As a business owner, you're bound to make mistakes. However, mistakes made with your bookkeeping can have a significantly negative effect on the cash flow of your business and may result in legal or tax problems. Here are two common mistakes business owners make and how you can avoid them.
Being Lax About Petty Cash Receipts
Sometimes you have expenses that are too minute to write a check for or that can't wait for you to grab the checkbook. That's why having a petty cash fund to dip into on such occasions can be immensely useful. However, this petty cash fund can cause problems too if you don't handle it correctly.
Specifically, many business owners are too lax when it comes to collecting receipts for expenses paid out using the fund, believing the amounts to be too small to be bothered with especially since the IRS doesn't need a receipt for certain expenses under $75. Not only can this attitude increase the risk of employees stealing from the fund, but you may miss out on tax deductions because of inadequate record keeping.
For instance, if an employee purchases a replacement calculator for the office using the petty cash fund and there's no receipt or record of it, you may not remember to write the expense off your taxes. Enough of these types of slip ups can result in you incurring a higher tax liability than normal had you kept good records.
At minimum, you should have a logging system where employees write down what the petty cash was used for, the date the purchase was made, and the amount. This will help ensure the money isn't being misused and prevent you from missing out on important deductions.
Another mistake some business owners make is misclassifying members of their workforce. This often happens in businesses where a mix if in-house employees and independent contractors (e.g. consultants, freelancers) are used to complete projects. Different tax rules apply to different types of employees. For instance, business owners don't need to pay income taxes for independent contractors. Therefore, misclassifying employees can result in serious tax mistakes that can trigger an audit and monetary penalties.
It's important to implement a system that will help you classify employees correctly. If you're not sure which category a person should go in, consult the IRS' documentation on telling the difference between an employee and an independent contractor.
For more information about these issues or help with your business' bookkeeping, contact a knowledgeable accountant.
Contact a company such as Watson & Company Inc. for more information.