Bookkeeping is a task that many solopreneurs struggle with because of their lack of financial background, but you don’t necessarily need a personal accountant to make sense of it.
Most of the really bad mistakes are easy to prevent, fix, or avoid altogether if your company doesn’t require them. Let’s look at the most common mistakes you can navigate yourself.
You’re probably wondering what a W-2 form is after researching a W-4, but both forms are used for employees. The W-2, however, is only given to an independent contractor, which is an employee that you don’t have control over. Creating a W-2 form online is easy and can make streamlining the employment process simple.
The 1099 MISC form is used when hiring an independent contractor (W-2) but is used to report the contractor's payments. You must file your taxes correctly when it comes to your employees because you could face a fine or an audit from a misfile, which can raise your premiums in the future.
Tax season comes at the same time every year, but many professionals will leave filing to the last minute because they’ve neglected to keep track of their finances or receipts. To avoid penalty fees from late or improper filing, it’s better to keep a record of your spending every single month so you can hand that information to an accountant quickly.
While it’s a good thing to track every expense that goes in and out of your household, mixing personal and business finances could spell disaster for you because you won’t know which category your transactions belong to. An excellent way to track your business expense is by using one credit card or one deposit account that is designated for your company only.
Separating personal and professional finances will give you a better overall picture of how your business performs, which means you can adjust your spending habits on the fly. Plus, you can sort out which of your purchases are tax-deductible. If you claim an item is tax-deductible when it isn’t, you could be committing fraud.
Cash flow isn’t just crucial for businesses that want to keep money in the register; it’s also essential for solopreneurs who want a different way of tracking the amount of cash they’re bringing into their company. Without monitoring cash flow, you could be paying for items you didn’t expect or missing the many ways your business can save money by cutting costs.
There are plenty of items you use daily that can be deducted from your taxes, including the room you’re working in, computers you use, rent, and utilities. Vacations, your phone, restaurant visits, and your car can be deducted from your taxes in specific circumstances, but you need to understand what qualifies as a deductible.
Plenty of professionals will avoid this step because they’re afraid they may deduct too much and get audited by the IRS. If you’re scared of penalties, ask an accountant what is always a tax write off and what percentage of an item you’re using can be recorded and reported. Doing this will save you a lot of money since freelancers typically pay more in taxes without deductions.
It’s tempting to throw out your business receipts because it’s a habit you’ve likely formed because you want to avoid clutter in your purse or wallet. Hang on to these receipts for at least 3 years because you’ll need to back up your claims in case the IRS audits you. Even if the IRS has a copy of these receipts, they may want the original document.
If you’re not interested in keeping these receipts in a filing cabinet, you can input all of your transactions or purchases in an online solution like FreshBooks or QuickBooks. As a solopreneur, you likely won’t have to make a lot of purchases (yet), so find a safe place to put all of your receipts in case the taxman comes to breathe down your neck.