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Day: July 27, 2022

As a small business owner, you already have a lot on your plate. And while bookkeeping is integral to any business, most business owners aren’t experts. A simple mistake can lead to loss of revenue and investors, and tax filing errors.

Accurate bookkeeping can mean the difference between success and failure for many businesses. So what is bookkeeping, and why is bookkeeping important for a small business? 

What Is Bookkeeping? 

Before delving into why bookkeeping is important for a small business, a core definition is in order. Bookkeeping is creating, organizing, and maintaining a business’ financial records. It is how you track your business expenses and revenue, and is crucial to tax filing, investor reporting, decision making, and more. 

Why is bookkeeping important? Let’s take a closer look at 17 reasons why bookkeeping is important for a small business:

1. Organize Your Business Records

Codifying financial information is perhaps a bookkeeper’s most vital role in your business. Regardless of what’s happening in your business or industry, you need those records to make decisions, interest investors, apply for loans and grants, budget effectively, monitor your revenue and losses, and more. 

2. Make Decisions Easier

Another reason why bookkeeping is important is it impacts your ability to make sound business decisions. Having a clear understanding of your financial records and projections helps you make decisions involving: 

  • Loans and other financing opportunities
  • Identifying and hitting company goals 
  • Hiring and firing employees, as well as their wages and bonuses 
  • Taxes, cash flow, and grants

And those are just a few examples. With a bookkeeper, you can evaluate your records using accurate data to help you make informed decisions. 

3. Create Accurate Financial Records

Your business decisions are only as good as the records you have on hand. It can be difficult for business owners to individually track every expense, loss, and profit. Maintaining accurate records requires a lot of work, even for small businesses. 

For example, do you know how much your business has spent on payroll this year? How about the amount spent on inventory so far this year? Do you know where all your receipts are? 

4. Tax Filing

Business taxes are complex, time-consuming, and can be stressful when trying to do them alone. Bookkeeping services that include tax filing take a lot off your plate come tax time. An expert will know things such as:

  • What forms need to be filed
  • Any deductions or credits your business qualifies for
  • Potential tax write-offs
  • Accurate data for revenue and expenses

If your taxes are off in any way, you’re more likely to be audited. If that happens, you’ll need to supply the IRS with the records your bookkeeper will have readily available.  

5. Budgeting

A bookkeeper provides you with organized and accurate financial records. You can review those records to help budget your expenses, find areas where you can save, see where a supplier may have increased costs, and more. 

6. Attract Investors

Many small businesses need funding, especially when first starting out. One of the simplest ways to receive funding is through investors. But investors require an overview of your business and finances before they’ll want to invest. Not having up-to-date records will likely turn away potential investors. 

7. Better Cash Flow

Bookkeeping can improve a business’ cash flow in many ways. For starters, you’ll be able to manage vendors, customers, and employees more efficiently. That means you can find ways to cut costs and ensure your customers are receiving services on time.

8. Get an Accurate Overview of Your Business

Bookkeepers don’t just provide you with a look at your financial records. You get an accurate overview of your business’ entire operation, including revenue, profit and loss margins, and so on. 

9. Easier IRS Audits

Another reason why bookkeeping is important is to protect your business in the event of an IRS audit. With detailed books, the odds your business will be audited are lower—but it can happen. Should you be audited, you’ll need to provide the IRS with answers to any financial questions they have and provide accurate records. 

10. Easier to Set Business Targets

The goal of every small business is to grow, but that’s a challenge if you have poor financial records. Bookkeeping provides accurate data, so you’ll have an easier time setting business goals rather than making guesses that could leave you disappointed. 

11. Meet Government Regulations

You must comply with federal, state, and local business regulations, including following tax codes, antitrust regulations, and state licensing requirements. An accurate overview of your business will help you ensure your business stays within government regulations.  

12. Get Extra Peace of Mind

With so much riding on accurate records and overviews, a bookkeeper provides peace of mind and reduces the risk of failing, being audited, missing business opportunities, and so on. You’re already spinning a lot of plates as a business owner; the last thing you want on your mind is wondering whether your books are up-to-date and accurate. 

13. Proper Reporting to Investors

Once you’ve secured investors for your business, you’ll need to report to them routinely. Investors want to know whether or not a company they’re supporting is making a profit and how it performs overall. That’s where good bookkeeping records come in. 

14. Track Business Growth

Creating achievable business goals won’t matter if you can’t accurately track your business’ growth. But with accurate overviews and financial records from a bookkeeper, you’ll see the growth over time and be able to celebrate milestones and adjust your goals as necessary. 

15. Meet Proper Record Laws

Businesses are required by law to maintain accurate records. For example, the IRS requires companies to keep employment tax records for at least four years. Additionally, you’ll need to provide your income and deduction records on your tax return. 

