Who wants to pay more taxes? No business owner I’ve ever met! 

Usually, tax deductions, credits and other planning opportunities to lower your tax burden are unique to you and your business. But one strategy works for everyone—and it’s often overlooked.

It’s called accurate and consistent bookkeeping. While that might not sound as glamorous as an account in the Cayman Islands or setting up a complex web of trusts, it’s a reliable (and legal) way to generate tax savings. Here’s why.

Accurate bookkeeping: The key to lower income taxes

We know you’re thinking, “Sure, just keep some records and my tax bill will go down? Seriously?” But stay with us here.

So many advisors promise complex tax strategies and get-rich-quick schemes. But really, when it comes down to it, the clients that pay the least in taxes are those who work with a bookkeeper throughout the year to ensure they always have accurate and organized financial records. Here’s how these financial records help you lower your tax burden.

No more missed expenses

Think of those miles you drive to the post office or visit clients, the new laptop bag you bought, or the airfare to a business conference in Chicago. These and other deductible business expenses can be easily overlooked when you commingle personal and business expenses and don’t have a system for tracking them.

Admit it: you’ve waited until year-end to start getting your books together and had to comb through a shoebox of faded receipts or credit card statements with a mix of business and personal transactions. Eventually, you just throw up your hands and say, “Good enough.” Either you’re missing some expenses but don’t have the time to track them down or include things that don’t belong—both options are less than ideal.

Accurate bookkeeping, on the other hand, ensures every penny spent on your business is accounted for, potentially lowering your taxable income. When you work with a professional throughout the year it’s more likely that you won’t leave any money on the table.

Prevent misreporting income (and getting a dreaded IRS notice)

Why is misreporting income a problem? Obviously, you don’t want to overreport your income and pay taxes on money you never received. But that happens more often than you may realize. One common pitfall small business owners encounter stems from complicated 1099 reporting rules.

Say you don’t track your income reliably and instead rely on the 1099s you receive from your clients at year-end. One of your customers sends you a 1099-NEC reporting total payments of $10,000 for the consulting work you provided during the tax year. However, they paid you via credit card, so you also receive a 1099-K for the same amount.

If you’ve accurately tracked your income during the year, you can compare those 1099s to your records, flag the double reporting, and ask your client to issue a corrected 1099. Without reliable bookkeeping, you might not notice the discrepancy and pay income taxes on the same income twice.

What about underreporting your income? This can also be a problem. If the IRS flags your account for an audit, underreporting income can lead to interest charges, penalties, and even criminal charges in some cases.

Avoid the last-minute tax filing rush

Filing taxes can feel like a sprint, but with proper bookkeeping, it’s more of a leisurely stroll.

If you’ve kept up with your accounting throughout the year, you can close your books soon after year-end and file a tax return right away rather than scrambling to file your federal taxes or state income taxes just before the deadline.

Keeping your records up-to-date makes you less likely to file late and incur penalties.

Estimated payments, estimated right

If you’re making estimated tax payments, accurate bookkeeping helps you calculate exactly how much income taxes and self-employment taxes you should pay in each quarter.

Making accurate estimated payments reduces the risk of underpayment penalties or significantly overpaying your estimated taxes—essentially giving the federal government an interest-free loan.

Open up tax planning opportunities

Bookkeeping isn’t glamorous, but it’s the foundation for all kinds of interesting tax strategies that just aren’t available when you’re throwing crap against the wall to see what sticks on April 10th. The strategies that can reduce how much you’re paying in taxes are only available with proper planning.

Think maxing out your SEP IRA, reducing your self-employment taxes, deciding between a W-2 employee or an independent contractor, or making a PTET election. You don’t know what any of that means, and you don’t have to. But a bookkeeper does, and they’re just waiting for you to get your stuff together so they can help you save some major cash.

Best practices for staying on top of your bookkeeping

If you’re like most small business owners, paying as little in taxes as possible is at the top of your list with bookkeeping on the low end of the list. Quite the conundrum! It’s understandable. After all, you didn’t go into business to spend hours tracking expenses and reconciling bank accounts (unless you’re a bookkeeper, in which case that’s exactly why you went into business). But you did go into business to stack racks. ha.

Fortunately, several best practices can make staying on top of your bookkeeping less of a chore. You can have your cake and eat it too!

Keep business and personal funds separate

Commingling funds is the number one way to cause issues, create a headache for yourself, and likely pay more in tax than you should. Many new entrepreneurs use their personal accounts to deposit checks and pay expenses. Or even worse, using the business account to pay for personal expenses. Just don’t do it. You need to separate your business and personal expenses.

Open a separate business checking account and business credit card, and ensure all your business income and expenses run through those accounts. This can help you build your business credit and offer some personal protection from liabilities and debt if your business is structured as a limited liability company (LLC) or corporation.

Keeping these funds separate also simplifies your bookkeeping. Let’s rephrase that. Keeping funds separate is absolutely necessary to not regret every decision you ever made when it comes time to do your bookkeeping and taxes. Plus, if you have an LLC or a corporation it’s required. Imagine not needing to worry about combing through your personal transactions to pick out tax-deductible expenses at year-end—they’re all in your business accounts.

Embrace technology: cloud-based accounting software

Cloud-based accounting software like Xero or Wave is essential in the digital age. These platforms allow you to automate some of your bookkeeping processes. For example, the software can automatically import and classify bank and credit card transactions and create recurring invoices.

Plus, cloud accounting software is accessible anywhere you have a device and an internet connection—perfect for the business owner on the go.

Reconcile your bank and credit card accounts monthly

Business owners often skip monthly bank and credit card reconciliations when they try to DIY their bookkeeping. Without monthly reconciliations, there’s a good chance your books contain errors.

Monthly reconciliations help catch any unusual transactions caused by fraud, accounting mistakes, or bank errors.

For example, if you’re not reconciling every month, you might miss errors such as transactions that don’t get imported, duplicate imports, or expenses that import as income. Yes, these are real examples we’ve seen at Countless. Most people expect the bank feeds to be perfect but like any technology, they’re just not. Plus, reviewing your bank statements regularly can help you save money. For example, if you signed up for software you never use, your bank statement can be a good reminder to cancel that subscription.

Turn your bookkeeping over to a pro

What’s more fun than bookkeeping? If you answered something along the lines of getting a root canal, waiting in line at the DMV, or listening to Uncle Larry’s political opinions during family dinners, it’s time to consider outsourcing. A professional bookkeeper can keep your financial records up-to-date and organized, ensuring you don’t miss out on any valuable tax deductions.

Yep, it costs money to hire a pro. But a good bookkeeper pays for themselves many times over and gives you more time to focus on what you do best: running your business.

Think about it: as a business owner, you help your customers save time, reduce frustration and meet their goals when they buy your products and services. Why not give yourself that same gift? Especially when it results in accurate financial reports, stress-free tax filings, and lower tax bills.

Reduce your taxable income with accurate bookkeeping and tax planning

Remember, good bookkeeping isn’t just about dotting i’s and crossing t’s. It’s the secret sauce that makes keeping your tax bill lean and mean. 

So embrace the magic of good bookkeeping practices, utilize modern tools, and turn over your most dreaded tasks to a pro. You’re not just saving on taxes; you’re laying a solid foundation for the success of your business and if you’ve been through a bad bookkeeping situation before, you know exactly what we’re talking about. 

If you need help staying on top of your bookkeeping or identifying tax savings, please reach out. Here’s to making next tax season less of a headache and more of a hooray.