Every company, regardless of size, must pay taxes. While taxes are a fact of life for business leaders, they can quickly become a significant burden without complete and accurate financial records. Missing or erroneous documents can lead to tax errors that yield serious fines and penalties for your business. To avoid these pitfalls, you need a good record-keeping system to ensure all your financial documents are in order long before it’s time to file. The following are record-keeping tips for smoother business tax prep to avoid a last-minute rush during the tax season.
1. Organize Your Records From Day One
Keeping your books updated all year long provides you with all the necessary information you require to plan, estimate, and pay your taxes. You will also avoid the trouble of racking your brain to remember transactions that you didn’t record. Whether you will be filing the taxes yourself or hiring a tax expert, having your books in order saves you time and money. Also, having up-to-date books helps you track your business’ financial performance, helping you make wise financial decisions.
2. Keep All the Receipts
Even though you are keeping your books updated, ensure you keep all the receipts for your business expenses. Receipts come in handy during business auditing since they offer proof of purchases. In the case of an audit, receipts make the process easier for both you and the auditors.
3. Separate Your Accounts
As a business owner, it’s usually a good idea to have separate bank accounts for business and personal uses. Keeping separate accounts helps you to easily categorize and document business and personal expenses. A separate business account is a crucial resource when tracking your business cash flow and calculating your profits, and it can improve the quality and efficiency of your business accounting processes.
4. Use Accounting Software
Using electronic accounting software helps you to organize and access your records in one place, at any time, and from anywhere. During the tax season, electronic software eases your work by providing instant access to every record on the go or from the comfort of your home office. Many accounting software tools can also create payroll tax documents such as Form 941, Form W-3, and Form 1099-MISC.
5. Look Out for Record Retention Mandates
The Department of Labor (DOL) and the Internal Revenue Service (IRS) have different requirements for how long you must keep financial records. Generally, it’s best to keep records for at least seven years to comply with their guidelines. The DOL requires you to maintain all records involving payrolls, while the IRS requires records on tax deductions, business income, and tax credits. Ensure you follow the guidelines of the IRS and the DOL and keep yourself updated on any changes made by the two departments.
6. Prioritize Security
Storing your records electronically protects them from natural disasters such as floods and fires. However, electronic software is still prone to data breaches and theft. Ensure you choose reputable accounting software with up-to-date security standards, and create regular backups of your financial data. Create a strong and unique password for your online software and consider instating measures such as two-factor authentication and log-in notifications to prevent data theft.
7. Implement Monthly Reviews
At the end of every month, go back to your books and review all records. Ensure the payroll is accurate, monitor monthly profit, and calculate your tax expenses. These reviews will help you to avoid surprise tax bills during the tax season. Having monthly reviews helps you to note any undocumented expenses, and you will be able to correct them before auditing or the tax period.
The Importance of Record-Keeping
Accounting and record-keeping skills are essential in running a business. Whether you file your taxes by yourself or use a tax expert, you must keep your books in order throughout the year. Not only will it save you time and money, but you will also minimize the risk of problems with the IRS and the Department of Labor.