1. Keep Business and Personal Finances Separate
This is a restatement of the Golden Rule given above. Unfortunately, it’s one of the most violated rules. Even if you are self-employed or a freelancer, I highly recommend you have separate bank and credit card accounts that are used exclusively for business.
By eliminating all personal transactions from your business accounts, you will reduce greatly the number of transactions your bookkeeper must categorize and reconcile. I’ve personally done the bookkeeping for small businesses where more than half of the transactions in their “business” accounts were personal. Sorting through your personal transactions is time-consuming, expensive, and can lead to mistakes.
2. Pay Yourself a Salary
Owners of C-corporations and S-corporations must pay themselves a reasonable salary and run it through the payroll system like any other employee. However, I suggest that self-employed owners, freelancers, and partners also pay themselves a “salary” although, technically, it will be an owner’s draw and not included in payroll.
Paying yourself a salary reinforces the notion that your business is a separate entity and reduces the need for you to violate the Golden Rule by having your business pay your personal expenses directly. Instead of numerous transactions during the month where the business pays an expense on your behalf, have the business write you one check per month that you deposit into a separate account used to pay your personal expenses.
3. Reimburse Yourself for Business Expenses
Despite your best efforts, there will be times when you pay for a business expense with personal funds. Remember, the Golden Rule says these business expenses should appear in your business bank account. To do so, have the company write you a check to reimburse the expense you paid with personal funds. This should be a separate check from your monthly salary.
The process for reimbursing yourself should be the same as for employees. List the expenses along with the date, vendor, and purpose on a spreadsheet and attach the receipts. Your business then writes you a check for the exact amount. While this is a bit of a hassle, it will guarantee your bookkeeper deducts the expenses since they were paid with a check from the business account.
4. Track and Reimburse Business Mileage
Your business can deduct a standard rate per mile (57.5 cents for 2020) for any business mileage you drive using your personal vehicle. Track the date, miles, and purpose of each business trip and submit it for reimbursement with your monthly expenses as explained in tip three above.
The business should not directly pay any expenses of your personal vehicle, even for fuel that will be used entirely for business. You should use the 57.5 cents per mile received from the company to pay for your fuel and maintenance.
5. Keep Your Receipts
While bookkeeping systems don’t rely on receipts to identify transactions, the IRS does require receipts for all tax deductions. An old-fashioned method of keeping receipts is to have a file folder for each vendor where you place paper receipts. A newer method is to scan receipts and attach an electronic copy of the receipt to the transaction within your bookkeeping software. This is a pretty nice function that many accounting programs include for free.
6. Outsource Payroll
According to a study by Wasp Barcode Technologies, 50% of small businesses outsource their payroll accounting. I highly recommend you do the same. Issuing paychecks, withholding employee taxes, and filing payroll tax returns is a cumbersome process that can be outsourced easily for a reasonable price. Many payroll providers even integrate with your accounting software so that the necessary accounting entries are loaded automatically.
If you do outsource payroll, I recommend opening a separate business checking account dedicated solely to payroll so that your payroll provider doesn’t have access to your primary account. In addition, when times are tough, you can ensure there is money in the payroll account, even if your primary account is overdrawn. There are few things worse for employee morale than bouncing payroll checks.
7. Hire a Pro to Set Up Your Accounting Software
There are many great choices for small business accounting software but setting up accounting software properly is complicated. The better the software is tailored to your business, the easier and more beneficial it will be to use. Approximately 82% of experts surveyed believe that the initial setup of a computer accounting system for small businesses should be done by a professional.
Hire a pro to customize your chart of accounts, products and services, customers, vendors, and invoices. Be sure to have them show you how to make changes to these lists as necessary. Once these lists are complete, everyday transactions like issuing invoices and paying bills are very easy.
