Do you count gift cards given to employees as cash payments? Have a system for easy reimbursement for taxes when an employee is overpaid? Treat vendor payments as payroll before you receive a Form W-9? If you don’t, you could be looking at serious fines from the IRS. Avoid these 10 common payroll and bookkeeping mistakes that small business owners tend to make.
1. Failure to Issue Form 1099 Correctly
Form 1099 should be issued to independent contractors and vendors who provide your business with over $600 in services. Failing to do so could lead to steep penalties.
2. Classifying Employees as Independent Contractors
Your workers are generally either independent contractors or employees. Choosing the correct classification is crucial. Different forms are involved (1099 versus W-2), and some workers may be subject to tax withholding.
3. Neglecting Backup Withholding for Vendor Payments
If a company pays a vendor before obtaining Form W-9 (Request for Taxpayer Identification Number and Certification), it could be subject to a payment of 28 percent for backup withholding.
4. Excluding Reimbursements for Expenses from Reportable Wages Incorrectly
The correct exclusion of reimbursements for expenses depends upon an accountable plan where expenses are reimbursed only if there is a business connection; other reimbursements must be included in taxable wages.
5.Trying to Go It Alone
Small business owners who try to deal with payroll matters on their own tend to experience more stress and may make costly errors.
6. Not Depositing Withheld Taxes in a Timely Manner
Withheld taxes should be deposited on a semi-weekly or monthly basis; however, some amounts require a deposit on the next business day. Failing to deposit correctly can lead to late deposit fees, penalties and interest charges ranging from two to 15 percent.
7. Not Including Non-qualified Deferred Compensation for Executive Income
Executive compensation may be subject to an excise tax. There is a relief program if this is neglected, but only certain oversights are eligible.
8. Excluding Travel and Commuting from Employee Income
In many cases, commuting and travel expenses are not considered taxable income for an employee. However, unique cases, like travel expenses for short-term assignments that lengthen, can be subject to income tax.
9. Not Including the Fair Market Value of Prizes, Gift Cards and Awards in Employee Income Totals
Most awards are considered taxable fringe benefits. Gift cards are considered cash and should be included within taxable wages.
10. Not Including Appropriate Fringe Benefit Value
Taxable fringe benefits can include company cars, country club dues, spousal travel and housing benefits. It can be difficult to calculate fringe benefit value correctly, due to a variety of valuation methods.
Don’t fall victim to unnecessary payments and penalties from the IRS. Partner with a professional bookkeeping service to handle your business payroll tax concerns and reporting.
10 Bookkeeping mistakes made by Start-Up Businesses
If you are a start-up business the information below will be extremely valuable to you. Avoiding mistakes in areas such as bookkeeping can determine whether you survive as a new business. The excerpt below outlines ten common mistakes.
Starting your own business is very exciting. You could be doing it for any number of reasons and there will be 101 things to sort out. In the rush to get off the ground, bookkeeping often gets relegated to the bottom of the start-up to-do list. For many new business owners, the main reason is there are always seemingly more important issues to consider. You’ll probably be able to guess the first mistake start-ups commonly make when it comes to keeping financial records:
1 Not doing any – until it’s too late
This is probably the most common mistake. The work then piles up – probably in a box file or shoebox – and you get further and further behind, to the point where you never have time to catch up. The more you try to hide from the problem, the more it will occupy your thoughts. Bookkeeping really is one of those things where if you do a little bit every day, you will always be in control.
2 Not using software
Whatever you do, use software. Electronic bookkeeping systems are much more convenient. You could use Excel if you don’t want to pay for specialist accounting software. At very least, it does the calculations for you but could restrict you as you grow.
3 Not having a separate bank account
If you mix your business and personal finances, you’re just making life more difficult, not least because you will need to separate it all out when it comes time to tax return time – or pay your accountant to do it. The first thing you should do once you have settled on a business name is sort out a bank account.
4 Not filing bank statements in order
It sounds simple, but you’d be amazed how many people don’t do it. What happens? You give your statements to your accountant at year-end and they phone back later to tell you a statement is missing. This means you’ve just paid your accountant (who probably charges by the hour), to organize your bank statements, when you could have saved money by doing it yourself.
Now you must find the missing statement, too. If your online banking records do not cover the full year, this will mean having to spend time on the phone to the bank to get replacement statements sent out, creating unnecessary delays and a greater risk of late-filling and a fine.
5 Not having a filing system for purchase invoices
There is a simple way of organizing your purchase invoices:
- Have two files – one for paid invoices, the other for unpaid invoices.
- When you pay, write the date and method of payment on the invoice.
- Once paid, move it to the paid file.
- Keep both files ordered alphabetically by supplier name.
6 Not paying by card or transfer
Your bank will do some of your bookkeeping for you for free. How? If you pay by Internet transfer, credit or debit card, a permanent record of the transaction is provided on the bank statement, detailing the date, amount and recipient’s name. In bookkeeping terms, that’s a great start.
7 Not numbering sales invoices sequentially
Numbering your sales invoices sequentially means you will be better organized. It also helps you to keep track of dates by which invoices should be paid, which enables you to establish an efficient system for chasing overdue invoices.
