Article by Navneet
Tax bookkeeping is one of the most mind-numbing topics in bookkeeping… but it’s critically important to your business success.
Not only does it ensure you pay what you owe (and only what you owe) so you can stay in business, messing up your taxes could actually land you in jail!
As a business owner, you absolutely need a strong grounding in the basics of tax bookkeeping… so we’re going to bring you exactly what you need to know in this must-have guide. Read on!
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The Importance of Tax Bookkeeping and Accounting For eCommerce
A good bookkeeping system is the foundation for a thriving and financially stable company. Without it, your business will fail! A lack of cash flow is one of the most potent business killers around, so getting your books in order is a non-negotiable part of the business. If you need some more convincing read our article on the importance of bookkeeping so you’re up to speed.
It doesn’t matter if you are selling through Amazon, eBay, Shopify, or Etsy you are definitely going to need a solid system to manage your finances, business, and books. If you are interested, our virtual bookkeeping service for eCommerce will do all of this for you!
We get it, bookkeeping can be intimidating and it might not be at the top of your priority list, but it shouldn’t be. With some fundamental bookkeeping knowledge, you will be able to manage your eCommerce business finances with confidence. The good news is you don’t need an intensive 3-month course to start, you just need to read on…
Tax and Accounting For eCommerce
How do you build a financially stable and reliable business?
Well, first you need a profitable business, then you need a bookkeeping and tax system.
Bookkeeping is the way to business stability and control. By recording all transactions and expenses, you get clear insights into how your business is operating. Bookkeeping will help you to forecast your business and plan for its future.
Taxes are also obviously required to stay on the right side of the government…. And by keeping on top of bookkeeping, your tax filings will become a lot easier.
Tax Bookkeeping For Your eCommerce Business
Now, I imagine, given your business success, you will be more than capable of getting your head around bookkeeping. But if you are going to go down the DIY route, then you are going to be keeping yourself busy!
It is certainly possible to undertake your eCommerce business bookkeeping just to make sure you keep on top of things. A taxes and bookkeeping service could take the work off your hand, but it is still worth knowing what you are doing or what should be done.
Here is an idea of what you can expect to be undertaking on a daily, weekly, and monthly basis:
Tax and Bookkeeping – Daily Tasks
Bookkeepers keep the business finances organized.
This means recording any daily transactions into the sale or expense ledgers. Inputting data and collecting incoming and outgoing transactions….
A bookkeeper can also handle the recording of day-to-day bank transactions which is vital bookkeeping for doing your taxes. If you use bookkeeping software, you can set your bank transactions to feed directly into your bookkeeping software. Saving double handling of your data.
Keeping records of all expenses is critically important for tax season so should be part of your day-to-day bookkeeping. Proper bookkeeping of income and expenses is vital for tax preparation.
Don’t get caught short on the tax front!
Tax and Bookkeeping – Weekly Tasks
The weekly tasks build from the daily ones.
Depending on how you want to organize matters, weekly tasks can include handling the accounts payable and receivables ledger. If you are not paying your suppliers they won’t be your suppliers for long. If you aren’t getting paid from your clients on time, cash will dry up and your business will fold. Managing cash flow is therefore something that you will need to keep a close eye on.
Bookkeeping keeps a business stable and allows you to see exactly how the business is doing. If you are running out of money on a day-to-day basis, look to the books to find out why.
How long is it taking on average to get paid?
Are you paying your bill before the clients pay you?
The books and your bookkeeper can help analyze what is going on.
Remember, it is the bookkeeper’s job to ensure that the accounts are valid and up to date when the accountant needs them. This then allows for the accountant to use their skills and knowledge to make business recommendations, and complete company tax returns.
Tax and Bookkeeping – Monthly Tasks
The month-end brings a chance for reflection as well as more bookkeeping tasks to keep everything in order.
One monthly bookkeeping task must be bank reconciliation. This is the process of evaluating what’s coming in and out of your business bank account and preventing any discrepancies with your bookkeeping records.
