11 Accounting Tips All Small Businesses Should Know

by Rashan Dixon
business.com | Updated: September 1, 2022

Even if it isn’t your forte, you still need to know the basics of accounting to ensure your business is being run right. Here are 11 accounting tips all small business owners should follow.

Most small business owners aren’t accountants by trade. But whether their background is in product development, HR, management or anything else, they have to learn the nuts and bolts of accounting.The good news is that small business accounting is relatively simple. Companies that operate in a single state and have a simple business structure have three accounting priorities:

• Ensure their revenues exceed expenses
• Keep their books clean
• Pay their taxes

Still, small business accounting can be tricky for leaders without any sort of financial background. Use these 11 accounting tips to stay on the right path.

1. Keep business and personal accounts separate.

One of the messiest accounting blunders small business leaders can make is to mix their business and personal funds. Although plenty of entrepreneurs chip in their own startup money, business revenue and expenses must be separate from personal ones.

The best solution is to start with a sound business structure. Establish your company as a distinct legal entity, such as an S corporation or LLC. Open a business checking account as your financial hub, and pay yourself a salary from it each month. Get a business credit card for expenses you can’t or don’t want to pay cash for, and open a business savings account as a rainy day or investment fund. Track any business usage of your personal items.

2. Classify workers properly.

When it comes time to build a team, you have two choices: employees and contractors. The IRS considers employees to be those you have behavioral authority and financial control over, as well as a long-term business relationship with. Contractors, meanwhile, are people who work for your company on a project basis and retain control over their own schedules and business decisions.

The penalties for misclassifying workers are steep. On top of the $50 for each W-2 form that the employer of misclassified contractors must pay, the employer pays fees of 1.5% of wages and 40% of FICA taxes that it didn’t withhold from the employee. The employer must also pay 100% of the FICA taxes that it would’ve paid per employee. If the IRS believes the misclassification was intentional, the employer could be fined up to $1,000 per worker or imprisoned for a year.

3. Calculate total labor costs before you hire.

If you decide to hire employees, know that you’ll be on the hook for more than just their wages. At least once a month, you’ll have to come up with the funds for their benefits and payroll taxes. Those costs add up faster than many small business owners realize. According to an OnPay survey, just 43% of those who do payroll themselves are confident in their ability to pay their employees on time. The rest are either behind on their books or too eager to expand their team.

Don’t put yourself in the position of having to cut compensation post-hire. Even if you were generous with your initial wages and benefits, your workers will feel cheated if you pare them down. Small businesses can’t afford high turnover, especially among their first few hires…[MORE]

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To read the entire article and all 11 small business accounting tips by Rashan Dixon at the business.com website, visit: 11 Accounting Tips All Small Businesses Should Know