8 Not being organized and up to date
Failing to maintain your books in a timely and accurate manner can lead to disaster. Pretty soon you begin to lose control of your business, which can ultimately lead to its failure. Having accurate and up-to-date financial information about your business enables you to judge its performance and perhaps anticipate and take steps to overcome cash flow difficulties.
9 Not retaining purchase receipts
The result? Working out your business costs accurately over the year becomes more time-consuming. You risk failing to account for certain expenses, which means paying more tax than you need to. Even relatively modest expenses can mount up, so keep a close record of every penny your business spends.
10 Not having separate office space
When doing your books, use a room away from noise and distractions of living with others (e.g. partner, kids, flat mate, etc). You’re likely to get your work done quicker and you’re probably less likely to make mistakes.
Source: Start Up Donut
Affordable bookkeeping services for any business anywhere
The Top 10 Bookkeeping Errors that Are Costing Your Business Money
Small-business owners often make bookkeeping mistakes in their early years of operation, primarily due to a lack of knowledge regarding proper accounting procedures. While you may not have the time, money, or desire to become a certified accountant, it is still possible to avoid a few key pitfalls that can impact your company’s bottom line.
The following are 10 of the most common bookkeeping mistakes made by small-business owners.
1. Trying to do it all yourself
While money management is certainly an important task, it’s not necessarily crucial for you to be the one to do it. In fact, if you don’t have a fairly strong background in accounting and business tax law, it’s probably advisable that you don’t handle your own bookkeeping. Delegating this task to a professional will help you find errors while freeing you up to work on your business.
2. Always going the cheapest route
While pinching pennies can certainly save your business money, there is a point where frugality can actually cost you money. In many cases, the adage “you get what you pay for” rings true. Spend a little extra to get a quality accountant rather than the cheapest bookkeeper available.
In addition, do your research before spending money on other business services and items that have a shelf life of more than a few months. When purchasing items like office furniture, equipment, or software, a good rule of thumb to follow is to select a moderately priced item and purchase it when it’s on sale.
3. Failing to negotiate vendor terms
Many small-business owners purchase items for their business from the same vendor month after month. If this is your practice, it’s a great idea to contact your vendor and build a personal relationship with them. Even if your purchases are relatively small, you can still call and ask questions. If you get to know your vendor personally, you might be able to negotiate reduced pricing or longer payment terms, which might mean increasing cash flow for your business.
4. Failing to track receipts for minor purchases
Even the most meticulous business owners occasionally forget to save a receipt related to a business purchase. While it might not seem like a big deal if a meal ticket is missing here or there, those small purchases can add up to big money. Likewise, you don’t want to have to answer to Uncle Sam if you claim expenses without the proof to back up every penny.
5. Writing off major purchases as immediate expenses
If you visit your local office supply store and pick up $250 worth of printer paper and other items that have to be replenished frequently, it’s perfectly acceptable to log the purchase under “office supplies” and write it off.
On the other hand, if you happen to pick up a new $250 printer, the purchase needs to be logged differently. It’s not the amount that matters, it’s the useful life of the items you purchased. A printer will definitely be used longer than a few months, so add it on the books as an asset and depreciate it over the estimated useful life of the item.
6. Claiming “charitable” tax deductions
For a personal tax return, individuals are allowed to write off donations given to charitable organizations. Businesses, however, are not afforded the same deduction. Because businesses are often given recognition, advertising space, or some other concession in return for their donations, they are not truly considered “charity.” If you make this bookkeeping mistake, the Internal Revenue Service will probably make sure you don’t do it twice.
7. Failing to back up your data
While keeping hard copies of all your records is generally a thing of the past, don’t rely solely on cloud hosting to ensure your data is always accessible. Make sure your accountant or bookkeeper uses software with a fail-safe data backup system and consider keeping two or more digital copies of each record, one in the cloud and one safely and securely on your desktop or hard drive.
8. Failing to accurately report sales and payroll taxes
As previously mentioned, the IRS has little tolerance for error. If you misrepresent the amount of sales or payroll tax owed by your company, you can expect hefty fines. It’s best to leave this one to the professionals, and double- or triple-check your returns before dropping them in the mail.
9. Failing to review books yourself
While it’s a good idea to delegate your bookkeeping to an experienced professional, it isn’t necessarily a good idea to give them open access to business records without a system of checks and balances in place. Many small-business owners assign responsibility of the company books to a close family member or friend with accounting experience, only to find out several years later they’ve been scammed. Had they reviewed canceled checks or petty cash ledgers once a month, the issue could have been caught early on.
10. Not staying up to date
The initial years of a new business are extremely overwhelming, but failing to keep your books current will only make the situation worse. If your books are suffering because business is booming, that’s a sure sign you need to bring on an extra hand. Costly errors will be caught more quickly, and your business operations will be more efficient in general.
These costly bookkeeping mistakes can happen to anyone, and at least one of them will probably happen to you at some point in your business. Seek out information, prepare accordingly, and be on the lookout for warning signs. Your bottom line will thank you.
Not interested in hiring a CPA? The right software can make bookkeeping a little easier for the average layperson. Check out our top picks for the year’s best bookkeeping software.
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