Reporting Income for Tax Purposes

A very good rule of thumb to follow is to always, always report all of your income.  Not reporting income can be construed as fraud.  Fraud comes with big penalties and possible jail time.

There’s more leeway on how you report expenses.  In most cases, over-reporting expenses results in penalties and interest only.  It’s not considered fraud.

So, when in doubt if something is business income or not, report it as income.  Then, make sure you’ve taken all allowed expenses against that income.

This one simple tip can save you tremendous amounts of money and grief in the event of an audit.

Record Keeping Tips

  •     If you have a payroll service that charges you a fee each time they calculate payroll,  consider using that service once a month only.   For employees who prefer to be paid twice a month, give them a mid-month payroll advance and report that advance to your payroll service on the following payroll.
  •     Check bank and credit card transactions daily using online banking access.  This is the best way to catch errors or fraudulent activity quickly thereby minimizing potential losses.
  •     When setting up your Chart of Accounts (Categories or Buckets) in QuickBooks or your accounting software … less is more.  Most business owners set up two to three times the number of categories than they really need.
  •     If you have a small retail establishment or restaurant where your inventory isn’t computerized, an inventory count at the beginning of each month will allow you to keep tabs on your pricing and recognize any theft.
  •     When choosing a bank, look for a bank that’s local, has low fees and a good reputation.  If you need a larger bank with interstate branches, look for one with a strong local presence.  Stay away from the big three (can’t name them here, but I’m sure you can guess who they are).  They charge you for everything from breathing to checking your balance. Supporting a viable local bank is the first step to supporting your local economy.
  •     Stay in contact with the IRS and other tax agencies if you’re behind in payments or tax filing.  The two agencies to keep happy are your sales tax people and payroll tax folks.  Income and other tax agencies will work with you if you have overdue issues.  I have found the IRS very easy to work with and extremely forgiving with respect to individual or corporate tax matters.
  •     The payroll tax and sales tax people are the ones most likely to slap liens on  whatever assets you have and ruin your credit.  Payroll tax money collected doesn’t belong to you; it belongs to your employees.  If you don’t pay it to the government, it’s considered stealing from your staff.  Don’t do it!  
  •     Bank and invest locally whenever possible.  Some national banks have a strong local presence.  Stay away from banks that are too big to fail!