Bookkeeping and Tax for Startups and Small Businesses
So you’ve started your own e-commerce store. Or a new restaurant aimed at delivering quality over quantity. Godspeed! Your entrepreneurship and go-getter attitude should be admired and treasured.
We don’t have to tell you about the overabundance of tasks and obligations flying your way from each and every direction, multiplying daily without respite. We’re sure you are well aware of those.
This post will focus on the fundamental aspect of any business – cash flow and tax obligations. Arguably, the most important one. A lazy employee with a history of truancy can be replaced. But a knock on the door from the IRS could spell curtains for the entire operation.
Bookkeeping is the day-to-day accounting process – managing, categorizing, and keeping records of business transactions.
Accounting services are a higher-level affair. They use the financial data collected by bookkeeping to create bigger-scale insights, reports, and statements.
First, let’s take a quick detour and see if there’s a difference between a small business and a startup.
The difference between a small business and a startup
Sometimes the terms startup and small business are used interchangeably. While they are not without their similarities, startups and small businesses are not entirely the same thing.
A startup is a ‘miniature corporation.’ Searching for a scalable and repeatable business model is a key feature. In other words, startups are small companies looking to go big, largely through investment rounds. They also usually have a ‘groundbreaking’ or ‘disruptive’ product aimed to have a significant impact on a given market.
A small business is a self-contained enterprise, not necessarily aimed at ‘making it big’ or ‘disrupting the market.’ The term ‘small’ is in regards to its employee pool. The threshold for the number of employees in a small business varies from industry to industry. Small businesses have accounted for 61.5% of net new jobs from 2000 to 2019.
As far as accounting goes, however, much of the same principles apply to both types of enterprise.
Who does your bookkeeping?
After you’ve opened a business bank account, it’s time to set up basic bookkeeping procedures.
There are three routes you can take, depending on the scope and size of your business.
- A DIY method, where you take full responsibility for keeping track of all transactions. You can use specialized software or just a simple spreadsheet. This way, the most important part of any business, the cash flow, is supervised by the person you trust most – you. It’s also a huge amount of very responsible but menial work.
- A middle ground, where you hire an online virtual bookkeeper. This outsources the drudgery of managing financial records to a professional. You can then focus on the thing that lit the flame of your entrepreneurship in the first place.
- Finally, if the size of your business merits it, you can hire an in-house full-time accountant. While expensive, this is obviously the most secure path.
If you’re a lone wolf, self-employed entrepreneur, you’ll claim your business’ tax income on your personal tax return. You will need to withhold taxes from your own paycheck, a job usually reserved for employers.
If you’re operating inside the USA, you will need to pay estimated quarterly taxes if your tax debt exceeds $1000 annually.
The world of eCommerce has brought upon new challenges in sales tax calculations. Since your customers can be from any state, or country for that matter, different taxes apply.
The main difference between states is whether the sales tax is the buyer’s or seller’s responsibility. Wherever your business operates, be sure to acquaint yourself with local sales tax procedures. Seeking professional advice is highly beneficial here.
For US-based businesses, International transactions are often tax-exempt.
You will need a payroll schedule for employees. The most important thing to keep an eye on is withholding taxes. Nowadays, this task is relegated to simple software, so it’s not much of a headache.
Payroll taxes usually boil down to the following:
- Medicare and Social Security (FICA)
- Income tax, on the federal, state, and local level
- Unemployment insurance
Some states will require you to pay disability insurance taxes.
Independent contractors file their own tax returns. However, keeping track of invoices is critical. You may be required to file end-of-year reports for each contractor you’ve hired. Be sure to keep their names and addresses for this reason.
A gross profit margin is expressed as a percentage. Say you sell an item for $15, and it costs you $10 to make it. To get to the gross margin, you need to divide the net profit (in this case, $5) with the total revenue accrued by the sale (in this case, $15). In this case, the gross margin is 33%.
There are many free gross margin calculators available online.
Having this information at your disposal is extremely beneficial. You can consistently track your company’s progress and compare it to other businesses in the same industry.
Whether you’re a promising startup looking to expand and dominate the market, or a small business looking for a small business loan, external funding is an excellent option to get your business moving. Or out of some downward slump.
Banks and investors alike will require you to provide neat and organized balance sheets and income statements. Having those in place even before the need for external funding appears can help you avoid unnecessary downtime.
As a side note, before you go rushing into debt, it’s beneficial to have at least a crude return of investment (ROI) calculation in place. Check the balance between the following figures: the expenses that need covering, the gross loan amount, the expected revenue the loan will accrue, and the total amount of interest you will need to pay.
Cash flow is everything in business. Keeping a record of it is just as important. Thankfully, tasks that were daunting just a decade ago are made trivial with software.
Hiring an accountant is highly recommended when you feel that accounting tasks are taking away too much time or when you feel the circumstances are leading you into deep water. Even if you do decide to keep your own books, always consult a professional beforehand.