If you’ve just launched or are about to launch your online store, congratulations! It takes uncommon passion and perseverance to get to where you are today.
However, as you know, business ownership is a constant flood of satisfying milestones coupled with expanding to-do lists. With your launch, you’ll need to get on top of the accounting tasks that come along with owning a store.
This list of small business accounting steps will give you the confidence to know you’ve covered your bases and are ready to move on to the next item on your business to-do list.
1. Open a bank account
After you’ve legally registered your business, you’ll need somewhere to stash your business income. Having a separate bank account keeps records distinct and will make life easier come tax time. It also protects your personal assets in the unfortunate case of bankruptcy, lawsuits, or audits.
Start by opening up a business checking account, followed by any savings accounts that will help you organize funds and plan for taxes. For instance, set up a savings account and squirrel away a percentage of each payment as your self-employed tax withholding. A good rule of thumb is to put 25% of your income aside, though more conservative estimates for high earners might be closer to one third.
Next you’ll want to consider a business credit card to start building credit.
Before you talk to a bank about opening an account, do your homework. Shop around for business accounts and compare fee structures. Most business checking accounts have higher fees than personal banking, so pay close attention to what you’ll owe.
To open a business bank account, you’ll need a business name, and you might have to be registered with your state or province.
2. Track your expenses
There are five types of receipts to pay special attention to:
- Meals and entertainment. Conducting a business meeting in a café or restaurant is a great option, just be sure to document it well. On the back of the receipt, record who attended and the purpose of the meal or outing.
- Out of town business travel. The IRS and CRA are wary of people claiming personal activities as business expenses. Thankfully, your receipts also provide a paper trail of your business activities while away.
- Vehicle related expenses. Record where, when, and why you used the vehicle for business, and then apply the percentage of use to vehicle-related expenses.
- Receipts for gifts. For gifts like tickets to a concert, it matters whether the gift giver goes to the event with the recipient. If they do, then the expense would be categorized as entertainment rather than a gift. Note these details on the receipt.
- Home office receipts. Similar to vehicle expenses, you need to calculate what percentage of your home is used for business and then apply that percentage to home-related expenses.
3. Develop a bookkeeping system
Before we jump into establishing a bookkeeping system, it’s helpful to understand exactly what bookkeeping is and how it differs from accounting. Bookkeeping is the day-to-day process of recording transactions, categorizing them, and reconciling bank statements.
- You can choose to go the DIY route and use software like Quickbooks or Wave. Alternatively, you could use a simple Excel spreadsheet.
- You have the option of using an outsourced or part-time bookkeeper that’s either local or cloud-based.
- When your business is big enough you can hire an in-house bookkeeper and/or accountant.
4. Set up a payroll system
Many online stores start out as a one-person show. When you’ve reached the point where it makes sense to hire outside help, you need to establish whether that individual is an employee or an independent contractor.
For employees, you’ll have to set up a payroll schedule and ensure you’re withholding the correct taxes. There are lots of services that can help with this, and many accounting software options offer payroll as a feature.
For independent contractors, be sure to track how much you’re paying each person. American business owners may be required to file 1099s for each contractor at year end (you’ll also need to keep their name and address on file for this).
5. Investigate import tax
Depending on your business model, you may be planning to purchase and import goods from other countries to sell in your store. When importing products, you’ll likely be subject to taxes and duties, which is worth noting if you run a dropshipping business. These are the fees your country imposes on incoming goods.
6. Find high-quality accounting partners
Whether doing your own accounts is too much for you or you just want a little external guidance, small business accountants and financial professionals can help you get more control of your money. There are a few individuals you might want to consider enlisting:
- Accountant. A small business accountant can advise at many different points, including your business structure, creating financial statements, obtaining necessary licenses and permits, and even writing a business plan.
- Certified public accountant (CPA). In case of an audit, a CPA is the only individual who can legally prepare an audited financial statement.
- Bookkeeper. The bookkeeper manages the day-to-day records, regularly reconciling accounts, categorizing expenses, and managing accounts receivable/accounts payable.
- Tax preparer. Your tax preparer fills out necessary tax forms and may file them on your behalf. Some will also set up your estimated tax payments.
- Tax planner. These professionals help optimize your taxes before you file them, helping you learn ways to lower your tax burden.