Category: Taxes

  • How to Avoid a Tax Audit: 12 Tips to Keep Your Business Safe

    How to Avoid a Tax Audit: 12 Tips to Keep Your Business Safe

    When it comes to running a business, you need to make sure that the IRS doesn’t consider your company a top priority for a tax audit. Otherwise, all your accounts will be investigated in detail, to see if your submissions and records add up.

    On top of this, you will have to provide evidence for each receipt and payment claimed. Since only a small percentage of small businesses are audited each year, there are some things that you can do to take corrective action and keep up to date. Be sure to keep up with financial statements. Complete records of all transactions. Get a handle on your cards, charges, and investment activities, and stay in control of your total financial picture with the help of a great bookkeeper. Here are some tips that will help you avoid a tax audit.

    Business owner trying to avoid a tax audit by being compliant and honest

    1. Always Evaluate the Numbers

    One of the most important tips that will ensure your small business isn’t selected for a tax audit is checking your numbers. You should know that when someone provides a tax form that reports income, the same information will be available to the IRS. Therefore, the IRS will expect you to include the details in your tax returns.

    If your numbers don’t match what other parties have mentioned, you will be issued a notice for an audit. It makes sense to double-check every detail that you enter on the tax return. Accounting and bookkeeping errors don’t just inspire audits, they affect the clarity of your decision-making and the perception you have of your company’s financial health.

    2. Do Not Continuously Report a Loss

    Another tip that you should consider is not reporting a net loss for more than two continuous years. If you report a loss every year, the IRS will be more likely to evaluate your tax returns and issue a notice for a tax audit. Besides, it might even disallow most of your business expense deductions. 

    3. Accurately Report Income and Expenses

    To minimize the chances of being called for a tax audit, you have to report your income and expenses accurately. For instance, it is important that you use your business bank account for receipts and payments. Besides, this will make it a lot easier for you to prepare tax returns every year, as you will just need to go through your bank statements.

    Although you can round the numbers to the nearest dollar, you must ensure that you do not go overboard. The fact is that the IRS will discover if the information entered is incorrect. It is best that you avoid rounding to hundreds or even tens. Your personal assessment of risk should always lead you toward the common sense decision of complete transparency, compliance, and preparation.

    Calculator, pen, and folio representing the tools of a tax audit

    4. Do Not Pay High Salaries to Shareholders Working for You

    A notable tip that you must consider so that you can avoid a tax audit is paying reasonable salaries to employees who happen to be shareholders as well. Although you can pay a high salary to executives to minimize profits and tax, the IRS would have some reservations against such a decision. This is why you should stick to a salary range that is typical of your industry.

    5. Be Wary of Contractors

    If your business process involves a lot of independent contractors, it will often be more prone to a possible audit. The reason behind this is that it is possible to avoid payroll taxes when you employ independent contractors. Moreover, you should go through the guidelines set out by the IRS for independent contractors to ensure that you follow the regulations perfectly. To avoid any complications, consult your bookkeeper. 

    6. Claim Only Legitimate Home Office Expenses

    The IRS is skeptical of home offices and reviews the expenses to make sure they are legitimate. For this reason, you need to only claim expenses that you know you can justify. You must have a separate space at home for your business. Working in your bedroom does not count. Moreover, having large expenses for utilities and maintenance (this risks an energy audit) when operating a home office will often result in greater scrutiny. Your method of accounting and keeping the books should always include an accurate record and justification for all home office expenses. 

    7. Pay Your Estimated Small Business Taxes

    In addition to the above, you need to pay your estimated small business taxes on time. If you believe that you would have to pay around $500 in taxes by the end of the year, it is crucial that you make quarterly estimated tax payments. Otherwise, the IRS will issue a tax audit notice and require you to pay penalties.You don’t want back tax-payments affecting your ability to make the most of your funds and pursue business expansion.

    Business owner counting cash during a tax audit

    8. Honesty Is Important

    If you think that you can submit tax returns with falsified information, you need to think again. It is vital that you are completely truthful. To avoid a tax audit, you have to accurately report income, expenses, and credits, along with a wide range of details such as financial actions including the purchase of supplies, labor costs, sales transactions, credit card activity, delivery charges, finance charges, mortgages, loan payments, assets and debt, investment income, and much more, whenever these details are required or requested. 

    9. High Earners Need to Be More Careful

    Most filers are people who earn less than $200,000 a year. If you fall in this camp, you should be able to avoid scrutiny, at least when it comes to this detail. On the other hand, anyone who makes more than $1 million and pays abnormally low income taxes will be audited.

    The IRS will look into your deductions, including charitable contributions. Furthermore, if you file Schedule C, your tax returns will be questioned.

    10. Make Realistic Deductions

    While reviewing your tax returns, the IRS will pay special attention to any deductions you have made. If there are unrealistic or unusual deductions, the auditor will issue a tax audit notice to call you in. For instance, if you claim charitable tax deductions that amount to 40% of your annual income, or claim tens of thousands in computer hardware purchase costs when you’re the only one on staff, you will likely be audited. 

    11. E-Filing Helps

    Since the error rate of electronically filed returns is 0.5%, whereas the error rate of paper returns is 21%, it is best that you file your returns electronically. Many taxpayers have opted for electronic filings over the years. In fact, around 138 million taxpayers e-file every year. Since there is a lower chance of mistakes when you file electronically, it is often the right move. However, combining this with a trusted bookkeeper is the way to completely protect yourself. 

    12. Match Up All Your Paperwork

    Lastly, you need to make sure that you have sufficient evidence for everything. The IRS will find out if there are any discrepancies. You need to review all government-issued forms, your own financial statements, and any important documentation so they match the information you report in your tax returns.

    Keeping good records and staying honest should help you avoid a tax audit. Now, if you are unsure about your income and deductions, don’t hesitate to team up with an accountant or bookkeeping service provider to help you out. 

    Graffiti representing the disappointments of a tax audit

    In Closing

    Tax audits are not much fun. It’s not the way you want to start off in the new year. Take your finances, your books, and your tax obligations seriously. Don’t get sloppy or accept errors. it will come back to haunt you. Remember, the IRS can come after you for bad tax returns for years afterward. 

    Be disciplined in your level of organization, your records, and your communication with your bookkeeper. Don’t add stress to your life. You’ve already got enough of that. Keep it all together each day, each week, and each month, so you’re never caught off guard or tempted to push details around during tax season. 

    Sound Accounts gives business owners greater confidence and peace of mind by providing top-notch bookkeeping support and sound advice. Contact us today to learn more and find out how you can qualify for 6 months of free QuickBooks.

    To learn more about avoiding a tax audit, check out our frequently asked questions below. 

    FAQ

    What are some common triggers for a tax audit?

    The following mistakes are likely to trigger a tax audit.

    Overestimating Donations: Although the IRS encourages taxpayers to donate money and items to nonprofit organizations, it makes sure that no one takes advantage of the system.

    Mathematical Errors: Another mistake that can trigger a tax audit is errors in your computations. Even though it might sound simple, most tax returns are audited just because of mathematical errors. This is why you have to ensure that everything adds up when you fill out your paperwork.

    Failure to Sign the Return: Whether you file your tax returns electronically or manually, you have to make sure that you sign them. Otherwise, you can expect additional scrutiny and the possibility of an audit.

    Under-Reporting Income: Even though you might be tempted to exclude certain income, the IRS will easily find out if you have under-reported it.

    Over-Reporting Home Office Expenses: If you are running a business from your home, you need to ensure that you do not over-report expenses. If the deductions are too large, the IRS will definitely raise an eyebrow and reach out for a talk. 

    Who gets audited the most?

    The IRS is more likely to audit taxpayers who have earned over $500,000 or under $25,000.

    How can you reduce your chances of being audited?

    Here are some of the ways you can reduce the possibility of getting audited.

    Not Reporting a Loss: If you report a loss, an audit is more likely. This is why it is important that you recheck your income and expenses before you claim a loss.

    Specify Expenses: Each expense you claim needs to be specific. Otherwise, it would be deemed fictitious.

    File on Time: By filing on time, you can reduce the risk of being issued a tax audit notice.

  • Year-End Bookkeeping Checklist: 8 Tips to Finish the Year Strong

    Year-End Bookkeeping Checklist: 8 Tips to Finish the Year Strong

    Being a business owner comes with its fair share of responsibilities. When the year is about to end, you are likely to struggle with bookkeeping procedures. In order to make it through the year’s end with confidence, it is necessary that you follow a detailed year-end bookkeeping checklist as it will ensure that everything gets taken care of. To help you get things in order and transition into the new year right, here are some tips to consider. 

    Business owner going through her year-end bookkeeping checklist

    1. Prepare and Analyze Financial Statements

    The first thing you need to do once the year ends is prepare and analyze financial statements. The fact is that financial statements provide a lifeline to every business by providing a glimpse into its financial standing. Look at all your reports, outstanding invoices, credit card accounts and credit card statements, cash-flow, accounts payable and receivable, and all financial reports.

    When you go through your statements to determine the state of your finances, you’ll have the information you need to forecast for the coming year and beyond. Your financial health gets clearer and your business goals are more attainable.

    Financial statements are necessary for preparing tax forms, and they help you, your accounting team or bookkeeping service provider, who can also serve as tax professional when the time comes. Financial records afford you a comprehensive evaluation of your business as you head into that year-end closing.

