Many new entrepreneurs start their businesses off without hiring a bookkeeper or bookkeeping services. I understand that. They’re trying to bootstrap and keep costs at a minimum in the early days. And for the most part, controlling costs at the beginning of a venture is a good idea.
But not working with a bookkeeper can be a costly financial mistake. Especially if it means you’re not staying on top of your financial obligations. Especially, ones to state and federal governments.
When a new client comes to Reconciled, one of the first things we check is whether the business has been setting aside the necessary funds to pay their taxes. Unfortunately, too often we find that a new business has failed to account for future tax obligations. These costly financial mistakes are either in their cash flow forecasting or in their bank accounts–or both.
Setting aside funds to pay your taxes is non-negotiable.
- As a business, you are required to pay income taxes to the state (in most states), the Federal Government, and sometimes even a municipality.
- If you have employees, you are required to both pay employer taxes and withhold taxes to submit at a later date.
- When it’s time to file your taxes–either with your state’s tax department or the Internal Revenue Service (IRS)–you will have to show that you paid the appropriate quarterly income taxes and payroll taxes and submitted withholding taxes on behalf of your employees.
- If you have not paid the state or the Federal Government what you owed throughout the year, you will be responsible not only for the past due amount but for interest and penalties. Interest and penalties can sometimes be as much as (or more than) the tax amount due.
So what should a new business do to avoid a costly financial mistake?
For brand new businesses, I recommend setting aside 20% of every dollar they bring in for taxes.
In the first 12 months, estimated taxes are not required. But, a business that doesn’t set aside funds will often find itself short on the necessary cash when it’s time to file at the end of the year. In the future, they’ll pay estimated quarterly taxes based on what they made the previous year.
I also encourage businesses with employees to do two things: (1) hold the withheld payroll taxes in a separate account and (2) create calendar alerts for submitting withheld payroll taxes.
This way there’s no chance of accidentally spending money that doesn’t belong to the business when cash gets tight. And an employer is less likely to get overwhelmed by other tasks and forget to submit the necessary filings.
Of course, any new business owner must balance the risk of running afoul of state or federal tax agencies with the cost of hiring out their bookkeeping. We have seen some businesses who were out of compliance with tax law but didn’t realize it. We’ve also been brought in as bookkeepers when a business has already gotten into trouble. They might already owe back taxes and penalties.
We’re glad to jump in and help sort things out when problems arise, but I love to see businesses taking the necessary steps to avoid the problems in the first place.