Category Archives: Bookkeeping

What Tax Documents Should You Keep?

And which ones should you shred?

If your filing cabinet is bursting at the seams, you’re not alone. As a small business owner, you have a lot of paperwork to keep track of – everything from business licenses, employee records, lunch receipts – the list goes on.

Some of the more challenging records to manage are your business’ tax documents and all of their supporting paperwork. Navigating tax document requirements is complicated and is often unchartered territory for a small business.

As a default, many business owners end up unnecessarily saving every last receipt for years and years. Or, they become overwhelmed and throw away important information.

Properly storing tax documents comes down to these four keys to success.

  • Know how long to store your tax documents
  • Understand which ones to store
  • Understand which ones are safe to shred
  • Devise a plan to do things right

How long should you hold onto tax documents?

The IRS can audit your return for up to seven years after you file if they suspect tax filings were made inaccurately or if you claimed a deduction you didn’t deserve. The period of limitations – the period of time you have to amend your tax return – expires three years after a return is filed. So, hang onto your tax returns and all supporting documents for at least seven years.

Which must stay and which can go?

Tax rules pertaining to financial records seem to change every year. The guide below will help you better understand the latest requirements and break down which documents you should store, which you can shred, and which belong under lock and key.

Store paper copies of these six documents.

The following documents are those you’ll want to keep literal tabs on – print, file and store these six tax documents every year.

  1. Form 1040
    Small businesses should store 1040 forms and any other supporting documentation for a minimum of three years.
  2. Schedule K-1
    Small businesses that file as an S-Corp or Partnership need to hold onto schedule K-1 documentation for a minimum of six years to show evidence of partnership shares.
  3. Employee Records
    Store your employee records, payroll reports and other similar employee record documentation for a minimum of seven years to be safe.
  4. Partnership Agreements
    It’s critical to maintain all partnership or LLC partnership agreements, and any amendments to those agreements, in hard copy for life of the partnership.
  1. S-Corp Acceptance Letters and Form 2552
    Maintain a copy of both letters and forms indefinitely if you have an S-Corp.
  2. Required Licenses
    Maintain hard copies of all state and local licenses that are required for you to operate your business.

Store these electronically. 

Not every business record requires you to maintain a physical paper trail. If you’re like many businesses and prefer to maintain your records and documentation electronically, you can keep these documents on a server or on the cloud.

  1. Transaction Statements
    Bank or credit card statements or other similar transaction statements are your back-up documentation to most, if not all, of your payables. Paper or electronic transaction statements should be filed and stored for at least three years after the filing of the transaction’s tax season.
  2. Legal Agreements
    Contracts or legally-binding documents should be stored for the life of the contact, and for years after in the event that those documents need to be revisited.
  3. Federal and State Tax Filings
    Maintain your electronic records for a minimum of three years – more if your business owns property, has employees, or has any inaccurate filings from the past.

If you do decide to store these documents electronically, it’s critical to the safety of your business that you protect your information with trusted, proven data security. A recent SCORE Webinar, ‘What Small Businesses Need to Know About Cybersecurity,’ touches on the back-up and recovery of sensitive documents.

Whatever electronic or cloud-based storage option you choose, it’s worth your time to research that platform’s data security and their process for safeguarding your business, as well as recovering your data should there be a security breach. Check out this list of business cloud storage providers to help you determine the safest way for your business to store sensitive information electronically and keep your tax documents and other business records in order.

These you can shred. 

There are several types of business records that do not need to be physically or electronically stored. In fact, some records containing personal information are many times better shredded than not. This excludes any tax documentation, legal documents, and most of the records listed above.

Always check with your financial advisor and accountant before you begin to shred what may be important documentation for your business to maintain. Typically, though, most businesses can shred non-essential documentation that lists personal information.

If you’re still not sure whether to keep those business records or store them away, even after the period of limitations has expired, hanging onto them for a while longer is never a bad option. And, digitizing your records will make it even easier to store past documents, taking the stress off of your filing cabinet.

Create a system to keep things organized.

Now that you’ve organized your business’ financial records and know which documents to store as physical copies, which ones can be stored electronically and which ones can be shredded, the next step is to come up with a system for filing and storing the right documentation. 

If you have a question about your business records, reach out to a SCORE mentor today!

Top 10 bookkeeping mistakes by small businesses.

couple working on finances

From one-person entities to Fortune 500 companies, no business can escape the dreaded task of bookkeeping. While it’s definitely not one of the more glamorous parts of the job, bookkeeping is at the heart of small business success, which means errors can be crippling.

To avoid the financial headaches that come with bookkeeping mismanagement, it’s important first to be aware of the pitfalls that can ensnare you. Continue reading

What’s the best way to pay your employees?

by Joe Heinrich, SCORE Seattle

Congratulations!! You’ve grown your small business so much that you need help, and so you’ve hired your first employee. Now you’re confronted with the task of paying that employee properly in accordance with IRS regulations and State of Washington statutes, along with making payments to taxing authorities and reporting to them periodically. And now you’re stomach’s churning!!

payroll

Overview

To correctly pay an employee in Washington, the employer needs to deduct the following taxes from the employee’s pay and report and remit timely these amounts to the relative taxing authorities:

  • Social Security Tax and Medicare Tax (just the employee’s share)
  • Federal Income Tax
  • Washington Labor & Industry Premiums (just the employee’s share)
  • Washington Paid Family & Medical Leave Tax (just the employee’s share)

There may be other withholdings from the employee’s pay, such as garnishments for child support, contributions to a retirement plan, donations, and the like. Continue reading

Washington State’s new paid family and medical leave.

by Johnnie Hawkins, CPA
Parker Mooers & Cena, Silverdale

Starting in 2020, Washington will be the fifth state in the nation to offer paid family and medical leave benefits. This benefit offers partially paid leave to care for yourself or a loved one in times of serious illness or injury, to bond with a new child joining your home through birth, adoption or foster placement, and for certain military-connected events if you have a family member in active duty service.  This isn’t like paid sick leave; you will file your claim with the Employment Security Department (ESD), and your payment will come from ESD. Typically, you’ll have access to up to 12 weeks of paid leave.