    When you analyze the year-end statements, including the income statement, balance sheet, and cash flow statement, you will get an accurate picture of your operations. The income statement is also called a profit-and-loss statement, and it summarizes the income and expenses for the year. This means that you will get an idea of how much revenue you generated and the payments you had to make.

    Some of what you’ll see on the profit-and-loss statement includes revenue, cost of goods sold, operating expenses, tax expenses, and other financial costs. 

    As for the cash flow statement, it simply lists all your cash inflows and outflows, along with a few other items of interest. Now, the cash flow can either be positive or negative. If it is positive, it means that you have some cash on hand. However, if cash flow is negative, it means you have to obtain working capital. The balance sheet shows what assets you own and how much debt you owe. 

    2. Collect from Pending Invoices

    Another tip that will prepare you for the new year is collecting from customers who have not paid yet. You’ve got to take care of all your uncleared transactions, unpaid bills, and unpaid invoices. You will need to put in some effort if you want to collect past due totals. But it’s worth it since you’ll have more working capital to expand your business in the coming year. 

    Some customers just need a nudge, a bit of a reminder. Another copy of the invoice and a friendly email should do the trick. To make sure that everyone pays on time, you can set up invoice payment terms, contact customers who have past dues, and establish a payment plan or automatic payments from some vendors. However, you must be professional, positive, and understanding at all times. Otherwise, you will struggle to collect from late-paying customers.

    If your customers or vendors are having trouble making payments on time, you should discuss a payment plan with them. It would enable them to pay in installments instead of leaving the entire balance unpaid. This allows you to prove to customers that you truly care about them and their requirements. But if you continue to have trouble after repeated attempts and letters, you’ll want to seek outside help, sometimes from a collection agency.

    3. Inventory Accounting

    Businesses that have inventory need to keep an accurate count of all the materials that are available on the premises or the warehouse. Otherwise, you’ll be dealing with inventory shortages or an unnecessary surplus.

    Towards year-end, you need to conduct an inventory check or inventory count. You will have to use inventory tools, inventory management software or even hire out the service, and determine if there are any discrepancies between the balance sheet and the count.

    When you account for inventory, you will determine how much money you have spent during the year on goods and supplies. Also, it enables you to find out how much money you will need for purchasing additional inventory going forward, and to adjust spending accordingly. 

    Business owner working through his year-end bookkeeping checklist

    4. Organize Business Receipts

    When it comes to storing business receipts, make sure everything is organized. As the year ends, it makes sense to tidy things up and prepare for the new year. If your receipts are disorganized, your business will have a difficult time making sense of your transaction history or how to move forward with certain aspects of spending or product and service offerings. There will also be a risk of inaccurate and sloppy books leading to difficulties with taxes, the possibility of an audit, and poor decision-making. 

    Here are some things that you can do to get all your business receipts in order.

    • Use folders and labels
    • Sort receipts by type of expense
    • Organize all the receipts chronologically
    • Store the receipts electronically on your computer

    Keep in mind that it is easier to stay organized than to organize a mess. Maintaining order is better than trying to fix chaos. You should file a receipt the moment you get it. This will minimize the risk of omission. Now, if you have accounting software, it would even be possible to upload the receipt along with all relevant documents associated with the transaction. This way you have a permanent electronic copy or record of the transaction.

    5. Reconcile Bank Accounts

    When the accounting year ends, you need to reconcile all your bank accounts. This will allow you to verify whether your accounting records are accurate and updated. Review your bank statements to reconcile the accounts. It is necessary that your actual bank balance matches your books. This is also a good time to remind you to keep your business and personal expenses separate.

    6. Review Your Accounts Receivable and Payable

    In addition to the above, you also have to review your accounts receivable and payable so that you settle debts and collections. You need to follow up with vendors and pay them off so that the new year starts with a clean slate. Also, you must ensure that your accounts receivable reflects how much money your customers actually owe you.

    Financial statements used for a year-end bookkeeping checklist

    7. Back Up Information

    If there is one year-end booking tip that you simply cannot afford to overlook, it is to back up information. This will save you time and make things a whole lot easier for you when you need to access that data for yourself or the IRS.

    You do not want to lose important information, as your company’s financial history and other details help you steer your business in the right direction. Having a reliable backup system, including a trusted cloud backup service, along with additional in-house physical storage like tape and hard drives, makes all the difference. Data back up isn’t an option; it’s a necessity, and one no good business owner neglects. 

    8. Provide Documents to Your Bookkeeper

    Lastly, you must have all important documents on hand so that you can give them to your bookkeeper. . Bookkeepers are great at keeping things organized. But if you’re still handling part of the bookkeeping process and aren’t as organized as they are, make sure to provide them will all necessary documentation so they can excel at their job.

    Some of the documents that you will have to provide include sales records, invoices, petty cash records, bank statements, financial statements, loan information, and payroll records. If you are using software, it should take you just a few minutes to gather all the necessary documents. Talk with them beforehand to see what documents they need. 

    In Closing

    This should give you a solid start to your year-end bookkeeping checklist. It is important that you follow the steps mentioned above for a stress-free new year. Give your bookkeeper the info they need to help you succeed. And give yourself a break in the new year by starting off organized, up to date, and with clear goals for 2023. 

    Sound Accounts helps small business owners get organized, make sense of their finances, and sharpen their business with individually tailored bookkeeping support plans and trusted advice. Connect with us today to get started and find out how to qualify for 6 months of free QuickBooks. 

    To learn more about year-end bookkeeping preparations, check out our frequently asked questions below. And Happy New Year!

    FAQ

    What does a bookkeeper take care of at year’s end?

    When the year ends, a bookkeeper has a lot of tasks that need to be performed. The professional will have to go through all your accounting records, perform necessary entries, complete bank reconciliations, and prepare financial statements. Moreover, they will also prepare your business for tax season.

    How long will it take to prepare year-end accounts?

    Preparing year-end accounts is often time-consuming. The larger your business, the more time it will take. It can take an entire month for an accountant or bookkeeper to complete the work. However, it can take even longer if you try to take on the work yourself. It is recommended that you hire a bookkeeper or bookkeeping service provider to help you manage your books. That way, you can focus instead on leading your team and your business operations.

    Do bookkeepers handle invoicing?

    Yes, bookkeepers can handle invoicing. They are experts in several roles. Therefore, you should have no trouble asking your bookkeeper to take on the invoicing and other tasks such as preparing financial statements and completing the bank reconciliations as well as preparing your tax returns, as long as all tasks are clearly communicated early on, written in a contract, and your bookkeeper is getting paid accordingly for their work.

    What are some things I need to do as the new year approaches?

    • Organize your receipts
    • Back up your data
    • Print and go over all your relevant financial statements
    • Reconcile your bank accounts
    • Do a full inventory count
    • Collect all unpaid invoices
    • Pay any invoices you still owe
    • and more
  • Surprising Tax Deductions You May Not Be Aware Of

    Surprising Tax Deductions You May Not Be Aware Of

    Nobody wants to overpay taxes. However, many people overlook various tax deductions that could have helped them save more money. Whether you are interested in paying fewer taxes or just want to stay in the know, the following tax deductions will ensure that you have the information you need. If you’re a business owner, working from self-employment income, married filing jointly or separately, a full-time student, or have moved into a different tax bracket, this list will help you uncover more than just your standard deduction and develop a few great ideas to minimize your federal taxes.

    1. State Sales Taxes

    There are a few states such as Wyoming, Washington, Texas, Tennessee, South Dakota, New Hampshire, Nevada, Florida, and Alaska where residents are not required to pay income tax. This means that you get to choose whether to pay local and state income taxes or local and state sales taxes.

    If you live in a state that charges income tax, you should opt for local and state income tax deductions. However, residents of income tax-free states can claim sales tax deductions in two ways. They can either track all the sales tax paid during the year or rely on the IRS tables to determine how much state sales tax they have paid on purchases and major renovations.

    2. Reinvested Dividends

    Although reinvested dividends do not count as a tax deduction, it allows you to subtract the amount you reinvest from stock and mutual fund dividends from your taxable capital gains. If you are an investor, it would allow you to save a ton of money. You should definitely keep an eye on how much you reinvest from dividends received.

    cash symbolizing money saving tax deductions

    3. Charitable Contributions

    If you make out-of-pocket charitable contributions, you can deduct the value from your taxes. The fact is that the charitable contributions you make in a year can quickly add up. It makes sense to write off the cost of your good deeds.

    A great thing about this tax deduction is that you can include just about every type of out-of-pocket cost including the fuel consumed by your car when you drove for charity or gave up ingredients for a soup to a nonprofit organization.

    4. Interest on Student Loan Paid

    Whether you have paid interest on a student loan you took out for your studies or on behalf of someone, you can deduct it from the chargeable taxes for the year. As long as a student hasn’t claimed themselves as a dependent, he or she can qualify for a deduction of up to $2,500. If you are a young professional or have recurring student debt, you should be able to benefit from some respite. It is definitely important that you take advantage of this tax deduction for education costs.

    5. Moving Expenses

    Military personnel still have the option to deduct moving expenses. Previously, every taxpayer was permitted by the IRS to claim moving expenses. As an active duty military member, you should be able to deduct expenses incurred for relocation. But you can only use this tax deduction for eligible expenses if you haven’t received any reimbursement from the government. You are not required to pay taxes on moving expense reimbursements either if the move was permanent and necessary for your job.

