Your vision for your business success should include a smooth, efficient process for handling all of the necessary financial record keeping and tax reporting responsibilities of the business. Because “time is money”, you need procedures that will optimize your time by streamlining your efforts. This paper is a stress-reducing guide, based on both the positive and negative experiences of hundreds of sole proprietors and their financial record keeping practices. It is designed to steer you away from many common bookkeeping pitfalls and bureaucratic nightmares (IRS, Tennessee Department of Revenue, etc), while pointing you towards sanity and prosperity.
If you would like to: Eliminate the overpayment of taxes due the incomplete reporting of business expenses. Ensure that funds are budgeted and available to make IRS payments on time Eliminate penalties and interest expenses by meeting IRS reporting and payment obligations in a timely manner Reduce the time spent on financial record keeping
Then this guide is for you!
1. Set up a separate bank account for your business with your Federal Employer Identification Number (FEIN) as the account owner, not your personal Social Security Number. See https://greaterknoxville.score.org/resource/tennessee-requirements for instructions to obtain a FEIN
2. If you plan to use a credit card for regular business transactions, open a separate credit card account for the business. Save all of your business credit card statements. The transactions will reflect business expenses and the finance charges are a business interest expense. If however, you will rarely be using a credit card for business transactions, then you can capture the transaction information by saving copies of the credit card statements and highlighting the business purchases. Next to the highlighted business transactions, pencil in a notation that will clearly identify the business item. For example, “office supplies”, “laptop computer for business”, “business lunch with client (and name of client)”, “inventory purchases”, etc. Save the credit card statements with this information and put them in your business financial files. (The finance charges on a personal credit card are not a business interest expense.)
3. Deposit all revenues checks and cash into the account promptly after you receive them, so you will have an easy track record of your total revenues. Your bank statements will provide that record for you.
4. Pay all expenses of the business out of this account and that will provide an automatic record of your business expenses on the bank statements. In addition, photocopies of checks that the bank sends along with the monthly statements, will provide a more detailed explanation of your expenses.
5. If you pay cash for some expenses, save the receipts in a file folder, a plastic “sandwich” bag, or an envelope. This information is important for tax reporting as well as tracking your profitability.
6. When you want to “pay yourself”, withdraw money for your personal use and deposit it into your personal checking account or use it as cash. Label the checks you write for this as “owner’s draw” on the check memo line. That will help your bookkeeper, accountant, or tax preparer to accurately track your owner’s withdrawals, and help keep your personal financial transactions separate from your business. Also, set aside money in a separate account to cover your estimated tax payments that are due quarterly. An accountant can advise you on what amount you will need to put aside, when it is due, and how to pay this. (You will use IRS Form 1040-ES for estimated tax payments.) As a general rule, for every $100 taken out of the business as an “owner’s draw”, you should probably set aside approximately $30 for estimated tax payments.
7. IMPORTANT: If you purchase any equipment or business assets that have a useful life of more than one year, and they are not inventory items or supplies, and the cost is $500 or more (such as a computer or a vehicle), these items should be depreciated on your tax return. Save all documentation relating to these purchases. Be sure to tell your bookkeeper, accountant, or tax preparer about these items.
8. If you will be using one or more vehicles for your business, it is important to provide documentation for mileage or actual vehicle expenses so you make take advantage of valuable tax deductions. In general, a taxpayer can choose to use mileage at the current standard mileage rate OR actual vehicle expenses, such as vehicle depreciation, gasoline, auto maintenance and repair, insurance, etc., BUT NOT BOTH. Sometimes mileage will provide a bigger tax deduction; other times the actual expenses will. If you track both, your tax preparer can then calculate which will give you the bigger deduction.
9. If you expect to have employees, you will need to apply for a “federal employer identification number” (FEIN#) from the IRS. You can do so easily on-line or by mail. You must have this tax reporting number in order to send collected social security taxes, Medicare taxes, and federal withholding taxes that you deduct from your employee’s gross pay, to the IRS. You will report these collected taxes on IRS Form 941, which you will file quarterly. The withheld tax money you will send in is due on the 15th day of the month that follows each quarter. For example, Quarter #1 is January, February, and March. On April 15th, the money for Quarter #1 would be due. The IRS Form 941 Report, however, is not due until the end of the month the follows the quarter. So, Form 941 for Quarter #1 would not be due until April 30th. If you will be collecting and sending in $2,500 or less each quarter for your Form 941 Report, then you can arrange to send the money in with the report at the end of the month following the quarter. Please see the IRS Form 941 Instructions. If you have employees in your business, the FEIN # will also be used when you send in your annual federal unemployment tax, called FUTA, which is reported on IRS Form 940. This is due in January of the year following the tax year for which you are reporting. (Please see IRS Instructions for Form 940.) For paying state unemployment tax, called SUTA, you will need to apply for a Tennessee State Department of Labor account number on Form LB-0441.
10. Spend some time reviewing your monthly financial information to keep aware of your profitability as well as your business financial needs in the near future. You will make better business decisions if you have an accurate picture of your business’ financial situation. Many businesses owners identify and track the key profitability indicators for their business (e. g. weekly sales, revenue per employee, hours worked per week).
