Small Business Accounting and Where to Start - Tax Professionals Member Article By Dennis Jao
Posted by Dennis Jao

Small Business Accounting and Where to Start

Small Business Accounting and Where to Start

Accounting is essential for any business. Smart records bookkeeping are essential for tracking business spending and finding new ways to grow. Additionally, keeping accurate records ensures that business owners remain accountable for their tax obligations to the government and employees.

When reviewing your accounting strategy, consider the company's financial goals. Whether you are an independent contractor, a freelancer, or an entrepreneur, the success of your business depends on your well-defined financial goals.

Experts agree that small businesses often fail when the cash runs out. Your business must have effective record-keeping policies and a solid financial strategy to avoid this situation.


What is Small Business Accounting?

Small business accounting requires accurate records, which involves keeping organized records of a business's financial transactions, including sales, expenses, assets, and liabilities. 

Accountants usually work with three major types of accounting reports: balance sheets, financial statements, and cash flows. Each report records different values and provides a unique perspective on a company's financial health. The following section focuses on the differences between these reports.


Where to start

1. Separate your business and personal accounts.

One of the most complicated accounting mistakes small business owners can make is confusing their business with personal funds. Although many entrepreneurs bring in their own start-up money, business income and expenses should be kept separate from personal income.

The best thing is to start with a solid business structure. Create your business as a separate legal entity, such as an S corporation or LLC. Open a professional current account as a financial center and pay yourself a monthly salary. Get a business credit card for your day-to-day expenses, especially expenses you can't or don't want to pay cash, and open a business savings account, like a mutual fund or for a rainy day. Track all commercial use of your items.


2. Properly classify workers.

When it comes time to create a team, you have two options: employees and contractors. The IRS considers employees to be those over whom you exercise behavioral authority and financial control, and a long-term business relationship. Meanwhile, entrepreneurs are people who work for your company on projects and maintain control over their business plans and decisions.

Penalties for misclassifying workers are high. In addition to the $50 for each W-2 to be paid by the employer of misclassified contractors, the employer pays commissions of 1.5% of the employee's salary and 40% of the employee's unpaid FICA taxes. The employer must also pay 100% of the FICA taxes they would pay per employee. If the IRS finds that the misclassification was intentional, the employer could be fined up to $1,000 per worker or jailed for one year.


3. Calculate the total cost of labor before hiring.

If you choose to hire employees, know that you are responsible for more than their wages. At least once a month, you will have to finance their payroll taxes and other benefits. These costs add up faster than many small business owners realize. According to an OnPay survey, only 43% of the same payroll managers are confident in their ability to pay their employees on time. Others are behind with their books or are too eager to expand their team.

Don't put yourself in a position to reduce compensation post-hire. Even if you were magnanimous with your initial salaries and benefits, your employees would feel cheated if you reduced their pay. Small businesses cannot afford a large turnover.


4. Create regular profit and loss statements.

A profit and loss (P&L) account is a basic accounting tool that summarizes your business income and expenses over a period of time. All public companies are mandated to put them out once a quarter. Although small business owners are not legally required to start one by law, Profit and loss accounts are a great way to see if you're on track to meet your financial goals.

Follow these steps to generate a profit and loss account:

  • Add the revenue generated during the quarter.

  • Itemize your business expenses. Classify these expenses into operating expenses and cost of goods sold (COGS).

  • Subtract total expenses from gross profit to get operating profit.

  • Subtract interest and taxes from this operating income, and you will know if your business had a profit or a loss for that quarter.


5. Always receive a receipt.

You can claim a large portion of your business expenses as tax deductions. The OTC accounting service lists 16 categories in which expenses are fully or partially deductible. These expenses include client meals, advertising campaigns, and office rentals. However, to claim them, you need receipts for tracking and verification.

Donations are one area where business owners often forget to receive a receipt. While businesses with certain structures, such as LLCs and partnerships, cannot claim charitable contributions as a business expense, the owner usually can. Ask recipients of in-kind donations and contributions for written confirmation of your time spent and use the documentation to support the fair market value of any real estate donations you make.


6. Invoice carefully and regularly.

Billing is necessary for owning a business, but it can seem complicated and time-consuming. Also, making mistakes can affect your ability to get paid. This is why it is extremely important to send correct and regular invoices.

Invoices should be itemized with specific transaction information and should be submitted in a timely manner. You should also continue with emails and/or SMS reminders to increase the likelihood of getting paid. By keeping accurate and detailed records of your accounts, you can identify customers who don't pay on time and be gracious to those who are always early.


7. Be aware of tax deadlines.

As an individual, you pay taxes once a year. However, most small businesses are required to file estimated quarterly tax payments. Quarterly payments are made under two types of taxes: self-employment tax (which includes social security and health insurance contributions) and income tax.

Follow these steps to decide if you should pay quarterly taxes:

  • Subtract the withholding tax from the amount of federal income tax you expect to pay this year. If this amount is less than $1,000, you do not have to make quarterly payments.

  • Take the total federal taxes you expect to pay this year and multiply it by 0.9. If you have withheld at least this amount, you do not have to make quarterly payments.

  • Compare the total federal income tax from last year's tax return with the amount of tax withheld. If it's at least that much, you don't have to pay that quarterly fee.

If you need to make estimated tax payments, check when the following four are due:

  • First Quarter: April 15

  • Second Quarter: June 15

  • Third Quarter: September 15

  • Fourth Quarter: January 15, 2023


8. Involve experts instead of doing it yourself.

Entrepreneurs like to be in control of all aspects of their business, but sometimes it pays to outsource processes and functions such as accounting and bookkeeping to specialists. By hiring a professional, you can reduce accounting errors and ensure that your accounting records are accurate and up to date. It will also save you time. A CPA can review your books to help you identify ways to cut costs and increase expenses in growth areas.


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Dennis Jao
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