    Hence, you should look for those receipts in order to claim the costs of travel and lodging as well as for moving household items, shipping your automobile, and other moving expenses. After all, anyone who serves their country deserves a thank you. Why not some form of tax benefit.

    6. Child and Dependent Care

    Did you know that you can get a tax credit for caring for a child or other dependents? As you might already know, tax credits are a lot better than tax deductions, as they help reduce the total tax charged for the year. 

    Some people don’t know about child and dependent care credits. There is a tax-favored reimbursement account in place to provide some relief in caring for your loved ones. You can easily get a tax credit of up to $5,000. You can even claim an additional tax credit if you spend a lot on work-related child care. It is because of this reason that parents can cut their tax bills significantly.

    Moreover, the tax credit amount increases for households that have a lower income. The American Rescue Plan was introduced in 2021 and many of the changes it brought to the child and dependent care tax credit are still in place. It increased the credit and made it possible for taxpayers to get a credit if they do not owe any taxes. However, it is important that you consult with an expert to make sure that you take complete advantage of this tax credit.

    7. Earned Income Tax Credit

    The earned income tax credit is wonderful for many lower-income taxpayers. But there are still many people who do not claim it despite being eligible. The rules can be somewhat complicated, which can deter one from going after it. Since tax credits offer greater value than tax deductions, it is vital that you look more into this.

    The maximum amount you can claim varies depending on your filing status. It supplements low to moderate-wage earners. However, you need to understand that the tax credit is not only offered to someone who earns minimum wage. In fact, it provides support to the entire middle class, including white-collar workers who have worked fewer hours during a given year, took a pay cut, or became jobless.

    If you are wondering about the exact refund you can receive, you need to know that it all comes down to your family size, marital status, and income. In order to get a refund, you have to file your tax return regardless of whether you owe taxes or not. Furthermore, anyone who was eligible to get the credit previously but failed to do so can file during the year and get a refund for up to 3 tax years.

    8. State Tax Paid Last Spring

    If you pay quarterly taxes, you can claim the state tax you paid last spring. You should include the amount in the state tax itemized deduction of your return. Also, you can add the state income taxes that had been withheld from your salary. Hence, you should be able to save additional money when you utilize this tax deduction.

    Individual working on tax deductions

    9. Refinancing Mortgage Points

    When buying a property, you get to deduct the points you paid for obtaining the mortgage in one go. On the other hand, you have to deduct the points over the new loan’s life if you decide to refinance a mortgage.

    This would mean that you will be able to deduct about 1/30th of the points for the year in case of a 30-year mortgage. For instance, you would get to deduct about $33 for every $1,000 worth of points paid. Even though it might not seem like a lot, there is no reason for you to overlook this. Moreover, you can deduct all the points that you hadn’t deducted when you pay off the loan because of the need to either refinance it again or sell your house.

    10. Jury Compensation Paid to Your Employer

    There are some employers who pay their employees a full salary when they take on their civic duty but require them to hand over their jury fees. However, the fees paid to you have to be reported as it is considered taxable income. Therefore, if you have handed over the money to your employer, you should be able to deduct it so that you don’t end up paying taxes on money that you never even got to keep.

    Conclusion

    Of course, everyone wants to save money at tax time regardless of their income level. But finding the best tax breaks as an individual takes reading, research, and oftentimes, linking up with a good bookkeeper who can uncover every possible avenue of savings. Don’t short-change yourself by missing out on key opportunities and putting yourself and your family in a stronger financial position.

    Sound accounts empowers business owners with individually tailored bookkeeping service plans that increase efficiency and help businesses reach their goals. Contact us today with questions and find out how good life can be with a top-notch bookkeeper by your side.

    To learn more about tax deductions, check out our frequently asked questions below. 

    FAQ

    What are the easiest tax deductions?

    Some of the easiest tax deductions that you need to know about include state sales taxes, charitable contributions, travel, moving, medical expenses, and interest paid on student loans.

    What are some hidden tax deductions?

    Now, some of the hidden tax deductions that most people don’t know about are charitable contributions, earned income tax credits, and child and dependent credits, and certain jury duty costs.

    What expenses can I write off?

    The expenses that you should be able to write off include purchases, home renovation expenses, and work-related childcare costs. 

    Who can I talk to for help with saving money on taxes?

    A qualified bookkeeper or accountant will be your best advocate. They’ll be able to uncover savings, not only for you as an individual, but for your business as well.

  • Choosing the Best Legal Structure for Your Business

    Choosing the Best Legal Structure for Your Business

    One of the most important decisions that every business owner needs to make is deciding which legal structure to adopt. You have to understand that how you structure your business carries tax and compliance implications.

    There are a number of factors you need to consider in order to determine the right type of business structure for your company. It should help you maximize deductions, decrease personal liability, and enable your business to grow at a steady rate. To help you choose the best legal structure for your company, we’ll look at the available options. Let’s jump in.

    Business partners discussing legal structure.

    1. Sole Proprietor

    One of the legal structures that you can adopt is a sole proprietorship. It is common for people to first start their business journey as sole proprietors. You would have to use your personal social security number initially until you obtain a taxpayer identification number for the company by filing the IRS SS-4 form.

    You will make a request to the IRS to provide you with an employer identification number. The business would operate under your name. However, you do have the option to seek an alternative name by registering for a Doing Business As (DBA) designation. This will allow you to get a different name for your business. You will have to comply with specific rules depending on the state you reside in. Moreover, you might need to apply for a business trademark as well.

    The main reason why individuals decide to run their business as a sole proprietor is that they have to file their taxes together on their business and personal income. This ensures minimal paperwork and less hassle. Besides, people who are freelancing part time or are fully employed, can become sole proprietors. However, it is important to keep in mind that it does not provide corporate protection (corporate liability protection). For this reason, your personal assets would be at risk if you are sued or the business goes bankrupt.

    This happens because there is no legal difference between personal and business assets with this business legal structure. Hence, your personal assets would need to be sold in order to pay debtors.

    2. Partnership

    Another type of legal structure that your business can opt for is a partnership. A partnership is a form of business that is owned by more than one person. You can either form a general partnership or a limited partnership. A general partnership is where both profit and loss are shared equally. On the other hand, a limited partnership is where only one partner contributes and receives part of the profits, whereas the other partner controls the operations. When there is no separation between the business and the partners, it is possible to operate the business as sole proprietors. However, limited liability partnerships provide a liability structure.

    Partnerships are suitable for anyone who is going into business with their family member, business partner, or friend. Some great examples include an agency and a restaurant. The partners get to make business decisions regarding business activities, and your business plan together and also share profits and losses.

    However, you would be held liable for the decisions made by your business partner. You should also know that this structure costs more money than a sole proprietorship as it would require an attorney to review the partnership agreement.

    Both sides have to agree to the business partnership agreement. A great example of a business partnership that you should know about is Google which was co-founded by Sergey Brin and Larry Page in 1995. What began as a small search engine ended up taking over the world.

    There are plenty of reasons a partnership might be the best structure for your business. A partnership is relatively easy to form, as there is little paperwork involved. You might need to adopt a fictitious name and file a certificate for conducting business as partners. Moreover, an article of partnership agreement is an absolute must. You will also have to obtain a license depending on the type of product or service you provide.

    A great thing about running a partnership is that it makes it easier for you to seek a business loan. The reason behind this is that the bank prefers two credit histories instead of just one. What’s more, you will have to file a federal tax form 1065 as well as state returns. Then, you and your partner will need to report the shared income or business losses when filing your income tax return.

    Partnerships are popular as each owner brings working capital and a certain type of experience to the business. If you invest more capital into the partnership, you and your partner can decide that you will receive a higher percentage when it comes to profit and loss. Hence, you would be the majority owner of the organization. Some successful partnerships that you should know about include Apple, Microsoft, Hewlett-Packard, Warner Bros, and Twitter.

    Business team discussing their legal structure.

    3. Limited Liability Company (LLC)

    A limited liability company is formed to protect owners from business-related liabilities. This type of structure has been popular ever since its inception. Its simplicity and strong legal protection make it worth considering for many individuals. If you want to protect your personal assets, you should consider forming a limited liability company. It takes a sole proprietorship to the next level.

    You will appreciate the fact that it is quite simple to set up and does not cost a great deal of money. There is less paperwork and you get to benefit from legal protections from court judgments and non-guaranteed debts, even though your company would not be considered a separate entity.

    Having legal protections in place makes all the difference, and removes a considerable amount of stress from your life. However, if you make a personal guarantee on a debt, it would become a part of the contract and your personal funds would be at risk. This means that the corporate veil would be exposed and you could be held personally liable. Moreover, you will need to operate the business as a separate entity in order to retain its value. As for the earnings made, they would be subject to self-employment taxes. You might also need to pay an additional franchise tax depending on the state you operate in. Make sure to consult the federal government’s IRS website, your state’s tax site, and your accountant, to better understand your personal tax burden and all tax implications for your business.

    4. S Corp

    A subchapter S Corporation or S Corp, is a type of business structure designed by the IRS to enable an organization to be recognized as a unique entity. This means that it is considered a separate entity from the person who owns it. Because of this separation, you would benefit from limited legal liability. As there would be a separation between personal and business assets, you will enjoy peace of mind and greater financial safety for you and your family.

