DIY Bookkeeping Before You Can Afford an Accountant
Starting a new business brings many challenges. Most of them are fun in a way, as they have to do with products or services and dealing with customers or clients. This is what you are good at, and it makes it important and not too difficult to do right. The other half of a successful business involves all those management and overhead tasks. They are less fun, and they are usually not things that you know how to do well or easily.
Even less fun are the IRS and taxes. It can even be a little scary. If you are just starting out, watching the pennies with cash flow, hiring an accountant can be out of reach. A bit of preparation and a plan will give you confidence and get the job done until you can put an accountant on the payrolli.
A Basic Plan for the Year
Know when you must do things:
Sure, everybody knows that April 15th is a big Tax Day. However, there are other deadlines and due dates during the tax year, and the small business owner must know when they should be doing things to satisfy the IRS, and this can depend on your business type.
Your due dates for various forms and returns depends heavily on your business structure as well. As a sole proprietor, most or all of them will be the same as for your personal return. For other business structures, such as S-Corps, Corporations, Partnerships, or LLCs, due dates, forms, and returns can be quite different.
Get your forms together:
Again, depending a lot upon your business structure, you will have different forms you need for the IRS and your tax returns. In general:
- Sole proprietors use Form 1040 and Schedule C to file their returns.
- C Corporations file their return on Form 1120.
- S Corporations use Form 1120-S.
- Partnerships use Form 1065 for the business and Schedule K-1 for each partner’s individual return.
Check to make sure that you know which forms you need for your taxes.
Document your business income:
All your business income should be documented with invoices and deposit records. Also, document refunds, returns, and allowances. Any business interest or dividend income must also be documented and reported on your tax return.
Document your expenses:
All business expenses that are legally deductible must be documented with receipts or other paid documentation, including canceled checks or receipts for cash payments. If you claim the home office deduction, be sure to be able to show the way it was computed in compliance with IRS rules. The same goes for vehicle expenses, especially when using your personal vehicle for business.
Send in required information returns:
If you have employees, you must submit W-2 forms for their income, and you must submit Form 1099s for independent contractors or freelancers you hired and paid more than $600 for the year.
Mistakes You Want to Avoid
It is easy in the busy life of a small business owner to cut a corner or just make an error in some area of the complexity of tax law, forms, and deadlinesii.
Do not be late:
Whatever the task, form, or return, file it on time or early, as the IRS has no patience or forgiveness for late filing. This includes when you must send forms like W-2 and 1099 to employees or independent contractors.
Make your estimated tax payments:
Businesses must usually make estimated tax payments based on the previous year’s taxes. There are specific due dates, and you must make them on time and in the amounts specified. Underpayment of those estimated payments can subject you to penalties and interest.
Deposit you withholding taxes on time:
Taxes you withhold from employees and your business share must be deposited by specific deadline dates. Failure to do so can subject you to substantial penalties and interest.
Do not misclassify workers:
Especially after COVID-19, there has been a move to hire more independent contractors for remote work. If so, be sure that you meet the IRS tests for reporting them as independent contractors and not employees. If you run afoul of the rules, you could be liable personally for all the withholding taxes if they are reclassified as employees.
Do not deposit too much in retirement plan or account:
There are limitations to how much you can deposit into a qualified retirement plan for deductions. Be sure that you know your limits and adhere to them, as depositing too much will subject you to an excess contribution penalty every year until you correct the problem.
Keep your business and personal separate:
Do not mix business and personal expenses or income, and keep the documentation separated. Separate bank accounts are the best approach.
DIY with Accounting Software
If you want to take the DIY approach, there are some free and low-cost software and online solutions available to you. Here are some of the most popular:
- Zoho Books
Whatever resource you choose to help with getting your income and expense records into a manageable system, keep these other information items in mind and pull your plan together.
i Ultimate Small Business Tax Preparation Checklist, Fool.com
ii 7 Common Mistakes & How to Avoid Them, Workful.com