Small-business accounting is an array of financial procedures for calculating, handling, and communicating a company’s financial information. Payroll, taxes, management, purchases, and inventory are a few of these tasks.
Develop a bookkeeping system
Every business has to decide how to handle the bookkeeping. The choices are hiring someone to do it for you or learning to do it yourself. It is possible to learn how to manage your own books, and doing it yourself has a number of significant benefits.
You can find a bookkeeping solution that will meet your company’s demands thanks to the abundance of paid and free accounting software solutions available today. Additionally, small business owners must choose between using accrual or cash accounting.
There are four major types of expenses you should track
Meals and entertainment – There will be times you’ll discuss business over lunch or dinner, but to be able to claim as an expense, it has to be recorded. Details should include who the meal was with, what was discussed, and keep the receipt.
Travel – The IRS scrutinizes travel expenses to be sure they weren’t really for personal, so keep all receipts and good records.
Vehicle expenses – there are 2 methods that can be used to expense the business use of a car. One is the actual mileage for every time the vehicle was used for business and using the mileage rate the IRS allows. The other is recording mileage at the beginning and end of the year, what the business mileage was, and deducting the percentage of business to overall mileage in all car-related expenses. This includes maintenance, gas, loan interest, lease costs, etc.
Home office expense – if you work out of your home, you can possibly take a deduction for the percentage of your home’s square footage that is used. The space has to be used only for business and nothing else. You can deduct that percent of electric, mortgage, and other home expenses. It’s best to check with your accountant on how to claim a home office expense as the IRS keeps a close eye on this category.
Open a small-business bank account
Opening a bank account for business that is separate from your personal accounts provides a barrier that protects your personal finances in case the business is audited, goes bankrupt, or is sued in court. Having good records for the business and proof of business income will help to secure loans or funding in the future.
Open a checking account first, then any savings accounts that can help in planning your taxes and organizing your cash flow. A savings account is a good way to set aside a portion of each payment to cover your self-employed tax withholding. A quarter of your salary should be set aside as a general rule, while estimates for high earners may be closer to one-third.
A separate bank account for business purposes is mandated by law for corporations, partnerships, and LLCs (Florida, Texas, and California LLCs have different guidelines). Having a separate account is not legally required for sole proprietors, although it is strongly advised.
New business owners should then apply for a credit card in the name of the business to start establishing credit, and to keep all business expenditures separate from personal, especially for LLCs and corporations. A credit card is good for financing large purchases or when you may need extra funding.
Tax obligations
How you choose to structure your business will determine what type of tax return you will need to file. If you are a sole proprietor and reporting as self-employed, all business information will go on your personal tax return, using a Schedule C. Otherwise you will need to file a separate business form for corporations and LLCs, both of which have their own EIN number and are taxed differently.
For peace of mind and to be sure you aren’t doing something that could bring about an audit, it’s best to meet with an accountant and go over all your particular details. Doing so can save you a lot of time, money, and headaches later.
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