To undertake a bank reconciliation, match your bank accounts to the cash on the balance sheet. Determine if there are differences between the two in order to make changes to the accounting records, resolve any discrepancies and identify potentially fraudulent transactions.
To reconcile your bank statement, your bank account balance and transactions are compared to the entries in your bookkeeping program. The cash column in your cash book should match with the cash total in your bank account/books.
If these balances do not match, something has gone wrong! You will then need to identify the reasons for the discrepancy. Did you forget to input a receipt? If so, you will need to reconcile this difference in your cash ledger (ie. your bookkeeping software).
Now, if you have done your job as a bookkeeper well, this bank reconciliation process should be fairly easy. Even more so if you are using cloud-based accounting software, such as Quickbooks Online.
In addition, you should produce and review your three financial statements (P&L, Cash Flow, and Balance Sheet) each month, check for trends from month to month, keep tabs on expenses, and get a sense of which sales channels are performing best.
Tax Bookkeeping Preparation
Tax can be a difficult subject for small eCommerce business owners. There are lots of deadlines to make and even more rules to follow. Bookkeepers play a pivotal role in the bookkeeping for taxes process. So does bookkeeping tax preparation.
Let’s take a look over what tax bookkeeping involves:
What is Tax Filing?
As a business, there are generally three main types of tax returns and filings that will need to be monitored and prepared. But tax filing is just that, filing your taxes with the relevant authorities.
Again, having an online bookkeeping software package which comes in handy and pays dividends in the end. Although there will be a steep learning curve it could well be worth your time… Quickbooks has a great guide here.
Why Does Getting Your Tax Bookkeeping Right Matter?
Well, if you are paying too much tax, you are giving away your money. It is as simple as that.
The good news is if you can prove you have paid too much you at least have the option of trying to get it back. Whereas paying too little can cause you a lot of trouble when the taxman comes calling. By getting this right you are able to improve the odds of running a successful and compliant business.
How To File Your Taxes for Your eCommerce Business
The good news is that nowadays tax filings can be done online, preparing the returns can be the tricky part which is why it can be good to get a specialist involved. Even if you are doing the books yourself, it is worth getting a specialized eCommerce accountant to review and file on your behalf. This will help to minimize mistakes and potential costs.
We have already briefly discussed these above but there are several main taxes that you will need to consider as a business owner. This is where your bookkeeping tax preparation will come in handy. You will need to be sure of your individual and company tax liabilities at each jurisdictional level and file them on time.
Let’s run through the basics:
Sales Tax Returns
Sale tax returns are usually kept up to date by your bookkeeper. This is the tax that you may have to add to your prices and unless the sales items at tax-exempt are charged on every sale. The government expects you to collect that cash on their behalf and send it their way at set times across the year.
By keeping tabs on your transactions your bookkeeper is able to fill and file the sale tax with the tax office. Any taxes that are due are usually paid at the time of filing the report. Definitely, something to keep on top of or an eye on if you are outsourcing your bookkeeping.
Business Income Tax
Probably a tax you should be thankful to have to pay as much as you can when handing over your hard-earned money. It signifies that you are operating a successful business. Income tax is calculated as a proportion of your profits, so first there must be profits for your income to be taxed.
See it as a sign of a job well done as opposed to a burden but just because you have to pay it doesn’t mean there aren’t legitimate and legal ways to pay less tax. This is why tax and accounting for eCommerce specialists can come in handy. Again, a monthly accounting and tax plan or review can be useful.
Are calculated and collected with each payroll cycle. You are required to report to the IRS and potentially the local tax office how much you have paid your employees and how much tax you have withheld as a result. Following this, you will be told when to hand over the money. This is another very important tax consideration.
If you don’t believe that failure to pay taxes can catch you out, check out our Virtual Assistant Bookkeeping Horror Stories.
Tax Bookkeeping Year-End Checklist
As the end of the year approaches there are a few tasks you need to carry out to prepare for the new year. We thought it would be helpful to provide you with some steps when tax season comes around. Use these steps as a guide or checklist:
1. Confirm the Start of Your Financial Year
Every business has a fiscal year (a.k.a. its financial year), and can be any 12-month period that the company uses for accounting purposes. Pick a month any month, as long as it’s not December (see below). When did you start your business or receive your first sale? This could become the start of your financial year.
