Home Accounting Preparing A Tax-Ready Accounting System: Part One

Preparing A Tax-Ready Accounting System: Part One

Preparing A Tax-Ready Accounting System: Part One

CPA at Centaur Digital Corp, helping busy business owners decrease the amount of time and energy needed to manage their accounting system.

Business ownership is no longer the domain of a small percentage of the population, at least not according to the IRS. If you freelance or have a side gig, you have a business. One survey showed over one-third of more than 2,000 respondents run a business in addition to having a full-time job. Without any other documentation, you are likely operating an unregistered business. The IRS still wants a cut of what you make, however, and that means you need to know how much you made—and be able to back it up. As well, running an unregistered business is not always the best tax strategy.

There are many compliance matters that a small-business owner must understand when setting up their business. This article will specifically focus on what a small-business owner or freelancer needs to know when setting up a tax-ready accounting system.

At a minimum, a business accounting system should be able to generate reports that can be used to file the required tax returns each quarter or year. Using tax filing requirements as a minimum standard for your accounting system is advisable since it applies to all businesses. Past this, an accounting system can get very complex and is beyond the scope of this article.

The following accounting system best practices don’t need to be done in any particular order, and you may find you already have some of these steps completed. So, focus on the steps you missed or address the ones you started but didn’t complete. The first part of this article focuses on steps that should be taken before or in the early stages of starting your business, while part two centers on practices that are ongoing.

1. Separate business and personal accounts.

First-time business owners often fail to segregate personal and business funds. This is especially true when a business is a “side gig” or freelance work. The first step in setting up any accounting system is to treat the business as a separate entity, which it is, and have separate checking accounts and/or credit cards.

Don’t mix business and personal accounts. If you fall behind in your bookkeeping or neglect it completely, commingled funds will make it very difficult to identify legitimate business expenses. In addition, in case of an audit, it will be next to impossible to substantiate your deductions—meaning the auditor will likely disallow them and you’ll pay more in taxes. It’s simple to set up separate accounts, and it will save you many headaches later on.

2. Pick a payroll service.

Most businesses will have to pay employees, usually starting with the owner. On the surface, many payroll providers offer the same service. Providers are distinguished by the strength of their support offered when you encounter a problem or get a tax notice, how much help is provided in the setup process, and the quality of their HR and related services.

Online payroll services such as QuickBooks Payroll and Gusto will provide the tools you need to run payroll and some limited support, but not much else. They are cost-effective, but you should know what you’re doing. Other services like professional employer organizations (PEO) will take care of most, if not all, of the paperwork since the PEO becomes the employer instead of you.

Payroll typically requires timely payments, usually within a week or two, as well as monthly or quarterly reports. A business owner must ensure that these are properly handled by the payroll company to avoid filing fees and penalties. It can be beneficial to get professional help in setting up your payroll system, such as from a CPA firm or payroll company.

3. Understand tax registrations and business licenses.

In the United States, a popular type of legal business structure is the limited liability company (LLC). It is typically the easiest to set up in most states and provides a versatile and flexible tax structure. Currently, an advantageous structure for many businesses is an LLC that is treated as a Subchapter S Corporation (S-Corp) for tax purposes. However, this may not apply to all businesses, such as real estate investors, so your best choice is to consult with a tax professional when setting up your business.

In addition to the legal establishment of the business, you must have the required business licenses and tax registrations. Many times, these two services overlap and are indistinguishable. There isn’t a comprehensive guide to tell you what you need to be registered for, and many businesses operate for years without the proper licenses in place—usually due to ignorance rather than negligence.

One helpful tool for business registration is your local chamber of commerce or county office. The government wants its taxes, so they are happy to tell you what to pay. Try not to rely on other business owners, as many are not compliant themselves. Just because another business has been “doing it this way for years” doesn’t mean it’s compliant with the law.

Continue to part two of this article for three more best practices on how to set up your tax-ready accounting system.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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