Expert Advice From an Atlanta CPA
As a small-business owner or the founder of a start-up, the end of the year is the perfect time to reflect on the past 12 months and plan ahead for the New Year.
This is especially true with your accounting structure for 2021, following a year when many businesses had to abruptly alter operations due to the pandemic and some basics became a second priority.
Tips for Establishing Sound Accounting Practices
- Maintain a separate business bank account – while it might be tempting to write a check or send a PayPal payment from your personal account, it’s important to keep your personal and business banking separate. It’s easy for business expenses to get muddled up with personal bills. You need an accurate account of business revenue and expenses for tax purposes as well as for financial reporting. If you get audited by the IRS, the bureau will look for a clean record of business transactions, which is easiest to maintain from a separate business bank account. Having a separate business account also helps prove you’re running a business and not pursuing a hobby.
- Establish a bookkeeping system that keeps track of revenue and expense – you can’t rely on your bank statement to be your set of books. As a small business or start-up, you need to establish a bookkeeping system to keep track of expenses, including payroll, and record revenue sources. The system should also track cash expenditures and employee expense reimbursements, as well as allocate credit card purchases. You can create an Excel spreadsheet, but programs like QuickBooks are inexpensive and easy to use. Your bookkeeping system can also be used to create invoices.
At the same time, you should keep good records to back entries in the bookkeeping system. These include receipts, expense reports, tax payments, copies of invoices, and records of payment. You can keep hard copies or virtual files.
- Determine how you will be paid – small business owners pay themselves in one of two ways. The first is known as the owner’s draw. The business pays the owner in draws. These are not regular payments but are usually based on business profits. Some owners take draws throughout the year and others in one lump sum at the end of the year. If you pay yourself by draw, you’ll need to make sure to make estimated tax payments on the draw in the quarter in which it is paid.
The other method of paying an owner is by salary. Decide on an amount and pay it regularly as you would pay any of your employees. This way you can withhold taxes and take out benefit payments.
- Set up a payroll system – payroll involves far more than simply writing a check. If you have contract workers, you need to have a W-9 for each on file, and keep track of when and how much you pay them so you can issue 1099s at year’s end. With employees, you’ll need to take income and payroll taxes (including Medicare and Social Security) out of each check. Your business also needs to make regular payments to the appropriate state and federal agencies, as well as file the correct tax forms. There are a number of programs and services that specialize in small-business payroll, including QuickBooks, Intuit, Gusto and PayChex. Payroll is complicated and can be an accounting nightmare if not set up appropriately.
- Schedule profit and loss (P&L) statements – it’s a good idea to regularly have a handle on how you are doing. From your bookkeeping system, you should be able to run a P&L statement that will take into account all sales or revenue, as well as expenses, including costs of goods. Depending on your business, you may want to run these monthly, quarterly or annually. It’s also a good idea to evaluate your gross profit, net profit and operating profit margins.
- Hire a CPA – an accountant can help with more than annual taxes. A CPA can advise on your bookkeeping and payroll systems, evaluate your P&L, review financial reporting, and help set budgets.
Rialto Accounting can help you review and set up small business accounting practices. Our experienced accountants can assist you with financial reporting, taxes, payroll and budgeting. When you work with Rialto Accounting, we put your needs first.
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