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Bookkeeping & Accounting Tips for Small Business Owners

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Young asian female work with financial papers at home count on calculator before paying taxes receipts online, planning budget glad to find chance for economy saving money, audit conceptsRunning a small business is a demanding task, requiring you to wear many hats, from managing operations to marketing and customer service. Among these responsibilities, bookkeeping and accounting are crucial for the financial health and sustainability of your business. While it may seem daunting, effective financial management doesn’t have to be overly complicated. Here are some essential bookkeeping and accounting tips to help small business owners stay organized, compliant, and financially sound.

1. Separate Personal and Business Finances

One of the first steps for any small business owner is to separate personal and business finances. Open a dedicated business bank account and use it exclusively for business transactions. This separation simplifies bookkeeping, aids in tax preparation, and ensures legal protection of personal assets.

2. Use Accounting Software

Investing in accounting software can save you time and reduce the risk of errors. Tools like QuickBooks, Xero, or FreshBooks offer user-friendly interfaces and automate many bookkeeping tasks, such as invoicing, expense tracking, and financial reporting. Many of these platforms also integrate with your bank account, further streamlining the process.

3. Track All Expenses

Maintain meticulous records of all business expenses. Use your accounting software or apps to capture and categorize receipts immediately. Keeping a detailed record of expenses not only helps in managing cash flow but also ensures you can claim all possible tax deductions.

4. Regularly Reconcile Bank Statements

Reconcile your bank statements at least once a month. This process involves comparing your accounting records with your bank statements to ensure they match. Reconciling accounts helps identify discrepancies, catch errors, and detect potential fraud early.

5. Implement a Consistent Invoicing System

A consistent invoicing system ensures you get paid on time. Send out invoices promptly, set clear payment terms, and follow up on overdue payments. Using accounting software for invoicing can automate reminders and track outstanding invoices.

6. Monitor Cash Flow

Cash flow is the lifeblood of any small business. Regularly monitor your cash flow to ensure you have enough funds to cover operating expenses and invest in growth opportunities. Create cash flow projections to anticipate future needs and adjust your operations accordingly.

7. Set Aside Money for Taxes

Avoid the year-end scramble by setting aside money for taxes throughout the year. Estimate your tax liability and regularly deposit a portion of your revenue into a separate tax account. Consider consulting with a tax professional to understand your tax obligations and maximize deductions.

8. Maintain Accurate Financial Records

Accurate financial records are essential for making informed business decisions. Regularly update your books and keep records of all financial transactions, including sales, purchases, payroll, and other expenses. Accurate records are also crucial for compliance with tax laws and regulations.

9. Prepare for Financial Reporting

Prepare financial statements, such as the balance sheet, income statement, and cash flow statement, on a regular basis. These reports provide insights into your business’s financial health and performance. Use these reports to identify trends, assess profitability, and make strategic decisions.

10. Seek Professional Advice

Consider hiring a professional accountant or bookkeeper, especially if your business finances become complex. A professional can provide valuable insights, ensure compliance with tax laws, and help you optimize your financial strategy. Many small business owners find that the cost of professional advice is outweighed by the benefits of improved financial management and peace of mind.

Effective bookkeeping and accounting are fundamental to the success of any small business. By implementing these tips, small business owners can maintain financial order, make informed decisions, and ensure their business thrives. While it may require an initial investment of time and resources, the long-term benefits of sound financial practices are well worth the effort.

Cafeteria Plans Might Be a Good Fit for Your Business

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A focused mentor is explaining project to mentees at the boardroom at enterprise.Employers understand that offering a broad range of employee benefits can help attract, motivate, and retain key employees. One benefit that an increasing number of employers are adding to their employee benefits package is a cafeteria plan (also known as a flexible benefit plan).

A cafeteria plan is a written plan under which participants may choose their own menu of benefits consisting of “cash” and “qualified” benefits. Cash here means:

  • Cash from current compensation (including salary reduction);
  • Payment for annual leave;
  • Sick leave, or any other paid time off;
  • Severance pay, property; and
  • Certain after-tax employee contributions.

A qualified benefit must generally be excludable from an employee’s gross income and includes:

  • Group-term life insurance on an employee’s life (up to $50,000);
  • Employer-provided accident and health plans (including flexible spending arrangements);
  • Dependent care assistance programs;
  • Adoption assistance programs;
  • Accidental death and dismemberment policies;
  • Contributions to a 401(k) plan;
  • Contributions to health savings accounts (HSAs);
  • Contributions to certain plans maintained by educational organizations; and
  • Long-term and short-term disability coverage

A cafeteria plan can save payroll taxes for both the employer and the employee. Pay that is contributed to the cafeteria plan is not subject to Social Security/medical taxes (FICA) or to federal unemployment taxes (FUTA). These tax savings essentially lower the cost of the benefit and lower year-end W-2 wages.