Premium collection starts on Jan 1, 2019. In 2019, the premium is 0.4% of wages, or $3.85 per week for someone making $50,000 a year. Employers can either pay the full premium or opt to withhold a portion of the premium from their employees. Employers who choose to withhold premiums from their employees may withhold up to 63 percent of the total premium, or $2.44 per week for an employee making $50,000 annually. The employer is responsible for paying the other 37 percent. Businesses with fewer than 50 employees are exempt from the employer portion of the premium but must still collect or opt to pay the employee portion of the premium.

You can learn more about the program at www.paidleave.wa.gov/employers or contact us with questions at 360-692-8808. Continue reading

Tax Time: A Guide to Completing the Schedule C

 

Before the cold sweat and anxiety of tax season gives you a clammy embrace, make sure you know what you need to complete your Schedule C Tax Return.

tax time clockIf you operate a sole proprietorship or single-member limited liability company (LLC), tax time can be worrisome, especially if you’re doing your own taxes.

A little preparation and you’ll likely find there’s nothing much to worry about.

What is the Schedule C Form?

At its core, the Schedule C is nothing more than a profits and losses worksheet for sole proprietors and single-member LLCs (as long as the LLC hasn’t elected to be taxed as a corporation).

Before jumping into the details of Schedule C, it’s important to note that if you have $5,000 or less in business expenses, you may be able to file a Schedule C-EZ instead. Schedule C-EZ is a similar but much simpler form. It’s worth taking a moment to look at the list of requirements at the top of the form to see if your business qualifies.

The rest of this article, however, focuses on the more complex Schedule C. Continue reading

The #1 reason small businesses fail… and how to avoid it.

Cash flow.

Mention those two little words to almost any small business owner, and you’ll see them flinch.

Very few business terms get as cool a response. And sadly, those two little words (both of them four-letter words, interestingly enough), are the #1 reason small businesses fail. They take out more small businesses than any other factor.

In fact, 82% of small businesses fail due to cash flow problemsContinue reading

Personal Property Tax: The forgotten tax for many small businesses?

by Joe Heinrich, Volunteer Business Mentor, Seattle SCORE

Most small business owners are perfectly aware of the Federal, Washington and city taxes they are obliged to pay. However, the one that tends to fall through the cracks is the local Personal Property Tax on businesses by the county in which the business is located. This article explains what personal property is, how to self-report a business’s personal property, how the tax is assessed and how much a business may have to pay in Personal Property Tax.

What is “personal property” of a business?

Taxable Personal Property typically includes items used by a company to conduct business. Examples of personal property which may be assessed include furniture, fixtures, electronic equipment, telephones and machinery. Leasehold improvements and leased equipment are also included as personal property. However, personal property does not include property which is attached to a building or to the land which a business owns as that is considered “real property”.

Exempt personal property includes inventory (i.e., items owned to be resold or used as raw materials to products to be manufactured and sold) and vehicles used on the roadways.  Continue reading

Services subject to sales tax in Washington.

From the Washington Department of Revenue website… 

There is a misconception that services are not subject to sales tax. This article clarifies that some services are indeed subject to retail sales tax. Following is a listing of services that are subject to sales tax when provided to consumers.

Construction services (WAC 458-20-170)

  • Constructing and improving new or existing buildings and structures. Installing, repairing, cleaning, improving, constructing and decorating real or personal property for others
  • Cleaning, fumigating, razing or moving structures, including painting and papering, cleaning and repairing furnaces and septic tanks, and snow removal
  • Clearing land and moving earth  Continue reading

3 Essential Financial Statements for Your Small Business

Accurately tracking financial data is not only critical for running the day-to-day operations of your small business, but it is also essential when seeking funding from lenders or investors to take your business to the next level. In addition, keeping tabs of your finances can help ensure your products and services are priced right, identify what your margins are, determine your cash flow and make filing taxes easier.

Here are three basic financial statements that are important for your small business:

  1. Balance sheet. This statement provides an overall financial snapshot of your small business. As an equation, it looks like liabilities + owner’s equity = assets. The two sides of the equation must balance out. There are two types of assets: current and fixed. Current assets include cash or other holdings that can quickly be converted to cash within a year. These may include inventory, prepaid expenses and accounts receivable. Machinery, equipment, land, buildings, furniture and other essentials that you are not planning to sell are considered fixed assetsLiabilities can be broken down into current or short-term liabilities, such as accounts payable and taxes, and long-term debt such as bank loans or notes payable to stockholders. Owner’s equity includes any invested capital or retained earnings.  If you captured all of your accounting information correctly, both sides of the balance sheet equation should be equal. Download SCORE’s template to start setting up your own balance sheet.

Read more on the SBA.gov website.

Ask SCORE: What should I do before I hire my first employee?

Hiring employees for your small business can help lighten your workload. But it also creates the need to manage something you didn’t need to worry about when you were handling all aspects of your business by yourself:

Payroll.

Even if you have just one employee, you need to do payroll accurately and in compliance with all legal and regulatory responsibilities. If you don’t, you could incur costly penalties from the Internal Revenue Service.

Before you hire your first employee and put processes in place to handle payroll, make sure you pay attention to two important details.  Continue reading