Many small business owners are DIY’ers. If you’re doing your own books, here are 5 common pitfalls to avoid.
1) Avoiding the Paperwork
You’re a small business owner, which means your time is overbooked. You make everything run, and have too many responsibilities. If you’re short staffed, it falls on you to cover. After a long day the last thing you want to do is tackle piles of receipts and paperwork, so most avoid it until tomorrow when they tell themselves they’ll have more time. Tomorrow turns into this weekend, which turns into next weekend, next month, and before you know it half the year is over.
Perhaps you have the time, but you hate accounting. You wouldn’t be the first. Accounting can be dull, tedious, and confusing. Whether you’re uninterested in the task or unsure about your skills, it tells the financial story of your business and needs to be done.
Find a time to do your accounting regularly, or hire someone to take that off your plate.
2) Not Retaining the Right Records
As a small business owner in the United States, you must file returns with the Internal Revenue Service, who hold the power to audit you. An audit will require you to furnish the accurate supporting documents for your returns. The burden of proof lies with the taxpayer.
Even if an expense was legitimate, failure to provide the appropriate record as proof allows the IRS to throw out the deduction and charge you penalties and interest.
Certain records must be kept forever, while others are limited to 7, 3, or even just 2 years. Check out our record retention guidelines for examples.
3) Not Reconciling Bank and Credit Card Accounts
It’s a scary fact of life that fewer and fewer people are able to balance a checkbook in the current digital age. As a small business owner, you need to make sure your records are accurate, and that starts by reconciling your bank and credit card accounts monthly.
Entering or importing data is a good start, but without reconciliation the job is only half done. Outstanding checks, deposits in transit, and more could be skewing your financial statements.
Fraud is also an issue. Reconciling your accounts monthly means you’re more likely to discover and stop fraud. Not all fraud occurs online. Some of the most successful fraud schemes are orchestrated internally by the person you trust most, and they can get away with it.
4) Inaccurate Reporting of Sales and Payroll Taxes
Pay special attention: these items can quickly shut a business down.
Small business owners need to be particularly careful classifying workers as independent contractors vs. employees. The IRS rules favor classification as employees, so if you’re going to classify someone as an independent contractor it needs to be watertight. The IRS can reclassify a worker as an employee and hit you with unpaid benefits and payroll taxes, plus penalties and interest, for years.
In addition, always remit your payroll taxes. Nothing shuts a business down faster. Failure will result in penalties and interest, but the IRS will also be quick to levy your account for the unpaid taxes, bankrupting you if you weren’t already.
Don’t forget about sales tax. The rules have become much more complicated since South Dakota v. Wayfair, and states want their money. Be especially careful of use tax, which occurs when you buy something and the correct sales tax wasn’t charged to you on a taxable item. You owe that state use tax.
5) Improperly Deducting Expenses
Not all expenses are 100% business deductions, but not all small business owners know that. The most common is meals and entertainment. Entertainment expenses are no longer deductible, and meals are either 50% or 100% deductible based on the circumstances.
Other items that aren’t deductible include bribes and kickbacks, lobbying and political expenses, and fines and penalties paid.
The IRS also limits expenses in certain scenarios, such as hobby and passive activities. Of course, any personal expenses are also not deductible. If you’ve mixed your personal spending into your business accounts you need to remove those expenses from your books.
Working with Haworth & Company, Ltd.
While you may be able to do some of it yourself, running a small business without an accounting or tax degree means there will inevitably be things you run into and don’t know. Those are the times to call your friendly professional and keep yourself out of trouble. We offer a wide variety of services at Haworth & Company, including accounting, tax and consulting, so that whatever you might need we can provide at a price you can afford. Keep DIY’ing and give us a call on the tricky stuff, or offload everything to the pros and get back to doing what you love. With five offices in the Twin Cities and Rochester we’re just a quick visit or phone call away when you need us.