Can I Establish a Cafeteria Plan?

Any employer with employees who pay income taxes is eligible to sponsor a cafeteria plan. A C corporation, an S corporation, a Limited Liability Company (LLC), a partnership, a sole proprietorship, and governmental entities can establish a cafeteria plan. However, non-employees are not eligible to participate, including partners in a partnership, members of an LLC, and individuals who own more than 2% of an S corporation.

Types of Cafeteria Plans

There are three primary types of cafeteria plans:

Flexible Spending Accounts — A flexible spending account allows employees to set money aside using pretax payroll deductions to pay for out-of-pocket expenses that are not covered by insurance, such as annual deductibles, office co-payments, prescriptions, and orthodontia. Pretax payroll deductions reduces an employee’s taxable income, which, in turn, increases the percentage of pay he or she will take home.

Full-Flex Plan — With a full flex plan, the employer provides a fixed dollar amount for each eligible employee. The employee uses that money to select what he or she wants from a menu of benefits. If the benefits end up costing more than the sum allotted by the employer, the employee can make up the difference by using pretax salary deductions.

Premium Only Plan (POP) — This type of plan allows employees to have pretax deductions taken from their salary to cover employer-sponsored health insurance plans. POPs are frequently used in conjunction with Flexible Spending Accounts and Dependent Care Assistance Plans. Plans that are eligible are restricted to the employer’s group plans – medical, dental, vision, and certain voluntary products.

Employer Requirements

Once an employer decides to sponsor a cafeteria plan, the employer is required by law to adhere to specific regulations. The employer must:

  • Create a written plan document that outlines the administration of the plan
  • Ensure that employee election changes are limited to those permitted by law
  • Comply with the nondiscrimination requirements that are designed to prevent the plan from favoring highly compensated or key employees

Cafeteria plans can be complex. Employers should work closely with a financial professional with an expertise in employee benefits and in the tax law to determine if sponsoring such a plan makes sense for their business.

The Many Types of Investment Risk

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Businessman using tape measure with risk wording for risk analysis investigate management and assessment concept.It is important for investors to understand that every investment has its own set of risks. One key to successful investing is to recognize the different types of risks that could be a threat to one’s financial well-being and to take steps to minimize their impact. What follows is an overview of the primary forms of investment risk as well as some tips on how to minimize that risk.

Market Risk

This is the risk that the prices of securities may fall due to external factors such as world events, economic changes, or investors’ expectations and outlook. Stock investors are more likely to be impacted by this form of risk than fixed-income investors.

Inflation Risk

Also known as purchasing power risk, this is the risk that is connected to the uncertainty over the future purchasing power of the income and principal of an investment. When prices rise (inflation), purchasing power typically falls. Historically, stocks have been less impacted by this type of risk since they have been able to appreciate in price at a faster rate than the rate of inflation. Typically, lower yielding cash equivalents are more likely to be affected by a rise in inflation.

Interest Rate Risk

When interest rates move up and down, bond prices change. When interest rates move up, newly issued bonds will generally pay a higher interest rate than similar, older bonds. What happens next is that the market of existing bonds falls because there is less demand for them. In other words, they lose market value. The opposite happens when interest rates fall: Older, previously issued bonds will pay higher rates of interest than newly issued bonds, making the older bonds more appealing to investors. The bottom line is that falling interest rates are generally beneficial to bond owners.

Maturity Risk

Since it is impossible to predict how the financial markets will perform in the future, long-term bonds are generally considered to be riskier investments than short-term bonds. This type of risk is known as maturity risk. Issuers of long-term bonds attempt to compensate for the additional risk by offering higher yields.

Credit Risk

Credit risk is the risk that a bond issuer will be unable to pay interest on the bonds it issued or repay principal when the bonds mature. Rating services, such as Moody’s Investor Services and Standard & Poor’s, carefully investigate the financial health of a bond issuer in order to alert investors to the risks of a particular issue. The rating services rate municipal bonds, corporate bonds, and international bonds. They do not rate Treasury bonds since the assumption is that they are solid, backed by the full faith and credit of the federal government. The rating services rate bond quality according to a system that employs letters and numbers, with AAA or aaa indicating the highest quality issues and CCC or ccc and below indicating poor quality issues that could default.

Credit ratings influence the interest rate an issuer must pay in order to sell its bonds. However, credit ratings are opinions about credit risk. Even though credit ratings are forward looking in that they assess the impact of foreseeable future events and can be useful to investors, they are not a guarantee that an investment will pay out or that an issuer will not default.

