Keeping accurate books is essential for any business to measure its financial health. However, some business owners do a lackluster job with bookkeeping because they do not have the time to devote to it. They may also think they lack the resources to hire a professional.
While each of these actions is understandable, they can result in a financial mess that creates even more problems. In this blog, we discuss five common bookkeeping mistakes businesses make and what they should do instead.
Not Separating Business and Personal Finances
This mistake is especially common among new business owners without any employees. They assume their business income and expenses are too small to take the time to separate them from personal finances. The reality is that all business owners should separate their personal and business finances, no matter how small they start. Taking this step now will avoid major hassles at tax time, such as having to sort through a year’s worth of receipts to determine which ones are legitimate business expenses.
Not Tracking Expenses That Would Qualify for a Tax Break
From driving to meet clients to maintaining a home office, business expenses can add up quickly. Unfortunately, too few business owners track these expenses to claim the deductions they have earned. Gas mileage is a common example. The sooner business owners start tracking every reimbursable expense, the easier it will be to make it an automatic habit. Failing to hold onto receipts for small purchases is a similar mistake.
Incorrect Classification of Employees and Independent Contractors
Independent contractors, freelance workers, and consultants make up a larger percentage of the workforce than ever. Companies not accustomed to working with these professionals often make the mistake of classifying them incorrectly. They might also classify workers who should be permanent part-time or full-time employees as independent contractors to relieve themselves of tax and paperwork burdens. Here are several questions for employers to help them classify workers according to IRS expectations:
- Does the employer determine where, when, and how a person works and provide equipment to do the job? If so, that person is an employee. The worker is an independent contractor if they have the right to control their own work schedule, mode of work, and purchase their own equipment.
- Independent contractor relationships are typically short-term to help companies fulfill a specialized task like website development.
- Does the employer have a written contract with the worker specifying a project scope and end date? This would indicate an independent contractor relationship.
Not Saving Paper Backups
With paper transactions becoming less common over time, some business owners make the mistake of not creating a paper trail as backup. If the IRS performs an audit, its representatives will want to see hard-copy documentation of claimed expenses or income. The good news is that business owners do not have to devote a lot of office space to paper storage. They can snap a photo of the paperwork using an application that automatically saves and sorts paper receipts.
Neglecting to Hire a Certified Public Accountant
Not only do CPAs have extensive financial training, but they also stay up-to-date on tax and regulation changes each year. Tostrud & Temp, S.C. invites business owners to schedule a consultation with our accounting firm to learn more about the benefits of working with a CPA.