Common Tax & Bookkeeping Mistakes Small Business Owners Make
These are 5 of the most common tax & bookkeeping mistakes we see private practice owners making (but they aren't the only ones). If you see something on this list that applies to you or makes you feel a bit nervous, it’s okay! The important thing is to learn how to stop making them and protect the financial health of your business.
We’re here to educate and support you because ‘How to operate a business’, ‘Bookkeeping 101’ and ‘Tax 101’ weren’t part of grad school.
Most Common Mistakes We See Small Business Owners Making
Poor Accounting Management: Not Paying or Underpaying Estimated Quarterly Taxes
A common bookkeeping mistake small business owners make is not paying or underpaying estimated quarterly taxes. This oversight can lead to significant financial consequences, including penalties and interest from the IRS.
Understanding Quarterly Taxes: The IRS requires many small business owners to pay estimated taxes quarterly. This is especially true if you expect to owe $1,000 or more in taxes when your return is filed. These payments cover income tax as well as self-employment tax for Social Security and Medicare.
Consequences of Underpayment: Failing to pay enough throughout the year can result in a large tax bill at the end of the year, accompanied by penalties and interest. This can put a strain on your business finances and disrupt your cash flow.
How to Avoid This Mistake: Use accounting software to help calculate your estimated tax payments based on your income, deductions, and credits. Or better yet, work with a qualified tax professional such as Therapeutic Tax Solutions! Then, set aside funds for these payments and mark your calendar with the quarterly due dates: April 15, June 15, September 15, and January 15 of the following year. Working with our team will ensure that your estimated tax payments are accurate and timely, helping you avoid unnecessary penalties and interest.
Not Understanding Your Bookkeeping Software
Your client management and billing system (Simple Practice, Open Dental, etc) is NOT accounting software and cannot double as a billing and bookkeeping system because it does not accurately track all income and it definitely does not record your expenses, assets, liabilities, or equity.
Real accounting records, which you’ll need for tax preparation purposes, IRS audits, and to secure any loans (like a business loan or for proof of income if you go to buy a house or car), will consist of at least a Balance Sheet which reflect the company’s assets, liabilities, and equities of your company and an Income Statement (Profit and Loss) which reflects your company’s gross income, cost of services, expenses, other income, and net income.
If you’re thinking your client management system will suffice for showing income and your bank account statements for showing your expenses, think again! Only up to date, accurate accounting records and financial reports are going to support you during loan processing and approval, tax preparation, and audits. In addition, up to date, accurate accounting records and reports are the only way to truly understand the full financial story of your company; what you’re making, how much you’re spending, what are you spending it on, how much money is left over, and how profitable you are! You’ll never be able to get that full picture just from looking at your client billing system or your bank account!
Failure to Properly Reconcile Cash Flow and Business Expenses
Many private practices and small business owners often underestimate the importance of maintaining accurate and up-to-date financial records. This is a critical aspect of bookkeeping that, if neglected, can lead to significant issues.
The Importance of Accuracy: Inaccurate records can cause cash flow problems and hinder your ability to make informed business decisions. Additionally, come tax season, you might find yourself scrambling to reconcile discrepancies, which can be both time-consuming and stressful.
Tips for Accurate Record-Keeping: Utilize reliable accounting software to keep your financial records in check. Regularly update your books and reconcile your accounts at least monthly. This proactive approach helps in identifying and rectifying discrepancies early, ensuring that your financial records are always accurate and up-to-date.
Example: We often see private practice owners fail to accurately calculate the gross revenue from credit card transactions as well as their credit card processing fees. This results in potential tax penalties as well as lost tax deductions that could have saved the business significant amounts of money. The numbers you report on your tax returns must match the data provided on the 1099-K that comes from your credit card processor.
Getting Tax and Bookkeeping Advice from Unqualified Sources
In the age of information, many business owners turn to social media and friends for advice on bookkeeping and accounting. While these sources can offer valuable insights, they can also lead to common mistakes if the advice comes from unqualified individuals.
The Risk of Unqualified Advice: Friends and social media posts often provide generalized advice that may not be applicable to your specific business situation. Following such advice without proper verification can lead to incorrect bookkeeping practices, mismanagement of business finances, and potential legal issues.
How to Vet Advice: Always verify the qualifications of the person offering advice. Consult with a professional accountant or bookkeeper who understands the nuances of small business bookkeeping and can provide tailored guidance.
Co-mingling Personal and Business Finances
One of the most common bookkeeping mistakes small businesses make is failing to separate personal and business finances.
As a business owner, even if you’re a sole proprietor or your business isn’t registered with your state, you need to set up dedicated business bank accounts and credit card accounts. Your business income, even if it passes through onto your personal tax return, is still income you earn separate from what the IRS considers ‘personal income’.
When you mix your business and personal expenses, it blurs the lines between what is actually a business expense and what’s a personal expense. This is definitely a bookkeeping mistake to avoid.
Example: If you use a personal credit card for your business Amazon purchases, how will you (or the IRS) know if those purchases were for business or personal use 3-4 years from now when you receive an audit letter? Common accounting mistakes like this could lead to tax penalties down the road.
Why Separation is Crucial: Keeping personal and business finances intertwined makes it challenging to track business expenses accurately. This can lead to overestimating or underestimating your business expenses, resulting in incorrect tax returns and potential IRS penalties.
How to Avoid This Mistake: Open a separate business bank account and use a business credit card for all business-related transactions. This practice simplifies the bookkeeping process and ensures that all business expenses are easily identifiable. By maintaining clear boundaries between personal and business finances, you can stay organized and ensure accurate financial records.
Tax and Bookkeeping Mistake FAQs
What is the best way to track business expenses?
The best way to track business expenses is to use accounting software that allows you to categorize and monitor all transactions. This helps in maintaining accurate records and simplifies the process during tax season.
How can I avoid common bookkeeping mistakes?
To avoid common bookkeeping mistakes, ensure you separate personal and business finances, keep accurate and up-to-date records, comply with sales tax obligations, correctly classify employees and independent contractors, and regularly reconcile your bank accounts.
Why is it important to use a separate business bank account?
Using a separate business bank account helps in maintaining clear financial records, makes it easier to track business expenses, and ensures compliance with tax regulations. This separation is crucial for accurate bookkeeping and avoiding common mistakes small business owners make.
What should I do if I realize I’ve made a bookkeeping mistake?
If you realize you’ve made a bookkeeping mistake, rectify it as soon as possible. Review your financial records, make necessary corrections, and consult with a professional accountant if needed. Promptly addressing errors can help avoid larger issues down the line.
Ready to Stop Being Your Own Bookkeeper?
If you’re ready to give up your (unpaid) part-time position as the bookkeeper and tax person at your private practice and get back to what you actually want to do, we'd love to have you apply to work with us here. Like our glowing review from our client, Liz, we’d love to ‘exceed your expectations and take a lot of time and stress off your plate’ as well!
At Therapeutic Tax Solutions, we’re not your typical, rigid tax & bookkeeping firm! We’re a husband and wife operated firm who help dentists and therapists save money on taxes, increase their profits, streamline their systems and scale their practices.
We work exclusively with therapists and dentists all over the United States offering accounting for therapists and dentists, tax planning for therapists and dentists, bookkeeping for therapists and dentists, and much more!