    What you will need to do is file separate tax returns for the organization. Form 1120S is normally filed. As profit and losses pass to the shareholder, the business does not get taxed. Instead, only the shareholders of the company are taxed. Moreover, if a shareholder works for the company, he or she can receive reasonable compensation for running the company. A fair market value must be paid to the shareholders for their work. Otherwise, the IRS would reclassify additional corporate income as wages and the S Corp would have to pay employment tax which includes Medicare taxes and Social Security.

    Generally, an S Corp is mostly suitable for people who would pay themselves a low wage in order to avoid having to pay self-employment tax. Furthermore, the company can be audited from time to time and penalties might need to be paid if there are violations.

    5. C Corp

    A C Corporation or C Corp is also a great option for independent professionals as it allows you to become a shareholder. You get to have the same status as any other Fortune 500 business. A C Corp is a separate entity from its owner. When you individually own the C Corp, you would be the majority shareholder. Although the structure might be more complex, it is more sophisticated and attractive for independent business owners.

    The IRS views C Corps as individual taxpayers. As the company would have limited liability, you will not be held personally liable for anything. Moreover, fringe benefit deductions are also offered, such as health reimbursement arrangements. A C Corp is subject to double taxation, which is something that you need to take into account. It’s good to gain a clear understanding of how your legal structure decisions affect tax treatment within your business so you can stay compliant, plan ahead, and continue to do business.

    Business partners discussing legal structure.

    Conclusion

    Different legal structures offer certain tax benefits, legal advantages, corporate and individual protections, and organizational advantages. It’s a good idea to do plenty of research in to each one, and seek advice from a good lawyer and an accountant so you can make the very best decision for yourself and your organization. 

    Sound Accounts helps business owners get organized, stay compliant, and make the most of their finances, with individually tailored bookkeeping service plans and ongoing advice. Contact us today to learn more and find out how to qualify for 6 months of free QuickBooks. 

    To learn more about business legal structures, check out our frequently asked questions below. 

     

    FAQ

     

    What is the best legal structure for my business?

    When it comes to selecting a legal structure for your business, you have to think about several factors – what kind of business you want to run, how you want to split up profits and liabilities, how much protection you want against legal ramifications, whether you want shareholders or to keep it entirely private, and much more. It’s good to consult an attorney and a financial professional for clarity and direction.

    Why is it important to choose the right legal structure for your business?

    The specific legal structure of your business affects many things, your taxes, how profits and responsibilities are divided, how much exposure you have to legal liabilities, whether stockholders are involved, and more. Your legal structure says a lot about who and what you are as a business, and allows you to function more successfully within your goals. It can also protect you from unnecessary penalties or the possibility of personal losses should problems arise. 

    Why is a Limited Liability Company (LLC) a good idea for many businesses?

    The main reason why limited liability is crucial for a business owner is that it ensures you are not held personally liable for certain court judgements and non-guaranteed debt incurred by the company.  

  • 7 Basic Principles of Financial Management

    7 Basic Principles of Financial Management

    When it comes to running a business or even a nonprofit organization, you need to understand the importance of financial management. After all, if your finances are not in order, your financial health and long-term viability as an organization will suffer. Whether it’s paying off credit cards or maintaining sufficient cash at the end of the month, you must have enough money to make payments and meet your responsibilities.

    Successful organizations know that controlling costs and managing risk comes down to how well they manage their finances and financial policies. If you want to make sure that you take the right actions to help your organization grow, you have to have a clear financial plan and financial goals. The following principles of financial management will enable your business or organization to thrive and move forward with purpose. 

    a couple working on the principles of financial management

    1. Organize Your Finances

    One of the most basic principles of financial management that you need to master is to get your finances organized. Only when your finances are in order, free of clutter and distractions, can you expect to proceed with procurement and the acquisition of supplies. In fact, it is necessary for obtaining a lease agreement and other types of agreements and to prepare for an audit.

    By organizing finances, both your personal and professional accounts, you establish the foundation for creating wealth. This is why you will have to track everything, including car loans, mortgages, brokerage accounts, personal loans, bank accounts, credit cards, and retirement accounts. You should be able to use budgeting software to track these accounts and make payments on time so you can avoid late penalties. Besides, the federal government advises businesses to account for everything, even indirect costs. This allows you to accurately prove how much you earn from your business.

    If you don’t have much experience organizing finances, you should educate yourself with a range of resources along with taking basic or in-depth courses on the subject to achieve your ultimate goal. Most of the tools available today provide access to insights and research that can help you move in the right direction. You should read financial blogs, books, and periodicals to stay updated and to continuously educate yourself. The last thing you want is to make mistakes you could have avoided. 

    2. Spend Less than You Make

    When you start a business, it’s pretty easy to go overboard. Similarly, individuals need to spend less than they earn in order to control their debt-to-income ratio. Even if you want to spend more on your investments, you still need to think things through. Otherwise, you could overspend and force yourself to borrow additional funds through a loan or other means. 

    Once again, you should be able to use financial software to keep track of spending and budgeting. It will allow you to meet your long-term goals. By learning how to monitor finances and understanding where most of your money is going, you’ll be able to establish control over your finances. It is one of the secrets to strong business performance. Luckily, you don’t need an accounting degree to know when you are spending more than you are earning. When you overcome debt or avoid it altogether, you decrease your liabilities and increase your ability to expand.

    In addition to controlling your spending, you have to limit debt to income-producing assets. When you have car loans and credit cards to pay off, you will have less money for your goals. You need to understand that only a few car models don’t depreciate to zero. On top of this, you have to pay for repairs and high-interest rates. Therefore, you should consider whether you even need to purchase things that are not an absolute must. If you want to take on debt, it should only be for financing items that actually retain their value with time, such as education, real estate, business equipment and technology, and talent. 

    3. Make Your Money Work

    If there is one basic principle of financial management that you need to master, it is to make your money work for you. This is where the concept of the time value of money comes into place. If you invest today, you can expect a greater return if you plan with wisdom and the right research. Whether you want to invest in entities, stocks, or a savings plan, the earlier you begin, the better.

    Consider diversification to ensure that you don’t expose your portfolio to excessive risk. Qualified financial planners are good for this. Make sure you regularly invest your money so that you get something in return and take prompt corrective actions to shift your investments toward more advantageous avenues when current results aren’t meeting your strategic goals.

    Since money loses value over time because of inflation, you cannot simply wait around and let assets collect dust. Instead, consider new places to invest, real estate opportunities, and remote contract work. Offer outside consultation services to businesses or non-profit organizations. Develop new products and services to introduce to the market. Invest in a franchise or another company, and consider expanding current systems to increase profit over time.

    Remember, when speaking of diversification, you should know that it isn’t only reserved for investment. You should find ways to get more out of your income. We all have talent and special skills that can provide money-making opportunities. Earning some extra income can help you with financial management and enable you to lead a better life.

    business owner applying principles of financial management

    4. Understand Risk

    Everything comes with risk in life. Generally, the more risky something is the higher the return should be. It is known as the risk-return trade-off. Investing in bonds and stocks comes with a higher rate of return because there is more risk involved, along with the possibility of you losing your principal.

    On the other hand, investments like money market accounts and certificates of deposit come with a lower rate of return, but they hold a lower level of risk. However, you still need to understand that no investment comes with zero risk. As long as you manage your portfolio well, don’t place all your eggs in the same basket, and make the most of wise financial advice from qualified investors and professionals, you should be good to go.

    5. Maximize Employment Benefits

    If you are working a regular job, it is a good idea to cash in on employment benefits. You should definitely get medical and dental insurance, consider flexible spending accounts, and take a serious look at a 401(k) plan. The reason why you need to set money aside for employee benefits is that they are tax deductible and a great way to protect you and your family. This means that you actually end up saving money when you get them, while providing for your family’s health and wellness. It is crucial that you invest in your future. It will ensure you improve your overall financial and personal well-being. 

    6. Pay Attention to Taxes

    The next basic principle of financial management that you need to know about is paying attention to taxes. Managing taxes accurately allows you to avoid penalties and to benefit from tax credits, while applying adequate safeguards to your compliance practices. You might not realize it now, but taxes can eat away at your earnings.

    If you fail to account for your tax burden, the same way individuals sometimes don’t pay enough attention to their capital expenditures or employment costs, you could easily lose a huge share of your income. You should look into taxable investments and organize your year-end tax filings to ensure there are no mistakes, no delays, and no missed opportunities for deductions and savings. Be sure to evaluate all your tax implications and possibilities. This will allow you to maximize your take-home amount personally and in the professional sphere, put your company’s revenue to work more effectively. 

    person organizing credit cards to improve financial management

    7. Plan for the Unexpected

    Nobody knows what the future holds. Still, you can’t just wait around for an unforeseen emergency to pop up and hope to deal with it when it arises. What you need to do is save enough money to ensure you have cash ready when something goes wrong. You might have to weather natural disasters, house repairs, car problems, catastrophic medical care, accidents, or extended unemployment. Therefore, you must prepare for uncertainty. Make sure to increase your savings during the good times to avoid a difficult situation later on.

