I will begin this post by apologizing for yesterday's article length. I will admit that it was a bit of a long read, however, I eel very strongly about the first pitfall because it seems to be the one that most people fall into without realizing it.
Nevertheless, I will continue on to the next pitfall -- poor accounting practices. The easiest way for me to explain this one is to tell my story, and what it cost me. Up until last year, not including my monthly invoicing to clients, I regularly allowed my accounting to fall behind each and every year. My fiscal year end is December 31, however, I have until June 30 to file my taxes with the federal government. Each year, I took full advantage of that six month window, and usually around April 30, I would begin to compile the previous year's accounting. I managed to file my taxes by August of each year, at which time I was always hit with a penalty and some interest because I always owed money on my taxes (because of my income level, I do not do monthly remissions).
Here's where the cost comes into play. If I were to go back and tally up all of the interest and penalties I have paid on my income tax, I could have hired a professional bookkeeper, if not accountant, to do all of the work for me. And, I would have saved myself tens of hours of work each year, during which I could have been doing billable work, and subsequently earning more income.
The first thing to do is get yourself electronic accounting software. I personally prefer QuickBooks because of its user-friendliness. If you are more advanced in your accounting knowledge, Simply Accountingis another great choice. And, if you do not wish to spend the capital on the software, you can always use Microsoft Excel (or another spreadsheet solution.) Alternatively, there are online accounting solutions available, such as QuickBooks Online Edition, where you can store your data offsite, and update it on the fly. And finally, if you have the available funds, hiring a bookkeeper to manage your day-to-day expense receipts is always beneficial. The important thing to remember, however, is to keep an electronic record of all of your income and expenses. The benefit to you is that you can always run reports to provide you with specific data, especially when it comes to tax time.
Nobody enjoys accounting and nobody enjoys paperwork. Okay, maybe there are a choice few who do, but for the most part, people dread keeping accounting records. But, if you enter in your receipts, expenses, bills, etc., AS THEY ARRIVE, trust me -- it no longer feels like accounting. It takes a couple of seconds to record your gas expense and quickly jot down your mileage (if this is a requirement in your home based business). The trick is to make sure you are only recording the necessary data! Don't try to include your kids’ toys that you bought for Christmas -- they don't count. If you really think about the trade off of what constitutes a legitimate expense and the time to enter it into your accounting system, it only makes sense to worry about the major ones.
Last year, I made a promise to myself to keep on top of my bills, and at tax time this year I was able to submit my return early -- yes, early! -- and saved myself from the pain of penalties and interest. My reward? This year, I get to hire someone else to do my tax return!
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