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5 Common Payroll Mistakes to Avoid

If your business does not have a properly kept set of books, an audit can be a nightmare. Tax deductions without proper records may be questioned and denied by the IRS. Use these tips to help you audit-proof your business records.

1. USE A GOOD SOFTWARE SYSTEM
It is highly recommended to use accounting software to keep track of your business income and expenses and reconcile your bank accounts. In addition, accounting software offers a suite of reports for business owners who want know how their business is doing at any time. Modern accounting software is fairly easy to use once it is properly set up for your specific business. Be sure to consult with a professional to help you select the right software solution for your business and have them set it up for your specific business needs.

2. DOCUMENT ALL OF YOUR INCOME
Make sure you maintain a separate bank account for your business and do not commingle personal and business income. All of your business income should be deposited to the designated bank account and only then used for expenses, to pay employees and yourself. An auditor will add up all of your deposits and compare the number with the total income declared on your tax return. Be sure to always report all of your income.

3. DEDUCT ONLY “ORDINARY AND NECESSARY” EXPENSES
The basic requirement for an expense to be deductible is that the expense is both ordinary and necessary to your business. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. It is important to separate business expenses from capital assets as the latter are depreciated over their life. In addition, you must separate business expenses from your personal expenses.

4. KEEP PROPER RECORDS
Even when you use accounting software, you must still maintain proper records of your income, expenses, asset purchases, cash and loan balances. Make sure to keep your bank and loan statements, copies of canceled checks, expense receipts, and a mileage log. You can maintain these records either on paper or electronically. There are multiple apps and add-on software solutions to help you automate record keeping. The IRS requires companies to keep copies of tax returns and supporting documents for a minimum of three years.

5. SELF-AUDIT YOUR BOOKS
Finally, self-audit your books. Generally, a tax professional will ask you reasonable questions and ask for any additional information when preparing your tax return. However, it’s a good idea to look at your Income Statement and Balance Sheet once in a while to make sure your reports make sense. Learn how to read these reports, so you can spot obvious mistakes or red flags. It’s also a good idea to sit down with your accountant after the return is prepared to make sure you understand what adjustments have been made and what the numbers on your return represent.

By |2018-07-19T15:09:16+00:00October 23rd, 2016|Payroll & Contractors|0 Comments

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