Sales Tax Fundamentals
Get up to speed on the basics of sales tax
A Step-By-Step Guide to Catching Up On Your Bookkeeping
byNovember 1, 2020
Tax season for many is coming to a close with deadlines around the corner. For many others a rush to getting tax-ready and compliant with IRS recordkeeping requirements has just begun. For those of you out there thinking of potential late fees, surprises, and a successful tax return, here’s a guide from our partner Bench.
Bench was started so you wouldn’t have to do your own catch up bookkeeping. But for the do-it-yourselfers, this step-by-step guide will help you get through your bookkeeping backlog in no time.
Step 1: Collect Receipts & Invoices
Start by collecting all receipts and invoices related to your business expenses. There are many different types, so we’ll outline the most important ones.
- Customer Invoices
Review your customer accounts and double check that you’ve collected all customer invoices for the tax year. Depending on whether you’re using a cash or accrual method, you’ll record these differently.
- Debt Collections
Review your customer accounts for any bad debt expenses. In order to deduct the cost of bad debt from your tax return, you will need to prove to the IRS that you have taken reasonable steps to collect the debt. Bad debts can be claimed by using either the specific charge-off method or the nonaccrual experience method.
- Business Expenses
Collect receipts from all business purchases you have made during the tax year. Use this handy list of small business tax deductions to double check that you’re tracking and claiming every deduction available to your business—because who doesn’t love saving on taxes?
- Vendor Accounts
Review your vendor accounts to ensure that you have paid them all in full. Make sure you have a copy of every bill from each vendor activity and, if you don’t, contact the vendor and ask them to send you a copy.
Important to note: Vendor accounts include bills for business activities that are still currently operating in your business’s closing period.
Step 2: Reconcile Your Bank Records
Reconciling your bank records accomplishes two things: 1) It ensures you don’t miss any business expenses or important records from Step 1, and 2) It helps you catch any mistakes your bank may have made.
You can do this by comparing each transaction from your bank statement with the same transaction in your company accounting records. If the transactions don’t match, identify and fix any errors to ensure they balance out.
Step 3: Separate Personal and Business Expenses
Keeping your personal and business expenses in the same account is known as piercing the corporate veil—which may result in you being held personally liable for your business’s debt and actions. The sooner you separate your business and personal expenses, the better. Learn how to open a small business bank account and keep your finances separate.
If you’re unsure about whether a purchase qualifies as a deductible business expense, learn how the IRS differentiates personal and business expenses.
Step 4: Create Digital Records
If you haven’t done so already, there are countless benefits to making your business paperless. As you process your paperwork, create digital records of receipts and important documents. Here are a few of our favorite tools to help you go paperless:
Step 5: Submit Forms for Contractors & Employees
If you paid independent contractors and/or employees during the tax year, there’s a good chance you’ll need to file the following forms:
- Independent Contractors: Form W-9 & Form 1099-MISC
If you paid an independent contractor more than $600 for work during the year, you’ll need to submit a Form W-9and a Form 1099-MISC. A W-9 requests a contractor’s taxpayer information. The contractor completes this and returns it to you. You then use the information on the contractor’s W9 to issue a 1099 to the IRS. If you’re new to the process, and unfamiliar with the deadlines, read How (and When) to File a 1099 first.
- Employees: Form W-2
You’re required to file Form W-2 for all employees.
Step 6: Review Your Books With a Professional
When you’re a small business, doing it yourself is often the least expensive option. But tax professionals can help eliminate errors, help you claim all of the deductions available to your business—which may end up saving you money in the long run—and can also represent you in the event of an audit. Developing a relationship with a financial pro, well before you need their help, will prevent last-minute scrambling and bring you peace of mind that your books are in order.
About the Author
Ryan Smith writes for Bench, the online bookkeeping service that pairs you with a dedicated bookkeeping team and elegant software to do your books for you.