1. Do not co-mingle your personal financial transactions with your business’s financial transactions by using one bank account and/or savings account for both of them. Doing this will require more time and money for yourself, your bookkeeper, your accountant, or your tax preparer to separate all of the transactions for financial and/or tax reporting purposes. It will create confusion in your record keeping.
2. Do not procrastinate about deciding how you will keep your business financial records. Do it yourself? Find a bookkeeper? Engage an accountant? Wait until it is time to file your taxes and let the tax preparer figure it all out? NOT A GOOD IDEA! A new business owner often can meet with a potential bookkeeper or accountant at no charge, to discuss the possibility of having bookkeeping services provided, or to see what it would cost for some basic start-up bookkeeping advice. For example, a business owner who wants to purchase a laptop computer and bookkeeping software, might need an accountant to set the system up and show him or her how to use it. Or, for the computer-shy business person, there are the classic Dome Bookkeeping monthly record books that can be found in most business supply stores. Do not automatically assume that getting information or basic bookkeeping advice will be expensive. It is generally far more costly to procrastinate and then have to pay someone to untangle a bookkeeping or tax return mess later on.
3. Do not ignore tax-reporting responsibilities until you “get around to it.” If your business is profitable, you need to be aware of the tax responsibility to pay estimated taxes for federal withholding. Failing to do so might result in a penalty. And, if you earn $400 or more in net profit (revenues less expenses), then you will need to pay self-employment taxes. These taxes are reported quarterly on IRS Form 1040-ES, starting with the first payment in mid-April, the second in mid-June, the third in mid-September, and the fourth payment in mid-January of the following year. Note: two payments are due earlier: June and September. The exact due dates change each calendar year and are published in IRS instructions for Form 1040-ES. This information is available on the IRS website on-line. (The approximate dates are two weeks into the month when due.) Failure to make estimate tax payments in a timely manner can result in a penalty. See IRS Form 1040-ES for instructions or consult an accountant.
4. Do not neglect to create an accurate record of revenues received by cashing revenue checks and depositing only some of the money, while not recording the total amount of the revenue received anywhere. If you don’t like writing information down, you can always photocopy revenue checks and let your bookkeeper, accountant, or tax preparer do the totaling. Relying on your memory is not a reliable way to conduct business.
5. Do not pay the expenses of the business from many different sources while not keeping a good record of all the transactions. For example, if you use your personal checking account for some business expenses and forget to save the receipts or record these transactions …. If you have three different credit cards that you use once in a while for business expenses, when you forget your checkbook, and then you do not remember to record those expenses…. If your friend uses her credit card when you shop with her for business supplies, and you need to reimburse her later but do not record this…. If your relative pays for some items that on he picks up for you on his way over to visit, and you reimburse him and lose the receipt, etc.
6. Do not write checks to yourself for personal use money (owner’s withdrawals) and then forget to make notations on the checks or in the check register about this. Your bookkeeper, accountant, or tax preparer will then be spending more time and your money to figure out what was going on in these transactions. For example, could the purpose of this transaction have been to get cash to pay for day labor or to send a worker for a supplies purchase in an emergency, etc.?
7. Do not write checks from your business account and then neglect to make entries in the check register that explains them. You need to record the vendor’s name and expense category in your check register along with the date of the check. At tax time you might lose valuable deductions if you lack proper documentation. Do not rely on the psychic abilities of your bookkeeper or accountant.
8. Do not pay your personal home expenses such as utilities, homeowner’s insurance, maintenance and repair, etc. out of your business checking account. If you have an office in your home that is solely devoted to your business, you may be able to deduct a portion of the home up keeping expenses as a business expense (Form 8829 for Schedule C on the 1040 tax return). However, not all of this is a deductible business expense. Instead, pay your personal home expenses from your personal checking account. Save your monthly utilities statements and payment receipts, for example, for these expenses and bring them your tax preparer who will evaluate possible tax deductions for you.
9. Do not ignore letters and/or notices from the IRS, the Tennessee Department of Labor, the Tennessee Department of Revenue, the County Clerk or Tax Assessor or other government authority that are addressed to your business. If you need assistance in understanding bureaucratic letters or documents which sound confusing, a simple phone call to the appropriate agency or authority can often shed light on the situation and avoid possible trouble. Your bookkeeper, accountant, or tax preparer probably knows how to interpret the notice, letter or document. Why not ask?
10. Do not neglect to calculate your business’ profitability on a regular basis. Are your revenues exceeding your total expenses? Having cash “currently in the bank” does not necessarily mean the business is profitable. Are the bills being paid or piling up? What are the financial trends in your business?
Source: Jeanne Daly, SCORE Counselor
The material in this publication is based on work supported by the U.S. Small Business Administration under cooperative agreement SBAHG-04-S-0001. Any opinions, findings and conclusions or recommendations expressed in this publication are those of the author and do not necessarily reflect the views of the U.S. Small Business Administration. The information contained in this publication is believed to be accurate and authoritative but is not intended to be relied on as legal, accounting, tax or other professional advice. You should consult with a qualified professional advisor to discuss issues unique to your business.
Copyright 1990. SBA retains an irrevocable, worldwide, nonexclusive, royalty-free, unlimited license to use this copyrighted material.