Sales Tax Fundamentals
Get up to speed on the basics of sales tax
How to Catch Up on Your eCommerce Bookkeeping
byNovember 1, 2020
Thanks to our friends at Bench for this timely guest post!
Bookkeeping is one of those mundane admin tasks that’s all too easy to ignore. But if you let it pile up, you’ll only have a bigger headache to deal with come tax time.
To help you power through your overdue eCommerce bookkeeping, we’ve put together a step-by-step guide to balancing your books and keeping them under control.
Ready to get started? Grab a (big) coffee, block out a hefty chunk of time in your calendar, and work your way through the following steps.
- Organize Your Paperwork
Dealing with a disorganized pile of paperwork could be the single biggest culprit in driving up the cost of business tax filings. While handling paperwork may seem unpleasant, you’re better off organizing documents and business records yourself than paying a CPA a high hourly rate to do it for you. If you’ve got a lot of paperwork to organize, now is the time to start working through it.
You can keep your record keeping system simple by using a filing cabinet, or you can invest in software like Shoeboxed to store all of your paperwork digitally. Whichever option you choose, the key is to stick with it.
If you’re not sure how best to organize your documents, here are some simple categories to get you started. Most online document services will also have a list of pre-set categories to guide you through the process.
- Merchant reports
- Inventory reports
- Sales tax reports
- Employee or contractor expenses
- Marketing and advertising expenses
- Meals and entertainment expenses (make sure to write write the date and occasion on the back)
- Travel expenses
- Phone and internet bills
- Mortgage or rent statements
Remember, your business’s needs are unique, so the documents, receipts, and tax records you’ll need to keep may be different from those listed above. If you’re unsure about which documents you need to hang onto, read our guide to small business recordkeeping as a primer, and chat with your CPA to confirm that you’re keeping everything you need to make the IRS happy.
- Separate Your Business and Personal Expenses
If you don’t have separate bank and credit card accounts for your business and your personal finances, separating your finances is a crucial step in getting your bookkeeping under control.
Even if you do have separate personal and business accounts, it’s still a good idea to do a quick review of your statements and make sure that there are no personal expenses on your business account, or vice versa.
Detangling your personal expenses from your business bank account is relatively simple. You’ll need to read through your business account statements and highlight any expenses that are unrelated to your business. It’s important to do this before you attempt to reconcile your accounts, because any personal expenses will throw off your balance. Once you’ve highlighted all personal expenses, you can start reconciling your accounts (excluding the highlighted expenses).
If you’re currently managing your business expenses through your personal bank account, then you’ve got more work ahead of you. You’ll need to go through your personal bank and credit card statements and highlight all of your business transactions. When reconciling your books, you’ll then have to balance your books against these highlighted transactions only. We also suggest you follow the steps in our guide How to Separate Your Finances, open a business bank account, and start managing your business expenses in separate accounts immediately.
Unless you’re operating as a sole proprietor, it’s a legal requirement that you keep your personal and business finances separate.
- Reconcile Your Accounts
Reconciling your accounts simply means “comparing two accounts and making sure they are in agreement.” So when you reconcile your accounts, you’re simply comparing the transactions on your business bank and credit card accounts with the numbers on your financial statements (income statement and balance sheet) and making sure that they’re equal.
For example, if your income statement says that you earned $4,600 in revenue for a particular time period, you need to be able to show that revenue in your bank account for the same period (no more and no less). Any discrepancies between your books and your accounts will need to be investigated further and accounted for—a CPA can help you with this.
Reconciliation is one of the key tasks a bookkeeper or online bookkeeping servicewould handle for you every month, but many business owners also choose to do it themselves. One important note: if you don’t have any financial statements for your business, you will have nothing to reconcile your accounts against. We would strongly recommend investing in a DIY or outsourced bookkeeping solution to generate monthly financial reports for your business right away.
- Collect employee and contractor tax forms
If you hired anyone to work on your business last year, you will likely have additional tax obligations to fulfill. The IRS has different filing and tax requirements for independent contractors than it does for employees, so it’s important to know which is relevant to your business. If you’re unsure, check out Employee vs Independent Contractor for more information.
For any independent contractors to whom you paid more than $600 last year, you will need to file a 1099-MISC (one per contractor). To file the 1099-MISC, you’ll need the following information:
- the contractor’s legal name
- the contractor’s address
- the contractor’s tax ID
- the total amount paid to the contractor for the year
As a business owner, you are responsible for knowing the total amount paid to each contractor; the rest of the required information can be gleaned from a Form W-9, which you should submit to every contractor. If you’d like more detailed information on filing 1099s, check out How and When to File 1099s.
For any employees to whom you paid more than $600 last year, you will need to submit Forms W-2 and W-3, which the IRS uses to track payments and withholdings to employees.
While Form W-3 is only submitted to the IRS, you will need to submit a copy of Form W-2 to each employee in addition to the IRS. For more information on submitting these forms, here are the 2016 General Instructions for Forms W-2 and W-3.
- Find a Professional to Review Your Books
Being an entrepreneur means that you’re accustomed to wearing a lot of hats, but accountant is not one that we would recommend trying on, simply because tax filing is a complicated area that calls for the expertise of a pro.
Once you’ve completed all the steps above, it’s a good idea to hire a CPA or tax professional to review your books and file your taxes for you. The good news is that having organized and up-to-date books is the easiest way to reduce your accounting bill, because your accountant won’t spend additional hours cleaning up your books.
Want to avoid doing all that work?
If you’re more interested in the end results (i.e. having tax-ready financial statements) than the process of doing the bookkeeping yourself, you might consider outsourcing this task altogether. Try putting an hourly value on your time and estimate how much it’s going to cost you to do this yourself. If you’ve got a lot of work to do, chances are you could find an outsourced option like Bench to do it for you more cost-effectively.
About the Author
Lindsay Angus writes for Bench, the online bookkeeping service that pairs you with a team of professional bookkeepers who do your bookkeeping for you. Want more time to focus on tasks that grow your eCommerce business? Let Bench take care of your books. Start your free trial today.Please note: This blog is for informational purposes only. Be advised that sales tax rules and laws are subject to change at any time. For specific sales tax advice regarding your business, contact a tax advisor.