4 Reasons DIY Bookkeeping Can End Up Costing You More

While many people only think of accountants at tax time, a big part of my job, more than preparing taxes, is bookkeeping for local businesses.  While finances are my number one priority, small business owners are very busy and tend to put it off for more urgent matters.  But unfortunately, around this time of year, finances are what becomes urgent and you have a year’s worth of book reconciliation to do.

Here is why the DIY route to bookkeeping will end up costing you money instead of saving it:

1.  Faulty bookkeeping will give you a faulty picture of your cash flow, which from all of my previous advice, you already know that cash-flow is the lifeblood of your small business!  Don’t obscure your financial viability.  Without accurate records, you won’t be able to tell how to fix a financial problem or even if there is one in the first place.  Dangerous!

2.  Overestimation or Underestimation of profits means that you’ll either pay more in taxes on income you didn’t actually receive, or you’ll raise the eyebrow of the IRS on cash you didn’t know you needed to report.  That includes reporting assets and expenses that can lead to a higher tax liability as well (i.e. depreciating assets).  Overlooking costs or misplacing receipts means you can’t write those expenses off, either.

3.  Payroll problems can arise if you have inaccurate records.  How do you know if you’re over or under compensating employees or their benefits with inaccurate bookkeeping?  Answer: you can’t.  An error that carries over to an employee’s W-2 from your own records causes tax problems for them as well.

4.  Who owes you what, what do you owe? When?  Unorganized invoicing means the longer it takes to get you paid.  It also means the longer it takes for you to send money you owe which leads to late fees and penalties.  Being backed up on your bills and incoming payments is a serious cash flow issue.

Ultimately, bookkeeping mistakes are extremely expensive and very time-consuming.    Hiring an expert like me to fix them will cost you a pretty penny I don’t mind saying.  However, hiring an accountant for regular bookkeeping can be a great decision.  It gives you the power to maximize your business decisions, like knowing when to make investments in equipment,  inventory or even more staff.  Accurate bookkeeping is what gives you, the small business owner, information on how best to run your business.

Quarterly Tax Returns

     

     If you make quarterly tax payments, the due date for the 2nd quarter is fast approaching; June 15. There are a few possibilities that mean you are required to make quarterly tax returns.

1. Self-Employed sole proprietor filing Schedule C.  As part of your personal return, you may be required to make quarterly estimated income tax payments.  Use Form 1040-ES.  Your payments will be in compliance with the federal “pay as you go” system and will save you from any underpayment penalties that you may incur even if you pay the full balance by April 15.  These payments include federal income taxes as well as self-employment taxes.

2. Payroll taxes.  You must issue and withhold taxes from any employee paychecks.  You are given a certain timeframe to pay, usually using Form 941.  They must be paid one month after each quarter.  The next deadline coming up is July 31.

 

3. Some LLCs, S Corporations, partnerships.  If you’re performing services for your company, you are required to pay yourself “reasonable compensation.”  That means giving yourself a paycheck and filing payroll taxes.

     Make sure you’re in compliance before the next quarterly due date!   

Keep Your Options Open by Planning Ahead

Okay, you’ve heard me say it before, but getting ready for next tax season NOW, is imperative.  By this time you’ve already gotten past the elation of a sizable return or the drudgery of paying that surprise lump sum.  So, begin to direct your attention to being the best proactive business owner you possibly can be.

Purchasing sophisticated accounting software to help keep you organized does you no good if you’re scrambling to enter your shoebox of receipts at the last minute.  Keeping your records up to date not only helps you rest easier at night, it helps keep an eye on the vitals of your business, which also helps you rest easier.  It’s a vicious cycle.  Doing this will help you make decisions in real time, rather than hindsight.  Updating your books with regularity, at least once a week, is like going to the gym.  You know it’s a good idea, but you put it off until eventually the paperwork (or pounds) pile up, then it seems an even more unsurmountable task.  Think of it as part of your overall financial health and just DO IT for the longevity of your business.

     To Do:

• Document invoices, bank statements and receipts.  Expenses for travel and entertainment are the most reviewed by the IRS so make an extra note on it’s business purpose and who attended the event.
• Always have an updated record of accounts receivable and accounts payable.
• A Form 1099 must be filed for any contractor you pay over $600 in a year.  This needs to be done in January, not at the last minute.  You should be able to predict by June if you will pay a subcontractor more than $600 by the end of the year.  You need their current address, tax ID number, and proof that they are a subcontractor to your business and not an employee.  This includes invoices or business cards.
• If you are the subcontractor paid more than $600 in a year, be sure to include that amount in your taxable income.  June is also a good milestone month to consider year-end bonuses or seasonal hires as they can both affect your tax liability.
• If you are audited, you are responsible for at least 3 years of previous tax and income records.  If they believe fraud is involved, that time period could be extended to 6 years.
• Check for accuracy; reconcile bank accounts and income statements.

  

Remember, having tax questions and asking about options in February is not really setting yourself up for success.  Last minute scrambles to save severely limit your options.  Ask your accountant about some of the things you can do to reduce your tax bill.  If it looks like your revenue is sky-rocketing, it might be a good time to purchase that large piece of equipment you’ve been wanting, therefore decreasing your income.  Also, keeping tabs throughout the year will help your liability be less of a surprise when the time comes, meaning you can accurately predict how much money you need to set aside.