    When you have sufficient savings, the bumps ahead, while difficult personally, will not have such a dramatic effect on you financially. You have to be ready for unexpected financial exposure. Otherwise, your long-term goals are in danger of going unrealized. Besides, you have to look after the financial security of your family. Lastly, don’t neglect all necessary forms of insurance, such as short-term and long-term disability, medical coverage, home and auto, business, and umbrella insurances. Having a financial plan and a high standard for your financial health can help you escape hardship or even ruin.

    Conclusion

    Understanding the basic principles of financial management is key to a healthy, fulfilling life and to the success of any company. From organizing your finances to planning for the unexpected, each tip mentioned above will help you prepare for uncertainty and make more strategic decisions. Never neglect sound financial planning and advice. It is one area that all successful individuals and organizations have in common. 

    Sound Accounts helps individuals and business owners make the most of their finances with individually tailored bookkeeping service plans. Contact us today to get started and see the difference an experienced bookkeeper can make for you and your business.

    To learn more about financial management, check out our frequently asked questions and answers below.

    FAQ

    What is the most important principle of financial management?

    There are several key principles to good financial management. One that should always remain a priority is to organize your finances. Good organization helps you stay in command of your money and future. Additionally, creating and following a budget will help you meet your financial goals. 

    What are financial principles?

    Financial principles are guidelines that people and businesses can follow to avoid financial hardship and continually build and expand. 

    Why Are Financial Principles Important?

    A few primary reasons financial principles are crucial are that they provide you with a framework you can follow to maximize your earnings and minimize expenses. Sound financial principles enable us to move ahead with a plan instead of making uninformed and reactionary decisions that don’t get us ahead. 

  • How to Organize Business Expenses like A Bookkeeper

    How to Organize Business Expenses like A Bookkeeper

    As a business owner, when it comes to organizing business expenses, there is a lot that you can learn from a bookkeeper. After all, a bookkeeper knows how to manage payments and prepare financial statements. The fact is that running a small business is no easy task. There is a lot that goes into it.

    You have to know how to track and organize all your business expenses to ensure that you’re able to make the necessary payments on time, run your business from day to day without missing a beat, and plan ahead more strategically. Thankfully, there’s no need to stress since we’ll show you how to organize your business expenses like a bookkeeper.

    bookkeeper working on business expenses

    Common Business Expenses

    Before we take a look at our tips that will help you manage your business expenses, it is important that you have an idea about the most common expenses. These include:

    • Cost of equipment.
    • Employee salaries and bonuses.
    • Travel and entertainment expenses.
    • Employee training and development.
    • Fees for cell phone, business phone, and internet.
    • Protective gear for workers to perform their tasks.
    • Fees for managing a bank account and paying credit card payments.
    • Fees for professional services such as legal and accounting services.
    • Business insurance policies include property, liability, malpractice, and auto.
    • Advertising and marketing expenses like website development, brochures, and business cards.
    • The payment for vehicles, office supplies, pictures, warehouse, equipment, and office space rent.
    • Top Tips to Organize Small Business Expenses

    Taking these into account, we’ll look now at ways to better organize your expenses.

    1. Open a Separate Business Bank Account

    One of the most important tips that you need to consider is opening a separate bank account for your company. The reason behind this is that you need to manage business transactions without having to deal with confusion, crossover from your personal accounts or other issues. Make sure that you don’t use this account for personal expenses. This makes tax time confusing, causes you to miss valuable deductions, can draw the auditor’s attention, and keeps you from using your resources in a focused manner. 

    It’s easy to open a business bank account. You will need to provide your personal details such as full name, birth date, address, ownership percentage in the business, social security number, and photo ID. As for the business details, you’ll need to let the bank know your entity type, employer identification number, business name, and business address, and have your business license and other documents ready for verification.

    Choose a bank with a long history of helping business owners manage their finances, credit unions and banks that understand the needs of entrepreneurs and their families, along with providing a range of quality services for someone with your goals. 

    .

    2. Group Your Business Costs

    When you start a new business, you will need to organize your costs and ensure they are under control. In order to do so, group expenses by type. You will have to organize the costs into two categories, one-time and recurring expenses. One-time expenses are those expenses that you have to pay for when you start a new organization, such as licenses, equipment, and permits. As for recurring expenses, they are expenses that you have to pay on a monthly or annual basis like employee salaries, interest, utilities, and rent.

    3. Use a Spreadsheet

    The next tip to consider is to use a spreadsheet to organize your business expenses. Although it is a low-tech approach, it is extremely effective at helping you to maintain company records across a range of areas and departments. It will allow you to manage cash flow, prepare for tax season/tax time, and account for all deductions.  

    To get started with a spreadsheet, you will have to track all your business expenses and go through your bank statements. Keep in mind that entries need to be made daily. Categorize every expense daily so that you don’t encounter issues later on. Google Sheets or Excel should help you get started.

    4. Digitize the Hard Copies

    Since dealing with paper can be time-consuming, it is best that you digitize your hard copies of all paper invoices, bank records, employee records, permits, trademark applications, contracts, receipts and invoices, tax papers and more.

    When you digitize these documents, you will be able to access them whenever you need. This will allow you to free up office space. There are apps and software programs that will help you visually record and organize your records. Also, don’t forget to back up all your digitized data both on hardware and in the cloud. 

    5. Save and Organize Receipts

    Organize receipts in ways that make the most sense for your business to ensure that you don’t encounter issues later on. Here are some ways that you can do this.

    Use Google Drive

    This cloud-based platform makes it possible for you to store just about every type of record. Besides, it supports Google Presentation, Google Sheets, Google Docs, and other tools.

    Use Folders

    Next, you should also make folders to suit your requirements. It is even possible to make use of sub-folders. You’ll be able to include all pertinent details to ensure that you can access every bit of needed info whenever the need arises.

    Use Evernote

    You can take notes of just about everything with Evernote, business ideas, conversation notes, thoughts on different business or personal matters, reminders to take care of something. It lets you access information with just a few taps on the screen to help you recall key information, so you can solve problems and create opportunities. 

    Use Welly Box

    This web-based app allows you to collect essential information quickly and enables you to create an expense report, which is always an important part of business management.

    6. Use Accounting Software

    As your business progresses, you will need to use accounting software to record transactions and other financial activities. The more your business grows, the more imperative it is for you to do so.

    With accounting software, you will have no trouble recording and categorizing financial transactions. You’ll be able to manage payroll, send invoices to customers, pay bills, study trends and generate forecasts, and much more. Here’s how accounting software can prove useful.

    • It syncs all your financial data.
    • It provides you with professional financial statements.
    • It generates daily, monthly, and yearly reports automatically.
    • It saves hours of work by ensuring that there is virtually no need for manual bookkeeping.

     

    business owner working on business expenses

    7. Import Transactions by Connecting Your Bank Account with Your Accounting Software

    To benefit from maximum convenience, you need to connect your business bank account with your accounting software. This will allow you to import transactions with just a click of a button. Generally, small businesses should be able to utilize integration support systems for managing multiple transactions.

    As there are plenty of solutions available, you need to pick one that suits your individual requirements. You must think things through and make a list of features you need. Finally, make sure it provides time-honored features along with occasional upgrades to its technology. Your software provider should stay relevant, engaged, and innovative.

    8. Stick to Either Accrual or Cash Accounting

    If you want to make sense of all your accounting records, you must select one accounting method and stick to it. It will allow you to better manage your business finances. Once you have selected the method, you will have to follow a set of rules that govern this method. Accrual accounting is required for businesses that generate annual revenue that is at least $25 million within the last three tax years.

    Under GAAP (Generally Accepted Accounting Principles), accrual accounting is recognized and allows for financial reporting to be done correctly. On the other hand, cash basis accounting tends to be a lot more straightforward and is easier for some small businesses to follow. It only requires you to record transactions when you receive the payment. Similarly, expenses would only be recorded when they are paid.

    9. Hire a Bookkeeper

    Since organizing business expenses is no easy task, you might want to hire a bookkeeper to help you out. At the end of the day, your focus should be on running your business instead of stressing over accounting errors and bookkeeping details. 

    The fact is that your bookkeeper or bookkeeping service provider will know how to handle everything, from keeping accurate records and overseeing all bookkeeping needs. This includes maintaining digital records, spotting tax deductions, watching and recording travel expenses and business meals, knowing deductible expenses and business income, running financial reports to give you a clear financial picture, spotting financial issues, keeping you in budget and accountable for operating expenses, helping you avoid things like overdraft fees, mastering your bookkeeping software, organizing customer invoices, and fully understanding how your unique business financials affect your business plans.

    In fact, you’ll be able to seek advice on how to improve the financial situation of your business. Furthermore, your bookkeeping service provider will give you regular reports and feedback to ensure that you are able to keep up with the latest trends and address issues early on. Even though it isn’t compulsory to hire a bookkeeper, you should definitely consider partnering with a bookkeeping firm.

    10. Secure Your Business

    Lastly, you need to secure your business. You might have to set up an S-Corp or LLC and get business insurance to stay afloat. The reason why you should consider an S-Corp or LLC is that it will allow you to separate your business identity from your personal finances.

    Besides, it will ensure that you shield your personal assets from encroachment if you encounter any legal issues. Also, don’t forget to renew essential licenses on time to stay compliant.

