Now that we’ve learned some key financial accounting concepts and GAAP principles, let’s talk about some of the most common issues small-business owners run into—and what it could mean for your business.
Proper accounting means recording everything on your financial statements—no matter how small the transaction is. It’s important that you record both large and small payments to get an accurate picture of your business finances.
As a small business owner, you’re probably wearing multiple hats. While everything you do is important to your business, one of the most significant things is to ensure that your finances are recorded accurately. Failure to do so could run into a lot of financial complications in the future.
Taxes. It may not be a very fun topic, but it’s something business owners have to address—especially in terms of financial reporting.
As a small business, you will need to meet federal, state, and local tax obligations. Depending on your business structure and location, the amount of tax you have to pay will vary.
As tax laws vary by business structure and location, make sure you check with the state and local government to determine your company’s tax obligations. Generally speaking, the two most common types of local and state tax requirements for small businesses include income taxes and employment taxes.
The way you structure your small business will determine the taxes you owe to the federal government. In general, the five types of business taxes include income tax, self-employment tax, estimated tax, employer tax, and excise tax.
When it comes to financial reporting, one of the most common issues that small-business owners run into is misclassifying workers—specifically between employees and independent contractors. Worker classification is important as it determines whether an employer must withhold income taxes and pay social security.
According to the IRS, the general rule of thumb is that a worker is considered an independent contractor if they have the right to control or direct the result of the work. Small-business owners should consider the degree of independence and control within the employer-worker relationship. The classification of the workers will depend on the facts in each situation.
Small businesses can end up owing employment taxes if an employee is misclassified as an independent contractor.
It’s important for a small business to reconcile its financial statements regularly. Reconciliation is essentially the process of checking an account balance to ensure that it’s accurate and that the amount matches the balance in your bank account.
Small expenses you may forget about could go unrecorded, and this can affect the accuracy of your financial statements. Regularly reconciling your accounts allows you to accurately track your company’s financial information. It’s usually a good idea for small businesses to reconcile their books on a monthly basis.