taxes as their second most significant problem (after the quality of the labor force).
The challenge is that the bigger your company grows, the more involved your tax obligations are. For example, if you’re paying freelancers or contractors, you’ll need to send out the right forms to cover your bases. That could be more difficult now than ever, though — the IRS adjusted 1099 designations. A 1099-NEC is your go-to for certain workers, like anyone you pay more than $600. But the 1099-MISC is still around, too, for reporting a shortlist of outgoing payments to select professionals. The good news is that however complicated these designations sound, you can file 1099 online through a trusted platform like QuickBooks while your accountant helps illuminate the rest.
Fudging numbers by accident can have implications beyond tax issues. If your estimations of income and expenses are incorrect, you won’t have a clear picture of how much your business is bringing in or what your outgoing amounts are.
Every business owner needs to keep an eye on their spending, especially when it comes to post-economic slump recovery. For up-and-coming entrepreneurs, the importance of tracking incoming and outgoing income is even clearer. After all, seeing an uptick in your numbers can serve as motivation — and justification — for your efforts. Plus, hiring a professional service like Vermont's Green Mountain Bookkeeper ensures that someone else is doing the fact-checking. Instead of poring over spreadsheets and repeatedly entering formulas into your calculator, you can outsource the effort and know that it will be far more accurate (and less stressful) than if you DIY.
When you’re bootstrapping a small business budget, it’s understandable that saving money is at the forefront. But the old adage of spending money to make money might just be true in this instance. Outsourcing saves you money — though it may not feel that way as you write checks and send 1099s to contractors. But in fact, multiple research sources agree that outsourcing saves companies money, and you don’t have to look far to see it.
Consider the hours you would spend tallying up receipts and managing a budget. Then, consider how you could invest those hours elsewhere — such as toward growing your business, developing marketing plans, or connecting with potential clients or consumers. Also, consider the financial risk you may be facing if the economy shifts. As Pew Research highlights, some higher-risk industries are more likely to fluctuate in a downward-diving economy.
When your energy can redirect somewhere more lucrative, it makes sense to outsource accounting responsibilities to a professional. Plus, with millions of freelancers available for hire, you may opt to outsource other tasks in your business, too.
Hiring an accountant can feel like a big step. But if you’re positioning your business for big growth, it may be a necessity. Whether you’re trying to save money within your business model or are looking to scale up, knowing what you have in the coffers is a vital step. Contact Green Mountain Bookkeeper for help getting your small business books in order.
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One of the simplest mistakes is forgetting to fill out part of your tax form or entering incorrect information. Even one error could flag an audit or require you to re-file, which can cause late fees and penalties.
The most common mistakes on tax returns include:
If you miss the filing deadline for taxes, your business could face a 5% penalty per month. This fee will increase each month until you file the return. If you neglect to pay your taxes, the IRS will charge 6% interest and a late payment penalty of about .5% each month after the deadline.
If you need extra time to pay for your taxes, you should file for an extension. Don’t miss deadlines, or you’ll end up with even more owed money on your plate!
The most important way to prepare your taxes for April is thorough record keeping throughout the year. Failing to properly track your expenses can be one of the costliest parts of your taxes (and the biggest headache).
If you don’t track and categorize expenses, you could miss out on deductions that could save your business a lot of money. There are a lot of deductions you may qualify for like furniture, supplies, advertising, equipment, licenses, mileage, and more.
Worse yet, inaccurate tracking could land you in hot water if the IRS audits you and you can’t substantiate expenses.
Make sure you keep all receipts for expenses, payroll, sales, and other costs. This makes potential audits easier and ensures you’re receiving any applicable tax breaks.
Small business owners often pay out of pocket for a lot of business expenses. Blurring this line can actually create a problem when tax time comes around. It can be harder to prove business deductions, and you may misfile between your personal and business.
To avoid this, you should separate expenses by using separate bank and credit accounts, tracking and storing receipts separately, and paying yourself a salary rather than using business accounts to pay for personal expenses.
A lot of small business owners want to cut the expense of taxes by using tax software to do it themselves. This can work for smaller businesses, but you could still miss areas or deductions that a professional would catch. In most cases, working with a professional will actually save you a lot of time, money, and errors.
The tax process can be complicated and painful, so don’t do it alone. Start by downloading our Ultimate Small Business Tax Checklist to get started. The checklist walks you through step-by-step to organize your business taxes all-year long, so you can better avoid errors and streamline the filing process. Download the checklist here.
Stacy Abrams is a founder of TaxFaqs. When she’s not serving her clients, she geeks out on board games, cider, and challenging her friends to top her awesome karaoke skills. She calls Bloomington, Minnesota home.
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