Running a small business is already stressful, but when you throw taxes into the mix, things can get even more complicated.
The trick is to work with an accountant during the year instead of waiting until tax season to do everything at once.
If you make decisions without the right knowledge, you may be putting your finances at risk, and this can cost you in the long run. Putting several best practices into play will help you avoid costly mistakes.
Take Some Time To Learn About Accounting
While hiring an accountant may still be the best option for you, learning about accounting for yourself can help you make better decisions.
Take some time to learn how to track spending, income, and cash flow. This allows you to monitor overall profits.
Tracking your finances throughout the year allows you to make better decisions.
Taking classes at a local college can help you learn more about business finance best practices.
One option is to get your degree in accounting or a finance field. If you are thinking of going this route, you can make it more affordable by applying for online scholarships.
There are scholarships for college students available to make it easier to go to school while running a business.
Keep Records Of All Income Earned
Keeping more accurate records can help you store information for your tax return in one place, so you are less likely to put inaccurate information on it.
If you don’t keep proper records, you might leave deductions behind, or you could enter incorrect information that leads to an audit.
It’s a good idea to use accounting software instead of trying to do everything manually.
It is relatively inexpensive to get this type of software, and it tends to be very user-friendly.
Keep track of any 1099 forms you receive from clients as well. The IRS matches income on these 1099 forms with what you say you have received to see if the numbers match.
If they do not match, the IRS may flag you for an audit. It is especially important to keep track of income you receive from clients who do not send a 1099, because the IRS will look at these things very carefully during an audit.
Draw A Clear Line Between Personal And Business Expenses
Mixing personal and business expenses can lead to a host of issues, especially if you are audited.
If personal and business expenses have been mixed, the IRS will start looking over your personal accounts as well.
It is best practice to have a separate account for your business expenses. Networking and socializing for business is a part of the program but be mindful of what to do and what not to do when networking and spending money.
Get a debit or credit card that is designed only for business expenses and avoid making any purchases for yourself there.
Learn About The Different Kinds Of Income
Take some time to learn about gross and net income, because selling a product for less than it costs you to make it will result in monetary loss.
If an item costs $100 to make and you only sell it for $125, your gross income will be $25.
However, if your other expenses are considered, that net income could drop to $5.
Understanding what each type of income is can help you make your business profitable, and it will also help you understand how to report each area on your taxes.
Carefully Manage Payroll
It’s a good idea to outsource payroll if you do not have a full-time team or employee to do this.
Just make sure the vendor you go with is reputable, as the wrong one could mismanage your money.
Many small businesses choose to go with a less expensive payroll company to save money, but disreputable ones may not take payroll taxes into consideration.
If that occurs, you would be responsible for the taxes yourself. It is common for the IRS to regularly check whether these types of taxes have been paid or not.
Keep Your Business Plan Updated
As your business changes, so should your business plan. Working with an accountant or doing your research will help you determine everything from the right time to open a new location to the amount you should put into your retirement account.
These things may also impact your taxes. Proper business classification is equally critical.
If you don’t classify your business correctly, you may end up paying too much come tax season.
Decide whether you should be a limited liability partnership, company, sole proprietor, or company, and which classification you should be under these categories.
You may want to work with an attorney to understand the legalities behind each type of business classification.