Your fiscal year is expressed by stating the year-end date. This is usually the end of any quarter, such as March 31st, June 30th, or September 30th. To make this even more complex, the IRS says a fiscal year is “12 consecutive months ending on the last day of any month except December.”
A business tax year is needed to calculate all of the taxes we have discussed above. If you are not sure when your financial year started, the IRS advises that the calendar year can be used instead. The financial year will be the starting point for your tax calculations. Keep in mind you can have any fiscal year you would like as long as it accords with the IRS guidelines.
2. Review Customer Account Balances
We have already covered the daily, weekly, and monthly tasks that you should be doing. Even if you aren’t doing your own books, it is good to know what to expect so you know if something has been missed. Using a reputable bookkeeping firm things should all be running smoothly but still, keep an eye just in case.
The year-end offers an opportunity to finalize the accounts and review your customer balances. If you have any outstanding invoices it is time to get these paid. Send your customers a polite reminder for the funds to be settled.
3. Review Vendor Account Balances
It’s also time to take care of any outstanding bills you owe and address outstanding credits, discounts, or products you’re owed from vendors. A quick check of your account payable report (if cloud-based) should identify anything that needs to be settled and paid.
4. Finalize Payroll & Reconcile Bank Accounts
If you don’t have any staff, or employees yourself then payroll is likely a problem for the future. However, if you do, you are going to want to make sure you are recording employee details such as how much you are paying them and any deductions for tax purposes.
We have already been through how to reconcile your bank accounts, if you have done this monthly as recommended it should make the year-end process much easier.
The business bank statements hold the true record of your transactions. Your books or ledgers should always match them, not the other way around. It is also best to start with your oldest bank statement. Your bank accounts should be reconciled each month. The order is important. If there’s an issue with an earlier reconciliation, it affects all reconciliations going forward, so be careful and take your time.
5. Run Year-End Reports
It is now time to collate the end-of-year reports which should be the highlight of your year if things have gone well. Or a time to reflect and work out how to improve moving forward. Again this should also be a monthly task.
As seems to be a running theme throughout this article, cloud-based accounting software such as Quickbooks or Xero will come in handy for each step of this process. Quickbooks Online integration with various accounts is a snap.
6. Prepare Your Tax For Your Accountant
This would be the time to speak with an accountant who can help you prepare and forecast your business’s future. They will also be able to work with you to get all your filings in place and correct. We have been through this in a bit more detail above but tax is a gift that keeps on giving and it’s important to stay up to date. A good bookkeeper can prepare all your forms and send them off to your tax accountant without your help.
7. Reclassify Transactions As Required
If you have made a mistake in recording any transactions throughout the year this is your chance to make amends. In bookkeeping, accuracy is an important skill so go through things with a fine-toothed comb and keep your records up to date and in order. Yes, it’s a pain to begin with, but it is worth it in the end. Trust me. Of course, you can skip the pain by opting for a good virtual eCommerce bookkeeping service.
As with tax, your accountant or bookkeeper will be able to assist with reclassification. All you need to do is ask, or a search online may help.
8. Close Your Books
Everything has been checked and re-check. If you are sure everything is correct you can close and lock your books so no further changes can be made. This ensures any accidental changes that will throw off your financial reports.
This should be the last step you take in the year-end process. Congratulations, you have just completed bookkeeping for the year. Well at least for this year. Now to email your accountant your year-end reports so they can file your taxes. Nice work.
Get Started Today
If this all sounds like too much work but you can see the obvious benefits, why not outsource your bookkeeping to an expert team?
Taxes and bookkeeping services can make the process much easier, just make sure you pick the right service. If the DIY approach is looking more and more like hard work, it might be best to outsource. Most successful online retailers do. Check our article on virtual eCommerce bookkeeping services to understand exactly what you need for your business.