Currency Risk

Changes in currency exchange rates will have an impact on returns from overseas investments. For example, when the dollar rises in value in relation to the Euro, the return on a fund that holds a large number of stocks in European businesses is reduced when the Euros are converted to U.S. dollars. The opposite occurs when the dollar falls in value in relation to the Euro.

All investments have risks. Before buying a security, understand that the key to investing success is balancing risk. You can do this by having a well-diversified portfolio and an asset allocation strategy based on your risk tolerance and the number of years until you retire.

Diversification helps you manage risk by spreading your assets among a broad mix of different investments. When you do this, you are taking advantage of the fact that securities usually don’t move in the same direction at the same time. When some investments drop in value, others may rise or remain unchanged, offsetting to some degree those investments that lose value. Of course, diversification does not ensure a profit or protect against loss in a declining market.

Be sure to talk to your financial professional for insights on how you can balance risk in your investment portfolio.

An HSA Can Also Be Used to Save for Retirement

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Health Savings Account ( HSA ) coin jar with piggy bankHealth savings accounts (HSAs) were created as a savings vehicle to help people pay out-of-pocket medical expenses. If qualified, you can establish an HSA in much the same way you establish a traditional savings account or an individual retirement account. You can open one with a lump-sum payment or through regular contributions, usually through paycheck deductions.

What makes HSAs appealing is that they offer several valuable tax-saving features. For example, your contributions are excluded from deductible income, all account earnings accumulate tax free, and, as long as the medical expenses paid with HSA savings are “qualified” expenses for you, your spouse, or your dependents, withdrawals from HSAs are tax free also. It is these tax savings features plus the ability to invest contributions in longer term assets that can make HSAs viable as alternative retirement savings vehicles.

Before looking into how HSAs can be used to save for retirement, it can be helpful to explain how they actually work.

The Rules on Contributions

The maximum family contribution for 2024 is $8,300 plus a $1,000 maximum catch-up contribution for participants who are age 55 or more. For self-only coverage, the maximum contribution for 2024 is $4,150 plus a $1,000 catch-up contribution for those participants age 55 or more. The limits will be adjusted for inflation in future years. An individual’s employer or family member may contribute as long as the total contribution amount does not exceed the annual limit.

Investing Contributions

As a participant in an HSA, you have the choice of keeping contributions in cash or investing them in other assets, such as stock and bond mutual funds.* Money not spent on qualified expenses during the year is rolled over for subsequent years. If you are in fairly good health and underutilize medical and health services, you could potentially build up a relatively large balance in the HSA account over several years.

Making HSAs Work as Retirement Savings Vehicles

If you currently maximize contributions to all tax-favored retirement accounts and also save in taxable accounts, you could treat the HSA as one more option to increase your savings and do so in a tax-favored way. Essentially, you would treat the HSA as a retirement savings account and allow the assets in the account to accumulate for as long as possible while paying out-of-pocket medical costs with taxable funds. Of course, this approach does not work if you cannot fully fund all your tax-advantaged retirement savings vehicles.

Remember, each person’s situation is different and you will benefit from discussing this option — and other retirement savings options — with an experienced financial professional

Double Taxation: How Small Businesses Can Avoid It in the U.S.

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Double taxation symbol. Concept words Double taxation on wooden blocks on a beautiful canvas table canvas background. Business tax and double taxation concept, copy space.Double taxation is a significant concern for small business owners in the United States. It occurs when the same income is taxed twice: once at the corporate level and again at the individual level when profits are distributed as dividends. This situation can create a financial burden for small businesses, affecting their ability to reinvest profits and grow. Understanding how double taxation works and exploring strategies to avoid it is crucial for small business owners aiming to maximize their financial efficiency.

Double taxation typically affects businesses structured as C corporations. In this setup, the corporation itself is taxed on its earnings. When these after-tax profits are distributed to shareholders as dividends, the recipients must pay personal income tax on the dividends, leading to the same money being taxed twice.

Strategies to Avoid Double Taxation

1. Choosing the Right Business Structure

One of the most effective ways to avoid double taxation is to choose a business structure that bypasses the issue entirely. Here are some alternatives:

  • S Corporation: By electing S corporation status, a business can avoid federal corporate income taxes. Instead, income is passed through to shareholders and taxed at their individual rates, thus eliminating one layer of taxation.
  • Limited Liability Company (LLC): An LLC can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation. Most small LLCs opt for pass-through taxation (as a sole proprietorship or partnership), where business income is reported on the owners’ personal tax returns.
  • Partnership: Similar to LLCs, partnerships enjoy pass-through taxation, allowing profits to be taxed only at the individual partner level.