16. Learn from the Experts

An easily overlooked reason why bookkeeping is important for a small business is that it gives you the chance to learn from an expert. If you’re interested in knowing how the books work, you can get a better overview of your records, how they are organized, and the data used for them. 

17. Ensure You’re Not Missing Valuable Business Deductions 

Taxes are complicated, and tax laws can change from year to year. That includes business deductions which reduce your tax responsibilities. A bookkeeper will make sure you never miss out on these profitable opportunities. 

Let Vyde Handle the Books 

Now that you know why bookkeeping is important, let us handle the books. Vyde lets you choose the plan that best fits your business at an affordable price. So whether you need help catching up on your books or you’re searching for a reliable ongoing small business booking and tax service, trust Vyde. Don’t wait. Contact Vyde to assist you in all of your small business taxes needs.

Running a small business has its pros and cons. It can be incredibly freeing to be your own boss, but doing your own taxes? That can be intimidating. 

All businesses need to pay annual taxes. If your small business expects to owe more than $1,000 in federal taxes, you’ll also need to pay quarterly taxes. There are several ways to calculate how much (and when) you need to pay. The type of business you are running and the state you live in will affect what you owe. 

Let’s look at this in more detail. 

Which Taxes Do I Have to Pay? 

If you are self-employed, you are subject to the following taxes:

Self-Employment Tax

The federal government sets the self-employment tax at 15.3%. This applies to all profits made by self-employed individuals and businesses. 

Federal Income Tax

You will need to pay federal income tax in addition to the self-employment tax. The percentage you must pay in federal income tax depends on which income bracket you fall into. The percentages range from 10% to 37% and are determined by income and your filing status (whether you are a single filer, married and filing jointly, or the head of household). 

Rate Single Filers Married Filing Jointly Head of a Household
10% $0 – $10,275 $0 – $20,550 $0 – $14,650
12% $10,275 – $41,775 $20,550 – $83,550 $14,650 – $55,900
22% $41,775 – $89,075 $83,550 – $178,150 $55,900 – $89,050
24% $89,075 – $170,050 $178,150 – $340,100 $89,050 – $170,050
32% $170,050 – $215,950 $340,100 – $431,900 $170,050 – $215,950
35% $215,950 – $539,900 $431,900 – $647,850 $215,950 – $539,900
37% $539,900+ $647,850+ $539,900+

State Income Tax

Not all states have income tax, but the majority do. The amount varies from 3% in Pennsylvania to 13.3% in California. You’ll need to look up your state’s income tax laws.

State Sales Tax 

Every time your business sells a product, it is subject to state sales tax (for the 45 states that require it). When you charge your clients for the sale of products, you should collect sales tax. 

In most states, you do not need to collect sales tax for the sale of services, but check with your state’s specific laws to make sure you’re compliant. 

Other Taxes

A few other common taxes you may need to pay are: 

  • Property Taxes 
  • Franchise Taxes
  • Excise Taxes

The best way to know which taxes you will need to pay is to contact a tax professional

How Much Should a Small Business Save for Taxes?

A common question small business owners have is: How can I know exactly how much I’ll owe until I file at the end of the year? 

The truth is that you won’t know with full certainty.

However, you don’t need an exact number, only a good estimate. The federal government allows you to make estimated quarterly tax payments throughout the year, and at the end of the year, you settle up with your annual filing. 

A Good Rule of Thumb

So, how much should your small business save for taxes? About 30-40% of your net income. 

This is a reliable rule of thumb because, on average small business owners make $66,000 or less, putting them into the 22% tax bracket or below. Add that to the 15.3% federal self-employment tax, and you’re probably right in the middle of that range. 

This doesn’t account for everything you’ll have to pay, and you may want to pay more based on your particular financial situation, but it’s a good place to start. 

What If I Don’t Pay Enough Taxes? 

If at the end of the year you file your taxes and discover you’ve underpaid, don’t panic. 

The government’s Safe Harbor rule states that so long as you paid 90% of the taxes you owed for the current year or 110% of the taxes you owed based on the earnings you made in the previous year, you will not be fined for underpaying your estimated taxes. 

This is why the 30-40% rule of thumb can be a safe way to help small businesses decide how much to save for taxes. However, you will need to pay whatever amount you still owe at the end of the year. 

If you underpaid your taxes (less than 90% of what you owed), you might be subject to fines and penalties. 

What If I Pay Too Much in Taxes? 

There’s no fine for paying too much. If you overpay, you’ll get a tax refund at the end of the year for the amount you’re owed.

Of course, overpaying can hurt your business indirectly, as it ties up money you could otherwise use to run day-to-day operations or make investments. Hiring a reliable bookkeeper, however, can prevent this from occurring. 

Get Professional Tax Help

Taxes don’t have to be stressful. With the help of expert tax and accounting professionals, tax season will just be another date on the calendar. 

Don’t wait, contact Mazuma to assist you in all of your small business tax needs.