    Conclusion

    Bookkeeping is immensely important for your business. Without excellent bookkeeping, your finances, and consequently, your business goals, go out the window. Business owners who manage money well succeed more often than those who don’t. It’s that simple. Don’t leave things to chance. Don’t let yourself get disorganized and fall victim to errors and losses. Organize your finances like a bookkeeper today and discuss your options with a professional. 

    Sound Accounts helps business owners increase productivity and reach their goals with top-notch bookkeeping oversight tailored just for you. Contact us today to learn more about how we can help you succeed. 

    To learn more about organizing your business expenses like a bookkeeper, see our frequently asked questions below. 

     

    FAQ

     

    Is a bookkeeping service worth the money?

    The short answer is yes! Bookkeepers are experts in a field that most business owners only carry a scant knowledge of. They can organize your entire bookkeeping system, develop better habits, help you make better use of your resources, save on taxes, and reach your goals. Plus, you’ll sleep better not having to worry about it all yourself. 

    What Is The Easiest Way To Track Business Expenses?

    The easiest way to track business expenses is by using accounting software. The best software programs will automate certain functions and allow you to record others, then quickly produce charts and reports which provide you with a clear financial picture and the ability to make projections. 

    Can I simply keep the books the old-fashioned way, with ledgers and files instead of with software?

    Yes, you can, and some people are still really good at doing so. Yet, for most people, software is a much better choice. It will help you avoid mistakes, keep digital files for everything, files that are instantly accessible and easy to back up, and provide you with a vast range of helpful features you probably never even knew you needed. 

  • How to Manage Small Business Finances

    How to Manage Small Business Finances

    One of the hardest tasks that business owners need to ensure is managing business finances. The fact is that you need to know how to manage the financial health of your company. Otherwise, you’ll definitely struggle to generate a profit, manage your resources, plan strategically and pursue your goals with a greater sense of clarity. Even if you have several other aspects of business management in order, neglecting your finances can topple your entire program.  

    It’s alright if you don’t have much experience managing personal finances, there are certain things that you can do to avoid slipping into bad financial habits. Here’s what you need to consider. 

    plant growing from coins symbolizing healthy business finances

    1. Properly Manage the Accounting

    Although you can invest in accounting software, it is best that you hire a bookkeeper or outsource the work to ensure that you can keep track of all costs and income. The fact is that managing business debt and expenses requires you to be on top of everything. Otherwise, you will struggle to pay off loans on equipment and other items, and slip into poor money management. 

    2. Review the Costs

    The next tip that you should consider is reviewing your costs. It is in your best interest to keep track of all expenses. You need detailed information to make more focused financial decisions. As costs can quickly add up, you have to stay on top of everything to not overspend or get into debt. 

    Managing costs allows you to obtain the supplies you need to keep your business running, invest in growth, and increase customer service standards, while ensuring you don’t go over budget.

    3. Make Financial Projections

    To avoid making serious mistakes in your business finances, and to give yourself the foundation you need to conduct long-term planning, consider making financial projections using all data within reach. The three most vital reports to use are a balance sheet, income statement, and cash-flow statement. These three reports provide the core information necessary for projections.

    Additionally, you can use several other forms provided by your accounting software and bookkeeper, like the profit and loss report, aged receivables summary, analyze sales report, and several others to refine your process. By anticipating your future business needs, you will be able to create a budget and address obstacles early on. 

    Moreover, you can use accounting software to monitor card payments and cash flow. In fact, you should be able to generate a report for a specific time period with just a click of a button. There are plenty of options for setting the period of time you want to focus on.

    4. Get the Invoicing Right

    Invoicing is one of the most important tasks that you need to get right to better manage your business finances. You must send out invoices as soon as you provide goods or services. There’s no reason for you to wait around. Also, you need to set the payment terms to ensure that payments are made promptly. You don’t want to be in a position to hound your customers to pay you back. 

    You want to establish a payment system that guarantees instant payments, or payments with a short lag time. You can even set automatic reminders that will reach out to your clients and customers to avoid late payments.  

    Make sure to clear the account balance as soon as a customer pays to avoid contacting someone who doesn’t owe you anything.

    5. Have a Separate Business Bank Account

    To avoid many troubles, you should have a separate business bank account. It will be used for income, capital, equities, and expenses. The worst mistake that you can make is mixing business money with personal finances. It is likely to cause tax problems, confusion when accounting for deductibles, mislocation of funds, and unexplained losses. Besides, you would be better able to track your working capital and cash flow when you have a separate business bank account.

    6. Manage Your Loans

    If you want your business to remain solvent and make the most of your resources, you will also need to keep a close eye on all your personal and business loans. Falling behind on payments, not taking advantage of lower rates when possible, refinancing too often, or taking out too many loans, these can all get you in trouble. Business debt can be a big help when you use it wisely and carefully. Unfortunately, it becomes a weight around your neck and a weapon against your credit when you don’t. 

    7. Use a Business Credit Card

    When it comes to paying off business-related expenses, you need to use a business credit card. However, it should not be used for personal purchases. You don’t want to get confused as to where certain expenditures need to go. You also need to account for these purchases when filing taxes. Plus, there are many perks to using a business credit card that can accrue over time. Always remember that you can save a ton of money when you choose the right card.

    8. Pay Yourself First

    Running a small business is a full-time job. This is one reason why you should pay yourself first. It doesn’t mean that you’ll gobble up all your profits. But you want to have a regular salary in place so that your needs and the wellbeing of your family are met. 

    Depending on the level of your current revenue and gross profit, you should set a salary that represents the hard work and innovation you put into your company. It should also provide enough that you aren’t worried about personal and family finances each day. This stress not only makes life more difficult, it makes it harder to focus on your work and the development of your people and your organization. 

    9. Be Frugal

    Since running a small business costs a ton of money, you have to remain frugal. There’s no other way to succeed, at least toward the beginning. Although you might pay yourself, it doesn’t mean that you should use up all the money. You need to save up and ensure that you invest it to diversify your income for long-term security and future opportunities. The money you save now will provide you with greater flexibility later on. It would allow you to weather many storms.

    10. Reduce Travel Costs

    In addition to the above, you also need to keep an eye on travel expenses. You can’t let them add up. If you notice travel costs going up, you will need to identify the source of the problem and find alternatives to reduce these expenses. If you’ve been flying to a location for business, you might be able to take a train or drive there instead if it’s close enough and economically wise to do so. Similarly, you don’t need to stay in a 5-star hotel or eat out at the finest restaurants every day. It’s the small things that make a huge difference.

    11. Keep Legal Fees Under Control

    Since legal services cost a ton of money, you need to better manage them to ensure that these fees don’t get out of hand. In order to better manage legal costs, make your expectations clear and opt for a more cost-effective billing option. 

    You should be able to discuss billing options to find out what works best. Moreover, you should also find out whether it is possible to defer payments until a more opportune time. Legal counsel is important for business owners. You don’t want to neglect it. However, you want to remain aware and engaged with it to ensure you are getting the best value. 

    business owners working together on business finances

    12. Be Strategic with Your Marketing Choices

    Marketing is such an important part of your business growth plan. It is imperative for building a dedicated customer base and your brand’s identity within the market. Sometimes, if you have the experience, you can handle your own marketing for a while. Be careful, though, as this can eat up a lot of your time, which can cause you to burn out and neglect it. 

    Other times, contracting with a professional marketing firm is the right choice, as they can put their experience, resources, and creativity to work for you to achieve significant results. It may cost a bit more, but you might make a lot more in return. Investing in a strong marketing plan is one of the best business decisions you can make. Look at all your options and invest in the marketing choices that push your business forward in tangible ways while not breaking the bank.

    13. Rent Instead of Purchase

    Since it costs a ton of money to buy property or large equipment, it might be better for you to rent or lease.. You should lease equipment to avoid having to pay maintenance costs. Besides, it will also ensure that you don’t overpay for anything and that you only pay when you need to use the equipment.

    14. Know When to Get a Loan

    There’s no reason for you to wait a long time until you take out a loan. Knowing when to take out a loan allows you to benefit from better terms. In fact, yo’ll be in a better position to negotiate and get the loan amount that you need to keep your business afloat. You should take a loan out when your business finances are in order. It is always best to get financing long before a possible emergency, and use it to strengthen your infrastructure and expand your efforts so you can navigate more difficult times more easily. 

    15. Sufficient Capital

    As a small business owner, you also have to keep an eye on your capital. It should be enough to keep the business running daily and to cover unforeseen expenses.. Generally, you should have capital that covers three to six months’ worth of expenses. 

    16. Never Spend Prematurely

    Lastly, you should think about each expense. Never pay for anything without justifying its cost. Know why you’re thinking about purchasing something. You need to be able to connect it directly to a clear objective or outcome. If you can’t, you should rethink your desires. 

    Conclusion 

    Managing your finances is one of the best things you’ll ever do for your business, No matter how many other areas you have in order, without a clear understanding and confident hand on your budget, expenses, spending habits, investments, and cash flow, problems will eventually arise. 

    Great money managers make better business managers. Finally, don’t hesitate to reach out to a great bookkeeper or bookkeeping service provider to help get your business finances in order. 

    Sound Accounts helps business owners achieve more with superb bookkeeping services and great advice. Contact us today to learn more. 

    To learn more about managing your business finances, check out our frequently asked questions below. 

    FAQ

    How can I learn how to manage my business finances?

