4 Crucial Accounting Mistakes Small Business Owners Can’t Afford to Make
You started a small business to make money. However, neglecting your accounting duties can mean less in your pocket. Some errors can even cost you your enterprise.
Unfortunately, you don’t get a crash course in managing your books in high school and even a college degree doesn’t fully prepare you for every detail. Here are four crucial accounting mistakes small business owners can’t afford to make.
1. Forgetting to Reconcile Bank Statements
Bank reconciliation allows you to identify and address discrepancies between your records and your bank’s. It prevents potentially embarrassing mistakes, like missing payroll because an extra zero led you to believe you had more in the kitty than reality.
Reconciliation serves additional business functions beyond balancing your checkbook. It allows for accurate tracking of accounts payable and receivable to make projections about future growth. It also identifies potentially fraudulent charges, safeguarding your security by alerting you to scammers who may have hacked your account. It allows you to count bank fees and charges as an expense, reducing your tax burden.
2. Using Employee Withholding for Other Purposes
If you have employees, you have an additional accounting burden. You’re responsible for withholding your staff members’ portions of Social Security, Medicare and income taxes and depositing them with the IRS according to your organization’s size. Although larger enterprises may face biweekly or weekly requirements, many small businesses are quarterly depositors.
Here’s where many business owners get into tax trouble that could close their doors. An unexpected expense arises and you dip into the funds you should deposit with the IRS to cover it. You might have good intentions of making the money up on your next scheduled date, but when that doesn’t occur, you fall further behind, wracking up penalties and interest charges each day of the missed payment.
Many business owners who adopt an LLC or S-corp structure erroneously believe that their status protects their personal assets from the IRS. While an individual can’t sue your business and take your home, the IRS holds those responsible for withholding and accounting for payroll taxes personally liable for a trust fund recovery penalty. As the owner, the authorities can force you to close your business doors and even come after your home or car if you fail to make federal tax deposits. The problem must become severe before such action occurs — but it does happen.
3. Neglecting Tax Planning
As a business owner, you have much more leeway to write off your expenses than you ever did as an employee. You can save considerable money, but it requires careful tax planning to reap the maximum benefits.
For example, you may be in the market for a new company vehicle. You can write off the cost of a capital asset, depreciating it over time.
However, going green by investing in an e-vehicle can save you even more. The IRS allows a $7,500 tax credit to people and organizations making this sustainable choice. Think of the perks. You get a nice bonus when you file and you can broadcast your eco-friendly choice, establishing your business as one that cares about the planet.
4. Missing Filing Requirements
Failure to deposit penalties is only one method the IRS has of correcting small business owners who fail to fulfill their legal and financial obligations. You also have to adhere to all quarterly and annual filing requirements to remain in compliance with the taxing authorities.
Unless your enterprise is small enough that you expect to owe less than $1,000 in total taxes, you have to file quarterly taxes. Those with employees have to file Form 941, Employer’s Quarterly Tax Return, where you report the amount of Social Security, Medicare and income tax withholding from your workers.
Otherwise, you can incur a Failure to File penalty of 5% of the unpaid tax for each month or the percentage of the period remaining unpaid. Since you must file quarterlies four times a year, these can add up quickly.
Additionally, you’ll have to file your annual return. Sole proprietors and single-member LLCs report their income on Schedule C of their personal 1040 tax return. Partnerships file 1065 and S-Corps complete an 1120-S, generating a K-1 form issued to shareholders to report on their individual returns.
Accounting Mistakes Small Business Owners Can’t Afford
Accounting mistakes can devastate your small business. At best, you lose money — at worst, you could forfeit everything.
Educate yourself about these four accounting mistakes small business owners can’t afford. Fulfilling your legal and financial obligations goes far in ensuring your ongoing viability and success.
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Martin Banks
Martin Banks grew up outside of Chicago and covers all things small-business related, as well as the world’s best hockey team, the Chicago Blackhawks
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