2. Retaining Earnings

C corporations can retain earnings rather than distributing them as dividends. While this means the corporation pays tax on the earnings, the shareholders avoid paying personal tax on dividends, thus mitigating double taxation. However, this strategy requires careful planning, as the IRS may impose an accumulated earnings tax on corporations that retain earnings beyond reasonable business needs.

3. Paying Salaries to Owners

Another strategy for avoiding double taxation is to pay salaries to owner-employees. Salaries are deductible as a business expense, reducing the corporate taxable income. This way, the income is only taxed once as personal income for the recipients. It’s crucial to ensure that the salaries are reasonable and commensurate with the work performed to avoid IRS scrutiny.

4. Using Fringe Benefits

C corporations can provide tax-deductible fringe benefits to owner-employees, such as health insurance, retirement plans, and education assistance. These benefits are not considered taxable income for the employees but are deductible for the corporation, thus reducing taxable income and avoiding double taxation.

5. Borrowing Instead of Distributing Dividends

Shareholders can receive loans from the corporation instead of dividends. This approach can defer personal income tax liability. However, the loan must be structured as a bona fide loan with a reasonable expectation of repayment to avoid reclassification as a dividend by the IRS.

6. Reinvesting Profits

Reinvesting profits in the business for expansion, research and development, or other growth initiatives can reduce taxable income at the corporate level. By lowering the corporate tax burden, the business can mitigate the effects of double taxation.

Double taxation can pose a significant challenge for small businesses, but by understanding the tax implications of different business structures and implementing strategic financial practices, owners can minimize their tax burden. Whether through electing S corporation status, leveraging the flexibility of LLCs, retaining earnings, paying reasonable salaries, or using fringe benefits and loans, small businesses have several tools at their disposal to navigate and avoid the pitfalls of double taxation. Consulting with a tax professional can further ensure that small business owners make informed decisions tailored to their specific financial situations and long-term goals.

How Do You Determine How Much to Pay New Hires?

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Healthcare, onboarding and handshake, doctors at job interview, meeting with HR recruitment agent. Diversity, human resources and hiring, asian woman shaking hands with doctor in welcome or thank youSmall business owners know that high performers seek out jobs that offer them an opportunity to grow and to develop professionally. Benefits are also important to job seekers. However, salary plays a major role in the decision to accept a job offer. Every owner of a small business struggles with the question of how much to pay a new hire.

As a small business owner, you understand that applicable wage and hour laws are an important factor in that decision. But beyond these legally mandated requirements, what else should you look at when trying to figure out a compensation rate that is fair and competitive? Here are some issues that you should review.

Education and Experience Requirements

It’s a given that jobs that require a specialized set of skills, long experience, or extensive educational background will be harder to fill than jobs that require only very general skills. Employees with in-demand skills expect a premium salary. If you find a likely candidate for an important position within your company, you may want to determine what others in your industry and in your location are paying for that type of job before you make that prospective employee an offer. The Bureau of Labor Statistics (BLS) website is a good source for information on employment and wage statistics for various occupations throughout the country. BLS data is broken down into occupational types as well as various subcategories within that occupation.

The Nature of Your Industry

Certain industries, such as engineering and health care, typically pay employees more in wages and benefits than other low-paying industries, such as hospitality and retail. However, you may have to consider paying above-market wages and benefits if the job you want to fill is critical to the profitability of your business. That could be particularly necessary if your business is located in a region where the cost of living is higher than the national average.

Supply and Demand Issues

If you are located in a region where labor is plentiful, you may be able to pay the going rate for the workers you need. However, if the talent you need for your business is in short supply, you may have to get into a bidding war with other employers in your region.

The Candidate’s Value to Your Business

Ask yourself: What value will the job candidate bring to your business? How much revenue can you expect the candidate to generate in the first 12 months? What skills do they possess that can help move your business forward? You want to come up with an approximate salary that you can justify, one that aligns with your expectations of the candidate’s potential contributions to your business.

What Does the Job Candidate Expect?

Take the time to understand why a particular candidate is interested in working for your business. During the interview process, try to determine what it is that drives them: more responsibility, a salary increase, or a career path towards management. Their answers can help you formulate an offer that is acceptable to both sides. Clarify what their expectations are in terms of benefits and how important benefits are in their final decision about whom to work for. Many candidates who prioritize working remotely part-time or a solid health insurance package may be willing to take a smaller paycheck in return for the benefits they truly want.

The reality is that finding the right candidate for a critical job at a salary you can live with is tough. Your financial professional can help run some numbers so that you can have a better idea of what you can afford to pay an employee who will be a valuable asset to your organization.