Managing accounting tasks is a large undertaking for any business owner, but it can be incredibly challenging for small business owners. In fact, only one in three small businesses feel prepared for tax season, with 19% feeling “completely lost and unsure” of where to start when it comes to taxes.
Smaller companies typically do not have the financial resources to have an army of bookkeepers at their disposal to keep good records and file taxes in a timely and accurate manner. As a result, tax season is difficult, especially when juggling day-to-day operations and ensuring the company’s accounting is accurate.
Despite these challenges, accounting and filing taxes cannot be avoided. To offset the difficulties, learning small business accounting tips and tricks can help smooth the process. In this blog post, we’ll take a look at some ways to make tax season less stressful.
Small Business Accounting Tips for Success During Tax Season
How a small business owner files their taxes will depend upon their business structure. Some will file business taxes in conjunction with individual (or, if married, joint) tax returns, or the business may file as its own entity. Regardless of how your company will be filing, the following easy small business accounting tips may ease your burden.
Keep personal and business accounts separate
A significant mistake that some small business owners make is conducting personal and business financial transactions through their personal bank accounts. Commingling funds is just bad business. Here’s why:
● Makes accounting hard to track
● Creates accounting inaccuracies
● Can misrepresent how the business is performing
● Lose liability protection
● Prevents business from building its own credit standing
● Could lead to inadvertently making mistakes on tax returns
● Lose out on bank features offered to businesses
Small business owners who opt to combine their personal and business funds will eventually run into conflicts and complexities. Keeping them separate makes it easier to track the company’s financial standing and helps avoid accounting and, by extension, errors on tax returns.
Automate manual processes
Instead of relying on ledgers and handwritten methods of tracking transactions and accounting entries, it’s highly effective to invest in software. Automation makes small business accounting much easier to manage. Automation will handle collecting, recording, managing, and categorizing data.
As a result, once you enter data, you’ll have easy access to your accounting and financial records which makes it easier to sort data, extract data, and run reports as needed. Need to generate payroll or run a cash flow statement? Easy with automation, simply run what you need.
Automation will increase accuracy, decision-making abilities, efficiency, and productivity, leaving you with more time to handle your company’s day-to-day tasks. To ensure you never miss a tax deadline or other important task, you can even automate reminders to generate to give you time to complete them.
Use bookkeeping software
Historically, small businesses (and even large corporations) used paper ledgers to manage their daily transactions to track and manage important financials such as assets, debts, cash flow, accounts payables, accounts receivables, revenue, inventory, invoices, payments, and taxes. Spreadsheets greatly improved the process, but technology has streamlined and improved efficiency more than anything.
In this digital age, specialized software easily handles these tasks. Not only does bookkeeping software eliminate the tediousness accompanying accounting tasks, it increases accuracy and streamlines the entire process, saving time, money, and resources.
Understand deductions
Deductions, commonly referred to as “write-offs,” are expenses owners can claim to reduce their individual and/or business taxable income. In the business sense, deductions are certain expenses a company incurs doing routine business for the industry in which it operates. To claim them, a business owner must meet IRS or state tax collection agencies’ criteria.
Some types of deductions are fully deductible, while others are partial. To qualify for business-related deductions, you must keep careful records to track business expenses, including claiming receipts to back up claims if the company is audited. Mathematically, this involves adding your total qualified deductions and subtracting these expenses from your revenue. The difference between the two becomes your taxable income.
Understand the laws and regulations
Tax collection agencies, both the IRS and individual states, require all taxpayers to follow very specific rules and regulations. When filing business taxes or individual tax returns filed with business income, the rules that must be followed will depend upon specific tax statuses and types of business structures.
The U.S. government has passed several laws regarding accounting that businesses, including small businesses, must adhere to if they meet a law’s guidelines. If you operate in the United States, you’ll need to familiarize yourself with the Sarbanes-Oxley Act (SOX) of 2002 and the Gramm-Leach-Bliley Act to see if you must comply.
All businesses should follow generally accepted accounting principles (GAAP). To ensure you follow all applicable accounting and tax rules, consider meeting with an accountant, attorney, or other tax professional to discuss what you need to know.
Tax collection agencies will not accept ignorance of the law as an excuse and will impose fines and penalties. For a small business, this could be financially devastating.
How Your Small Business Can Benefit From an Accountant
Small business owners typically face many obstacles when juggling accounting issues with day-to-day operations while trying to keep up with recurring and/or long-term processes such as taxes and securing financial data. Without the staff to help, many business owners typically run into problems at some point in time.
Working with a third party, such as an accountant, to help manage your accounting tasks can help to ensure your company’s financials are accurate and in good order. Tasks they’ll take over include:
● Tax return preparation and filing
● Tax return amendments, if necessary
● Payroll
● Managing and maintaining your company’s financial accounts
● Preparing financial statements (e.g., income statements, balance sheets, etc.)
● Handling fixed asset accounting
● Conducting financial analysis and forecasting
● Offering small business accounting tips and advice
The person you select to handle your accounting should have a strong reputation, be experienced in small business accounting, possess the required licenses, and have references. Ideally, the accountant should be willing to meet with you first to see if you are a good fit for one another.
Efficient Small Business Accounting Software
So, you’ve decided to upgrade and invest in small business accounting software – this is one of the best small business accounting decisions you can make. However, it can be daunting to decide which software will best meet your business needs with all the available options on the market.
Unfortunately, when it comes to small business accounting software, there is no one-size-fits-all option. Before purchasing a program, it’s beneficial to do research to help you find the best one that aligns with your company’s needs.
To help get you started, check out the recommendations published by USA Today, NerdWallet, and The Ascent. As you read suggestions, you’ll likely see an overlap of recommendations, which may be helpful in shortening your list of what software to explore.
Be Sure to Obtain your EIN Number
Before you file your taxes, you may want to consider applying for an employer identification number (EIN). Also referred to as a “tax ID,” obtaining an EIN is advantageous for a small business in many ways.
Without one, you cannot hire employees, open business bank accounts, or be eligible to file for certain permits and licenses.
Other advantages include better access to business loans with favorable terms and gaining a higher level of credibility as a business. Put simply, an EIN looks more professional than using a Social Security number for business purposes, and it simplifies the tax filing process.
To apply for an EIN, you’ll need to gather specific information to enter on your application.
● Information about your business
○ Name of your business
○ Business address and phone number
○ Your DBA “doing business as,” if applicable
○ Date you opened or acquired your small business○ Type of business entity structure (e.g., LLC, sole proprietor, etc.)
● Information about the individual responsible for the company (usually you)
○ Full name
○ Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN)
● The reason why you’re applying for an EIN
● Information about employees
○ How many employees currently work for you
○ Estimated number of employees you plan to hire
● Proofread and carefully review your application
● Submit your application and wait for a response
Even if your small business has you as the sole employee, it’s still beneficial to have an EIN. Aside from the aforementioned benefits, you’ll simplify the process if you have a future expansion where an EIN is required.
Conclusion
Running a small business, especially on your own, consumes a lot of time and energy. Managing accounting tasks can lead to higher stress levels and an increased possibility of making errors in accounting records or when filing taxes.
Many owners aren’t well-versed in accounting and have to learn along the way. Tax laws constantly change, and keeping up with them is challenging, at best.
An easy small business accounting tip is to work with a professional tax expert. Doing so eliminates the cumbersome tasks that come with financial recordkeeping and filing taxes and also helps to ensure everything is correct and in proper order—not just in April but all year long.