    There are several resources to tap into. Start by teaming up with a great bookkeeper or accountant. Check out several excellent books on money management for business owners. Take some online classes from places like Coursera and Udemy, and partner with a mentor with considerable experience in this area. 

     

    How can I decrease errors and make the most of my business finances?

    Create a clear budget and stick to it.

    Keep meticulous records.

    Go over your most important financial statements and financial reports each day and keep physical copies of your financial documents on hand in addition to your computer files.

    Reconcile all invoices and receipts daily.

    Stay on top of your business expenses.

    Follow your business plan and your financial plan closely.

    Separate your business accounts and personal accounts.

    Control business travel expenses.

    Create a business savings account as an emergency fund to stay ahead of surprises and unexpected expenses.

    Keep detailed business records for everything.

    Consider strategic financial partners and angel investors.

    Make monthly payments on time.

    Consider leasing equipment instead of purchasing.

    Keep track of cash flow, profit margin, and business revenue so you can reach your financial goals.

    Protect yourself with business insurance.

    Know your tax burden and be detailed and on time with tax payments.

    Educate yourself on financial management principles.

    Talk with your bookkeeper about other ways you can stay ahead and avoid mistakes.

     

    How Long Does It Take For A Small Business To Be Profitable?

    It varies widely from business to business. It’s common, though, for many businesses to turn a profit after the second or third year. Your experience will be unique to you, though. 

  • New WA State B&O TAX CREDIT AND FILING THRESHOLD

    New WA State B&O TAX CREDIT AND FILING THRESHOLD

    SMALL BUSINESS B&O TAX CREDIT AND FILING THRESHOLD

    Beginning with tax periods starting on or after January 1, 2023, this bill increases the small business B&O tax credit as follows: 

    • For taxpayers that report at least 50% of their taxable amount as subject to business and occupation tax under the Service and Other Activities classification including those subject to tax on contests of change and/or tax on real estate brokers the maximum credit for a reporting period is $160 multiplied by the number of months in the reporting period, as determined under RCW 82.32.045. 
    • For all others, the maximum credit for a reporting period is $55 multiplied by the number of months in the reporting period.

    The bill also increases the threshold for filing returns to $125,000 per year for all taxpayers that do not have other taxes to report to the department.

    Credit and threshold effective January 1, 2023 (ESSB 5980, Chapter 295 Laws of 2022).

    Special notice coming soon.

  • How to Get Your Small Business Payroll Ready for Tax Season

    How to Get Your Small Business Payroll Ready for Tax Season

    Business owners have to minimize their tax liability during tax season in order to save money. Payroll issues are likely to arise when submitting tax returns. This is why it is crucial that you prepare yourself thoroughly for this process. All businesses have to calculate and pay taxes at regular intervals and stay current with all tax requirements. 

    Generally, you will need to make payments every quarter. In addition to this, you also have to follow the payroll tax schedule. As you have a responsibility to make a tax payment, everything is interconnected. To help you prepare your payroll for tax season, here is everything that you need to know. 

    business owners preparing for small business payroll tax season

    The Importance of Preparing for Tax Season

    When tax filing season comes around, it is natural to worry. No one likes paying taxes and we like being scrutinized even less. This is why it’s important that you get prepared, especially when it comes to payroll. 

    Since preparing your accounts for taxes can be complex, the earlier you go through your business transactions, your balance sheet, and other statements and reports the better. It can be difficult to navigate US taxation when it comes to payroll. The following reasons highlight the importance of good preparation.

    1. Saves You Money

    One of the main reasons why you must review your payroll for tax season is that it can help you save money. It would give you enough time to identify deductions and credits that you might have not even thought of.

    2. Minimizes Time Involved

    Another reason to prepare for tax season is that it helps minimize the amount of time involved. This allows you to manage your available time wisely. By going through all the forms, documents, payments, receipts, and business expenses, you’re able to determine your taxable income regardless of your business type or business structure.

    3. Eliminates Errors

    No matter how many workers you might have who report to you, it is important that you prepare for tax season to eliminate errors. Errors in payroll taxes can result in audits or penalties. They can also keep you on the IRS’s radar, so to speak, and decrease the confidence of your staff. 

    Top Ways to Prepare For and Navigate Tax Season

    If you are preparing your payroll and other tax documents, you should consider the following tips to breeze through this tax season.

    1. Ensure That You Are IRS-Compliant

    The first thing that you must do before you file any documents is to find out if you are currently IRS-compliant. Make sure that you have properly classified your employees and that you have an EIN (Employer Identification Number). Be sure that all payments and filings are up to date and that you have no outstanding taxes owed for past filings.

    2. Review Documents and Data

    The next thing that you need to do is go through your documents and the information you’ve entered in reports or tax filings to ensure accuracy.

    Even though you have certain things automated, there is still the possibility that mistakes such as misspelling names, transposing numbers, and checking wrong boxes can happen. What seem like simple mistakes can lead to unforeseen consequences down the road. 

    3. Determine Year-End Payroll Before Proceeding with Business Taxes

    Once January comes to an end each year, you have to do a few things as mentioned below.

    • Submit a copy of W-2 for each employee.
    • Submit a Form 940 that contains a summary of the tax payment made for the year and a Form 941 which indicates that quarterly federal tax payments had been made.
    • Submit a Form 1099 if you have hired any contractor and paid over $600 in the previous year.

    4. Know All Payroll Tax Deadlines

    When the new tax year begins, you have to meet multiple deadlines. Most of these will require you to close your financial records for the previous year. You will also need to work out strategic plans. It makes sense to focus on meeting the W-2 deadlines first as you can’t use an extension and would immediately incur penalties. It’s a good idea to have a schedule or calendar posted somewhere that displays all the tax days for the entire year.

    6. Evaluate Payroll Write-Offs

    After you have calculated total wages along with their respective taxes, you should be able to determine if you qualify for a small business deduction or not. Here are some payroll expenses that you should be able to write off.  

    • Cash awards.
    • Paid vacation and sick days.
    • Reimbursements made for covering travel expenses.
    • Bonuses and commissions in case they would be considered additional wages.
    • Benefit programs like an accident, life, and health insurance as well as education reimbursement.
    • Contributions made to certain state payroll taxes, unemployment benefits, social security, and Medicare.
    • Wages paid that qualify as a necessary and ordinary business expense. These are typically considered an expense during the first year of startups.

    7. Have the Right Records on Hand

    Lastly, your tax process will require certain records. You never know if the IRS or the state might conduct an audit and thorough records help you manage your payroll, finances and employee relations with greater ease and confidence. 

    Keeping all necessary documents in order and quickly accessible allows you to access them right when you or the IRS needs them. It also helps you stay organized and on-time. IRS guidelines advise businesses to maintain tax records for up to three years. However, employee records have to be kept for four years. It is best that you keep both electronic and paper copies to stay on the safe side.

    business owner working on payroll for tax season

    Reasons You Should Consider a Professional Bookkeeping Service

    Since handling your payroll and tax issues on your own can be extremely difficult, it might be worth considering seeking a professional bookkeeping service. Here are a few reasons. 

    1. Allows You to Focus on Core Business Activities

    A major reason you could use the help of accountants or a professional bookkeeping service is that it enables you to focus on your core business requirements. To run your business successfully, you need time, attention, good resource and personnel management, a clear plan, and consistent leadership. Hence, the last thing you want is to spend a lot of time working on payroll and taxes and losing track of what matters most to you. 

    2. Helps You Navigate Taxes

    Since most owners don’t have a background in finance or accounting and don’t know how to manage accounts, it is best to leave the job to an expert who is certified and has the experience needed to handle every aspect of the bookkeeping and tax process. They can help you limit mistakes which would otherwise prove detrimental to your business.

    3. Provide a Different Perspective

    Tax experts work with just about every type of business, and because of this, they’ve acquired a great deal of knowledge. When you hire one to help you out, you get to benefit from their storehouse of experience. 

    Even though you might think that you are managing your startup well, it is always best to seek all the help you can get. Having another pair of eyes allows you to see things that you otherwise might not have noticed.

    4. Eliminate Tedious Work

    Tax submissions can be grueling to take on completely on your own. It makes sense to escape it by seeking a bookkeeping service provider. Preparing your payroll and managing your accounts is often not something you tend to feel passionate about. Bookkeepers are geared for it and will ensure that everything gets managed in the best way possible. 

    5. Ensure Correct Tax Filings

    A great bookkeeping service provider is highly meticulous with details and focused on making sure every piece of information is perect. They go through every corner of your payroll and finances to ensure complete accuracy and compliance. As there are various requirements that you have to meet, it often helps to get a financial expert involved.

    6. Reduce Financial Obligations

    Now, you might think that you can handle all your taxes on your own in the hope of reducing costs. However, you may be missing a few things. A professional bookkeeper would help you save big. The fact is that missing out on tax obligations and payments is easy to do when you’re focused on everything else.

    A lack of knowledge, and the possibility of human error could prove costly. Trying to backtrack and fix errors and pay fines can be overwhelming. 

    Conclusion

    Taking time to walk through the process of preparing your payroll for tax season will pay off several fold. Don’t miss any of the steps and tips above and start early, that way you can avoid the stress of last-minute action. And never hesitate to reach out to a qualified bookkeeper to help you navigate tax season. Their invaluable advice and professional focus will keep your business humming right along. 

