I’ve been working with small business owners on their bookkeeping for a long time now and while every business is different and has its own personal needs, there are always some similarities that I see over and over again.
One of these similarities are the mistakes that have been made when it comes to their bookkeeping. There are a few things that I see that just never surprise me. Why? Because when we start our businesses, nobody hands us a big book of do’s and don’ts. We do the best we can, we take courses, read articles and hope for the best. Honestly though, sometimes we fail, right? Not on purpose, not because we aren’t intelligent but truly just because we weren’t made to do every little task in our business and bottom line we just are knowledgeable about certain areas and THAT’S OK.
You guys, for the first 3 ½ years of my biz, I had a website that I created myself. Thank God that thing has been replaced with my current one which was done by an amazing professional because it was bad. If there is a list out there of “mistakes a business owner makes when trying to DIY their website”, guaranteed I probably hit everyone of those mistakes. Seriously. I’m just not good at that kind of stuff and now I no longer mess with it. I can make small updates here and there but trying to make it look nice and cohesive or adding a code…no thank you, not for me.
Here is part one of the 10 most common bookkeeping mistakes I see in small businesses + How To Avoid Them. Stay tuned next week for part two!:
1. Classifying Employees as Contractors
This is a big one. Often times in business, you start to grow and the need arises to hire someone to help you out. Whether it’s web design, administrative assistance, social media or a second shooter, you have to be really careful and make sure you are not “hiring” that person as a 1099 contractor when they really should be a W-2 employee. The IRS regulates this and tells us all about the guidelines here. When you hire a 1099 contractor, your business is not liable for taxes, benefits, etc which is often appealing to small businesses because when you hire a W-2 employee you are now responsible for half of their FICA taxes as well as withholding and remitting federal and state taxes.
There is a 20 Factor test the IRS does to determine if an individual is an employee or contractor. Here are some of the main factors. Please do not ignore these. There are serious implications for mis-categorizing an employee including paying back taxes for as long as the individual has been working for you. If you answer “yes” to any of these questions, you should be treating the individual as an employee and not a contractor.
- Are you instructing the individual on how to perform the tasks, where to work or what hours to work?
- Did you train the individual in accordance with your methods instead of allowing them to be the expert and use their own methods?
- Did you have to invest in equipment or products for the individual to complete their tasks?
- Are you the only employer the individual works for and they work at least 30 hours a week for you?
- Do you provide benefits such as insurance, vacation or sick pay?
- Did you provide a handbook to the individual instead of them supplying you with a contract outlining their services?
- Do you allow the individual to fill out a timesheet and turn in hours for each pay period instead of asking the individual to invoice you?
2. Overstating your income
Nobody wants to pay more taxes than they have to, right? Sadly, I’ve seen that happen all too many times because income was overstated in their bookkeeping records. How does that happen you ask? Well, bookkeeping softwares are great and easy to use but you have to be sure to have a good understanding of the software, know general bookkeeping terms and meanings and understand your chart of accounts in order to really make the software work the way it’s supposed to. The biggest mistake here is that a transaction will sync in the bank feeds for a payment that was received on an invoice and it is immediately categorized as income without matching it to the payment that has already been received. When the payment was received on that invoice, the software a lot of times will deposit it to “undeposited funds” because it wants you to manually verify the deposit, add any other transactions that might be included and then deposit it into the proper bank account. When it’s categorized in the bank feeds as income and deposited to the bank and then the payment is sitting in undeposited funds, that’s double entries which means overstated income. Be sure to match all deposits and payments to their original invoice and make only one deposit to avoid this mistake.
3. Not reconciling your accounts
After the end of each month your bank, credit cards and even merchants like PayPal will release statements showing your beginning and ending balances as well as all of the transactions that occurred in that month. Take those statements and reconcile your accounts in your bookkeeping software. Make sure all of the transaction amounts and dates match up and make sure the ending balance matches up as well. Not reconciling your accounts each month can lead to errors that copy over month after month. If there was a transaction that was not input correctly and it also was not reconciled, the error may not immediately show itself and it could be throwing everything off month after month after month.
4. Over or Under Categorizing
When it comes to bookkeeping, I like to keep things simple. Accurate, but simple. Sometimes it’s easy to overthink how you should be categorizing transactions and it leads to a huge chart of accounts, a 10 page P&L report and a confused CPA. There’s no need to make an account for every type of office expense, every software you subscribe to or every contractor’s name you pay. Keep it simple with accounts like Office Supplies, Software, Contractor Expense, etc. The same can be said for under categorizing though. Sometimes I’ve seen accounts that only have one income account maybe 4 or 5 expense accounts. This isn’t good either. You don’t ever want to have items left in “misc expenses” or “uncategorized expense” or if you have 3 photography packages, you don’t want to have all of your sales just go to “sales”. Be detailed enough so that you can get a good picture of where your money is going and where it’s coming from without detailing every little thing to the point that you’re over categorizing.
5. Not tracking Mileage
Did you know you can be reimbursed for the miles that you drive for your business? It’s true. The IRS sets a mileage rate for businesses each year that covers your gas, maintenance to your car and general wear. Use an app like MileIQ that will track all of your drives and then you can categorize them as business or personal. At the end of every month they’ll send you a report showing how many business miles you drove and what that amounts to. You can take that amount and reimburse yourself from your business account while categorizing it as a business expense. Not doing this prohibits you from claiming this eligible deduction on your taxes.
Come back next week when I provide the final 5 bookkeeping mistakes I see over and over again!