Many sole proprietors and small business owners choose to pay themselves off the payroll. When making drawings from your company or receiving compensation in the form of a payment from a client, accounting for income tax deductions is often overlooked. Falling behind with bookkeeping or failing to file proper paperwork with federal and state tax agencies is easy to do when busy schedules don’t allow for processing of these tasks.
To avoid accruing penalties and interest on unpaid taxes, estimated state (if applicable) and federal income taxes need to be paid on a quarterly basis and filed with the appropriate form. By adhering to the designated due dates and staying up-to-date throughout the year, annual tax liabilities will be kept at a minimum.
The end result – no surprises and less stress in the following year.
When starting a new small business, much of your focus is on startup costs which will consume a large portion of your first year’s budget. To name but a few: new insurance premiums such as liability, workers’ compensation and, depending on the industry, auto insurance, possibly for multiple vehicles, may require large sums. There may be security deposits if renting a location, down payments on assets required for your business, or preparing to make payments on a newly acquired small business loan.
During this startup phase, be careful to keep your operational expenses at a minimum wherever and whenever possible. Payroll will likely be one of your bigger expenses. If you’re starting small and taking on the burden of responsibilities to run your company, your payroll expense is probably already at its lowest. However, if your industry requires a staff to be out in the field, there’s a good chance your payroll expense is on the high side as you strive to make ends meet.
Review your business operations to see where you can cut back and save. One common solution among small business owners is hiring an independent contractor to “pay as you go” when the task does not need to be completed by a permanent full-time employee. Savings in payroll expenses can be reinvested in your company as you get off the ground.
And as your customer base grows, any savings will contribute to a steady paycheck for yourself.
When funds are scarce and liabilities are due, some business owners may be tempted to combine business and personal financial obligations. However dire the circumstances, using company funds to pay personal debt and expenses or vice versa is ill-advised.
Among the transgressions that could potentially wreak havoc on your company’s financial statements are the following transactions:
- The deposit of business checks into a personal account.
- The transfer of funds between business and personal accounts.
- The disbursement of business checks to pay personal credit cards and personal expenses.
- The use of a company credit card for personal purchases.
Of the many nightmares misuse of cash creates is the confusion to be had when filing tax returns. Explaining to the IRS the differentiation between business and personal transactions when merging them is a headache you don’t need.
Commingling funds discredits the financial profile of your company. The statement of cash flows is skewed. The balance sheet is inaccurate and discrepancies surface on the profit and loss statement. The result being inaccurate tax liabilities and a bogus bottom line.
Preventing the aforementioned scenarios is simple.
- Have a buffer. A minimum savings of six months of expenses will suffice and continue adding to it. Keep separate savings accounts for your personal and business expenses.
- Create a budget and stick to it. Both a business and a personal budget will keep you on track and prevent overspending.
- Limit credit card debt and pay off balances within a short period of time.
- Deposit business checks into your business account and pay yourself. This allows disbursement of funds from the appropriate sources of income.
Remember that commingling complicates your bookkeeping and jeopardizes the progress of your business. Business income is used to support business operations which includes your paycheck.
Abiding by this simple rule of keeping distance between your business and personal financial obligations will help ensure the stability and success of your small business.
In our high-tech society, few business operations use a manual timekeeping procedure. A favorite of the entrepreneur who provides services at multiple locations for a multitude of clients is a call-in time tracking service.
This automated service has dual roles. Billable time is recorded in order to invoice the client at a later date and hourly time is tallied on a timecard for payroll processing. An employee will call a designated phone number from any location to “punch in.” Upon completion of a job, a second call allows the employee to “punch out” thereby closing out the assignment. However, this system isn’t without its drawbacks; one of which is its lack of employee supervision.
On the occasion that a timecard appears to have exceeded the allotted time for an assignment, a business is confronted with a dilemma. The actual cost to the client will show a discrepancy in the proposed cost and the payroll will be over budget. A solution to the problem may be to provide a more accurate estimate of time in future proposals. However, a common problem is an employee failing to follow the proper procedure in reporting time.
A disobedient employee may pad his/her time by calling in with a cell phone before reaching the destination and after leaving the location thus increasing his paycheck as well as the client’s billable time. A benefit to using an automated time tracking system is its ability to reveal the source of a call.
A thorough of review of timecards in addition to enforcing a policy to have all employees call in from a landline at the location where the work is taking place will ensure that company time is tracked properly and honestly.
Ultimately, clients will be satisfied and payroll expenses will be on budget.
Preventing misuse of employee company credit cards and monitoring employee spending could be a major component in cutting costs if abuse of your reimbursement policy is present. Verify receipts are actual company expenses and collect reimbursement forms at scheduled intervals rather than random requests from employees.
Was that dinner on Friday night business related? Was the last toll over the bridge en route to a business meeting? However small reimbursements may be, multiple offenses could damage your bottom line.
Consider setting credit limits on company cards and track expenses diligently. Adhering to this policy and procedure may reveal where attention is required without having to make budget cuts.