    Sound Accounts helps businesses of all kinds stay on top of their payroll and prepare for tax season with confidence. Contact us today to learn more about partnering with Sound Accounts for your bookkeeping needs. 

    To learn more about preparing your payroll for tax season, check out our frequently asked questions and answers below. 

    FAQ

    How do small businesses keep track of taxes?

    Small businesses keep track of their taxes by maintaining accounts, going through their bank statements, understanding your assets, reading through and analyzing all financial reports, staying organized, keeping current with all IRS codes and requirements, and preparing in advance.

    If I need help with payroll or taxes, where should I turn?

    Hiring either an in-house bookkeeper or contracting with an excellent bookkeeping service can help you make sense of your payroll, fix mistakes, find money-saving opportunities, and prepare thoroughly for tax time. 

    Can I write-off small business expenses?

    There are several expenses that business owners can deduct. It is important to familiarize yourself with current options here and reach out to a qualified professional with any questions or needed assistance. Common deductible expenses include:

    Payroll

    Office furniture

    Office equipment

    Rent or lease payments

    Company vehicles

    Company travel and lodging

    …and much more.

  • 5 Common Mistakes Small Business Owners Make with Payroll Taxes

    Paying your employees for the time they have put in is not as easy as you might think. The truth is that businesses of all sizes have to record everything. Organizing your payroll, making sure all info is correct, and staying current on all requirements is imperative to your safety and success. 

    Before you send your workers a check, you have to meet various tax and regulatory requirements. This is what makes processing payroll more complicated. In fact, it’s quite common for business owners to make payroll mistakes when they don’t have a bookkeeper. And it’s not something you want to ignore or try to fix after the fact. That’ll cause even more problems. 

    When processing payroll, you have to adhere to certain rules. However, you must first avoid the following common mistakes to save money and stay compliant with payroll taxes.

    1. State Unemployment Tax Errors

    Unemployment taxes also have to be accounted for, just like payroll taxes. They are paid by employers and withheld at the state level. You must ensure that you file them regularly.

    Keep in mind that every state has its own requirements and rates which you have to meet depending on the state where your employees reside. You have to be extra careful if you operate a business in different states or close to the state border.

    2. Employee Information Errors

    One of the most common mistakes that you need to avoid when dealing with payroll taxes is employee information errors. It occurs right when you hire an employee and complete his or her paperwork or make changes along the way. 

    If you are not cautious, it is easy for errors like wrong Social Security numbers, addresses, and even misspelled names to occur. These costly mistakes are often not easy to correct and only cause clerical headaches in the future.

    It’s even possible for the IRS to fine you for an inaccurate tax return or delayed income taxes. You have to be very meticulous and check the information entered with your employees a few times to ensure accuracy.

    3. Outdated Employee Information

    Another mistake that startups make that costs tax time is outdated employee information. Even after you have correctly entered employee information into your payroll processing software, you also have to maintain it. Otherwise, your records become outdated.

    You have to regularly check employee legal name changes, addresses, tax payments, benefits, and more. Generally, you must update the information of workers when they have a baby, get married, or move to a different area.

    4. Employee vs Independent Contractors

    In addition to the above, it’s common for small businesses to mis-classify their workers as independent contractors when submitting tax forms. If you are unaware of accounting principles, you wouldn’t know how to properly classify employees.

    Now, you have to consider IRS-mandated requirements. However, these are not as well-defined. Only if you have control over how an employee performs his or her duties, would you be able to classify him or her as an employee. It is important that you learn more about what makes an employee different from a contractor.

    We live in an era where our economy is growing more complex and more connected. More and more people are working as contractors, are employees working from home, or working several jobs for multiple companies. 

    Startups such as Lyft and Uber have blurred the lines between how workers and contractors are classified. You have to be careful. President Obama had initially issued an executive order in 2014 to increase scrutiny in order to prevent companies from mis-classifying workers. The government has only enforced more stringent laws ever since.

    5. Payroll Tax Inaccuracies

    Small businesses waste $850 in fines on average every year for late or missed payroll tax payments. The fines are imposed by federal and state tax agencies. However, if your business makes plenty of payroll tax errors, it would only add up business expenses that you would be unable to claim in your tax return.

    Payroll taxes must be paid at the local, state, and federal levels on a pay as you go basis. This means that payments would be due on every payday. There is no denying that keeping up with tax requirements would prove difficult if your business operates in different locations or if you don’t have a centralized office and rely on a distributed team.

    business owner trying to avoid mistakes with payroll taxes

    The Importance of Maintaining an Accurate Payroll and Payroll Tax Process

    The main payroll mistake that you can make is not knowing just how important it is to maintain an accurate payroll and payroll tax process. This is why you need to learn more about establishing a proper tax process. Ignorance is never an acceptable excuse when the taxman comes calling.

    The payroll process represents an accounting system that connects your organization with various agencies that are responsible for the collection of taxes on the wages you pay your employees.

    As you are fully accountable to both your employees and tax authorities, you have to ensure that the payroll process is precise. Besides, an accurate payroll saves you from the stress and hassle that would emerge when your tax deadlines are near.

    Business owners must also understand that maintaining an accurate payroll process is an ethical issue. When you hire workers, you enter a contractual relationship with them that requires you to compensate them for the hours they have worked.

    If you fail to maintain your payroll, you would be unable to adequately compensate employees and it could be considered a form of theft. This could be used as grounds for litigation against you by your employees should a conflict arise. 

    Moreover, an accurate and precise payroll process is integral to reconciling tax liabilities. Every business is legally responsible for withholding taxes from employees to pay federal and state income taxes along with Social Security.

    Only when you have a precise process, can you pay taxes accurately. If you fail to do so, you would end up accruing expensive penalties which could result in a tax audit.

    Consequences for Certain Mistakes

    Payroll errors can hurt your business in ways that you cannot even imagine. Here are some of the repercussions that you need to know.

    Damages Employee Trust: When employees trust an employer, they are likely to work hard and increase your productivity. However, if you damage this trust, it would affect productivity adversely and even result in your star performers looking for work elsewhere.

    Wastes Times: Dealing with tax inquiries and corrections only wastes time. You will end up spending a huge amount of time trying to correct the errors.

    Costly: Certain payroll mistakes would prove costly as you would have to pay for them without being able to claim the expense.

    Damage to Your Reputation: When you make payroll mistakes, it damages your reputation in the market and deters customers from choosing your business and keeps quality talent from partnering with you.

    The Upside of Staying On Top Of Things

    There are many reasons that will convince you to stay on top of things. Let’s look at a few of them. 

    Reduces Expenses: One of the main reasons to focus on your payroll process is that it helps reduce expenses. As the IRS wouldn’t require you to pay any penalties.

    Boosts Employee Morale: By taking care of payroll taxes and paying your employees properly without interruption, you will also notice an improvement in employee morale. If all is well with their paycheck, their tax payments and their benefits, they’ll stay loyal to you and dedicated to their work. 

    Keep Your Business Running Smoothly: An accurate payroll system keeps you clear of the law and the risk of getting shut down, which would definitely affect your brand and your relationship with your customers. 

    Accurate and organized payroll is a great foundation for the rest of your accounting and bookkeeping process, helping you accomplish the basics before adding on everything else. This lowers your stress and helps you focus on leading your team. 

    Benefits of Hiring a Professional Payroll Tax Expert

    There are many advantages of getting professional payroll tax help from an experienced bookkeeping service provider.

    Helps You Stay Organized: One of the main benefits of a professional bookkeeping service is that it would provide an effective system to ensure that you’re able to manage responsibilities, tasks, and meet deadlines. 

    Define and Document Your Processes: The payroll tax expert would provide clear documentation of the process which you can utilize for finding answers to all types of questions you might have.

    Avoid Mistakes and Spot Problems Early: Bookkeepers are always monitoring your process and crunching the numbers. This in turn allows them to spot errors within documentation or your process, correct some past mistakes and spot opportunities for doing things better in the future. 

    Keep Up with the Latest Laws: Professional bookkeeping services are always up to date with the latest laws and tax codes. They will work with you to make sure you don’t miss a single beat. 

    Conclusion

    Your payroll process is nothing to take lightly. It is part of the foundation of a strong company. It keeps you on the right side of the law, keeps you organized, protects your relationship with employees and customers, and makes other accounting practices run more smoothly. 

    Sound Accounts helps small business owners create and manage the perfect payroll and bookkeeping process. Connect with us today to learn more about reducing stress and increasing productivity with better bookkeeping. 

    For more information about the payroll process, check out our frequently asked questions below. 

    FAQ

    What Is A Payroll Error?

    A payroll error can be inaccurate information, a wrong payment, a late or missed payment, improper employee designation, or several other things. 

    Do Payroll Taxes Affect Employees?

    If you aren’t keeping up with your tax process, the consequences can destroy your relationship with valued employees, leading them to talk bad about you and your organization, look for work elsewhere and sometimes even bring litigation against you. 

    What Challenges Do Payroll Professionals Encounter During The Payroll Process?

    Payroll professionals encounter a number of challenges during the payroll process including the following.

    • Record keeping
    • Misclassification
    • Managing changes
    • Tax non-compliance
    • Over or under payments
    • Manual payroll processing
    • Confidentiality and privacy
    • Keeping up with the most recent law and regulatory changes in the relevant states