Heads up: this article is only relevant to U.S. businesses.
As tempting as it is to ignore, it’s worth catching up on overdue bookkeeping well before tax season rolls around. Having tax-ready books can help you comply with IRS recordkeeping requirements and file an effective tax return.
Although we offer a Catch Up Bookkeeping Service here at Bench, we know that some business owners prefer to tackle overdue bookkeeping on their own.
Here’s a step-by-step process you can use to plow through your bookkeeping backlog in no time.
Step 1: Gather your receipts
First, collect all of the receipts and invoices related to your business expenditure.
Here are the different types of receipts, invoices, and records you’ll want to look for.
Review your customer accounts to ensure that you’ve collected all customer invoices for the tax year. If your business operates using a cash basis accounting method, you only need to send the customer an invoice once they have paid. If your business uses an accrual basis accounting method, you record the amount in your books the moment the sale occurs, even if you haven’t received the cash yet. Say you made a $1000 sale in October 2014, but you weren’t paid until February 2015. Under cash basis, you record revenue in February. Under accrual basis, you recognize it right away in October.
Review customer accounts for any bad debt expenses. Under an accrual basis, if a customer doesn’t pay you for work completed, you can write this off as a bad debt expense. In order to deduct the cost of bad debt from your tax return, you will need to prove to the IRS that you have taken reasonable steps to collect the debt but have been unable to recover the amount.
Normally, bad debts are deducted in part or in full from a business’ gross income while determining its tax income. Bad debts can be claimed by using either the specific charge-off method or the non-accrual experience method.
The specific charge-off method means you can deduct a specific bad debt that becomes partly uncollectible during the year. The nonaccrual experience method means that you can deduct income from your business gross income for the purpose of a tax return in the case you were unable to collect a bad debt.
Collect the receipts from every business purchases you have made during the tax year. You can also use this comprehensive list of small business tax deductions to double check that you’re tracking and claiming every deduction available to your business.
Review your vendor accounts to ensure that you have paid them all in full. Make sure you have a copy of every bill from each vendor activity and, if you don’t, contact the vendor right away and ask them to send you a copy. These include bills for business activities that are still currently operating in your business’s closing period to ensure these expenses will appear on your year-end financial statement.
Step 2: Reconcile your bank accounts
It’s important to reconcile your bank accounts so that you can identify any errors in your company or bank records. Compare each transaction from your bank statement with the same transaction in your company accounting records to ensure the balance of each account is the same. If they aren’t, identify and fix any errors to ensure that the balance in your bank statement matches the balance in your company records.
Handing over any accounts to your bookkeeper or accountant that aren’t properly reconciled can be costly. If your accountant has to do extra work to reconcile your accounts and fix your books, you will be charged extra in accounting fees. By reconciling your accounts beforehand, you are saving your accountant and yourself time and money.
Step 3: Separate personal and business expenses
We always advise our clients to keep their personal and business expenses separate. Commingling your personal and business expenses in the same account is known as piercing the corporate veil—which may result in you being held personally liable for your business’s debt and actions.
If you operate a corporation or LLC and you fail to keep your business and personal affairs separate, you can lose the liability protection afforded by your company’s structure—you could become personally liable for business losses.
Managing personal and business expenses in the same account can result in unnecessary stress when you need to file taxes or do your bookkeeping; it takes more time to sort through personal and business expenses when they’re mixed together in the same account.
If you’re unsure about whether a purchase qualifies a deductible business expense, learn how the IRS differentiates personal and business expenses.
Step 4: Go paperless
While you’re catching up on your bookkeeping, make your life easier by making your business paperless.
As you process your paperwork, create digital records of receipts, important documents, and other paperwork using these tools:
- Shoeboxed: scans and organizes your receipts, and automatically creates expense reports from your uploads
- FileThis: a smartphone app you can use to photograph and store receipts, statements, bills, and other documents online
- Evernote’s ScanSnap Scanner: automatically uploads and stores all scanned documents to Evernote
Step 5: Collect W-9s, 1099s, and W-2s
If you paid independent contractors and/or employees during the tax year, there’s a good chance you’ll need to file the following forms:
Independent Contractors: Form W-9 & Form 1099-MISC
A W-9 is a form that requests a contractor’s taxpayer information. The contractor completes this and returns it to you. You then use the information on the contractor’s W9 to issue a 1099 to the IRS. Put simply, the Form 1099-MISC is the tax form that the IRS requires to track payments to independent contractors.
There’s plenty of legwork involved in gathering W-9s and filing 1099s. If you’re new to the process, and unfamiliar with the deadlines, read How (and When) to File a 1099 for tips on how to make it an easy process.
Employees: Form W-2
You’re required to file Form W-2 for all employees.
Step 6: Have a tax professional review your expenses
If you’re reading this article, it’s likely that you’re wanting to do everything yourself when it comes to bookkeeping and filing your taxes. And we hear you. It’s often the least expensive way to go about things. But we do strongly advise that you have an experienced CPA or tax professional review your books, tax deductions, and any other financial information relevant to your tax return, before you file your taxes.
This helps to eliminate errors and ensure that you’re claiming all of the deductions available to your business. Tax professionals can also speak to the IRS on your behalf, and represent you in the event of an audit, so it’s often a good idea to develop a relationship with a financial pro well before you need their help.
If you’d prefer to have someone else process that backlog of bookkeeping for you, get in touch. Our Catch Up Bookkeeping Service can help.