When running a small business, you have a lot to keep up with. Serving customers, managing employees, ordering inventory, and overseeing every department can wear a business owner thin. It can force you to choose between which tasks are prioritized and which aren’t.
The task business owners most frequently brushed to the side is… bookkeeping.
Many business owners delay managing invoices, entering expenses, and reconciling bank accounts. They continuously put off bookkeeping tasks until tax time when they find that their books are outdated, inaccurate, and problematic.
Putting off bookkeeping can feel like a short-term solution, but your books are not something that can be ignored.
Failing to keep up with your bookkeeping can lead to a slew of problems, especially when it comes to your taxes.
Tax Problems Caused by Bad Bookkeeping
Bad bookkeeping translates into bad tax problems. When your books are inaccurate or incomplete, it can lead to:
- Paying more in taxes
- Incurring fees and fines
- Increasing your chances of an audit
- Hours of extra work
At tax time, bad books will increase your stress while wasting your time and money.
If you aren’t sure how bad bookkeeping is directly related to tax problems, here are some examples to show you exactly how brushing bookkeeping to the side can cost you peace of mind and cash in the bank.
5 Examples of Bad Bookkeeping That Lead to Tax Problems
When you aren’t taking care of your books, here are a few ways it can lead to expensive and complicated tax issues.
#1) Overstating Income
Bookkeeping requires the task of tracking all business income. You must document each time your business brings in revenue. Your income is then used to determine your tax liability.
If you report extra income, you will overpay on taxes.
We’ve seen this happen. A client had a broken bookkeeping system that was reporting all income twice. This error doubled their annual revenue, which increased the amount of taxes they thought they owed. We caught the error and prevented the company from paying taxes on income they never actually received.
#2) Understating Income
Overstating income is a problem and so is understating income. Failing to document income can cause your reports to show a lower revenue, which can lead to a lower tax liability. While this may seem like a benefit, it is illegal. You are legally required to report and pay taxes on all income.
If you fail to report and pay taxes on income, the IRS will find out and penalize you.
When the IRS finds out you received income you didn’t report, you could be hit with costly fines and fees. If the IRS believes the underreporting was intentional, it can even lead to criminal charges. Don’t do it.
#3) Missing Expenses
Bookkeeping also requires the task of tracking expenses. You must document each transaction your business makes when purchasing goods and paying for services. At tax time, you can deduct some of the expense from your income, which lowers your tax liability and leads you to pay less in taxes.
If you fail to enter expenses, your tax liability will be higher, and you will pay more in taxes.
Many small business owners don’t have a strong system for entering expenses which causes them to miss valuable deductions. The best way to ensure each expense is tracked is setting up a system to reconcile bank and credit card accounts each month. It’s also important to correctly classify expenses so they are properly deducted from income (as not all expenses are deductible) and keep documentation and receipts (as you would need to verify purchases in the event of an audit).
Related: These 6 Small Business Tax Deductions Are Overlooked Too Often
#4) Not Remitting Sales Tax
As a part of bookkeeping, you may also need to track and remit sales tax. Sales tax is the amount collected from customers at the point of sale on taxable goods and services. It must be reported and paid to the appropriate tax authorities, usually on either a quarterly or monthly basis.
If you fail to remit sales tax, you may face penalties, fines, and interest charges.
Many small business owners do not have a system for tracking and remitting sales tax, which can lead to errors and oversight. It’s vital to implement a reliable system for calculating and collecting sales tax, setting aside the correct amounts, and ensuring timely remittance to tax authorities. In addition to fees, failure to remit sales tax can also trigger an audit by tax authorities, which can be time-consuming, stressful, and expensive.
Related: The 10 Tax Mistakes You Don’t Want Your Small Business to Make
#5) Miscalculating Estimated Tax Payments
Businesses shouldn’t make one lump tax payment at the end of the year. Instead, you should pay quarterly payments throughout the year. Accurately tracking revenue and expenses throughout the year helps you do this. It gives you a projection of your annual revenue and how much you should pay in estimated tax payments.
If you misjudge and underpay your estimated taxes, you may face penalties, fines, and interest charges.
Failing to keep accurate books can make it difficult to project your annual earnings, which can cause you to pay the wrong amount of estimated tax payments. This error can cause you to overpay and keep money out of your business (you will get it back in a refund at tax time, but you will lose the financial capital in the meantime). Worse, underpaying can lead to a larger bill at tax time and can even lead to fines and interest fees.
Related: Add These Important Tax Deadlines to Your Calendar
Get Your Books Ready to Breeze Through Tax Time
It’s clear that disorganized, inaccurate books can cause you to lose money, time, and sleep at tax time. So, make changes now. Start getting your bookkeeping in order now so you have less stress at tax time.
With good books, all you have to do is pass your reports over to your tax accountant and they will be able to quickly and accurately prepare your return.
With CFO2U, monthly bookkeeping is as affordable as $300/month. See how our team can take over tedious bookkeeping tasks while setting up your business for a more streamlined tax season. Explore our monthly bookkeeping packages.
Or get started now by talking to our team about how we can create a custom plan that matches your unique business needs. We can even offer tax planning support so all of your business finances are aligned to help you keep more money in the bank. Schedule a free discovery call with our team today.
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