Record keeping is one of the most important things you'll do as a business owner. You'll need to account for every expense and incoming payment for tax purposes, as well as for possible inquiries by investors or stakeholders. If you keep meticulous financial records throughout the year, you won't have to scramble to gather information at tax time or in the event of an audit.
Benefits of Good Record Keeping
If you run a small business, business tax is an inevitable part of making money. You'll pay income tax on your earnings, sales tax on any products you sell, payroll taxes for your employees and self-employment tax for yourself. Corporations pay corporate taxes, as well as payroll and sales taxes.
The good news is that if you're self-employed or running a business, you'll be able to claim tax deductions against the income you make each year. This is where meticulous business records come into play. You'll need to track your income and expenses, but you also may need supporting documents like receipts and bank records to show an auditor.
Consider also: Is Now the Time to Go Freelance?
How to Track Income
The earlier in the year you can start keeping tax records, the easier it will be at tax time. Accounting software is your friend. There are so many options, including QuickBooks, Quicken, Freshbooks, Xero and Wave, that you can easily find one with an interface and price you like.
Whether you get paid through invoicing clients, selling products or a combination of both, it's important to make sure all your income is being tracked. Your bank statements will serve as documentation, but it will be much easier to do your taxes if you can access all your income in one place. If you can link your business bank account to your favorite accounting software, you'll reduce duplicate entry.
How to Track Expenses
Before you start tracking your business expenses, pull the appropriate form from your tax return and look at the categories listed there. Schedule C, Profit or Loss from Business, is where you'll log your expenses each year when you file your taxes. Make sure the expense categories in any accounting software you're using matches those categories to keep things simple.
And something that can make your business record keeping simpler is to only make business purchases using your business account. If all your income and expenses are coming through the same account, it will be easier to gather the information at tax time. In addition to financial statements, many bank accounts now let you pull reports, so you might even be able to skip the bookkeeping software and pull your tax information from there.
Consider also: 5 Sites for Freelance Success
Capturing Receipts and Other Paperwork
There are strict IRS regulations when it comes to business documents. While you don't have to submit receipts or bank statements with your tax return, you will need to have them on hand in case you're ever audited. The IRS expects you to keep paperwork relating to all business expenses and income you've claimed for four years.
Keep in mind that your paperwork could contain sensitive information that needs to be secured. For example, employee records could include Social Security numbers that you don't want compromised. You can scan receipts and paperwork and save them on your business servers or in the cloud, but make sure everything's in a secure location to avoid a costly data breach.
Good record keeping is an essential part of running a successful business and it also provides peace of mind.