What Your CPA Wants You to Know
A podcast for entrepreneurs! We are a husband and wife team running our CPA firm together. We know just how difficult it can be to take your business dream to a reality. Our mission for this podcast is to guide, empower, and educate entrepreneurs in an easy-to-understand way! We want business owners to have the information that they need when they need it, AND without the hefty accounting invoices from a CPA! Follow along for practical advice, tips, and tricks from a CPA who knows what it is like to run a business, and strategies to keep your business thriving from an MBA! We will also show you how to run a business while keeping your family and sanity intact along the way!
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What Your CPA Wants You to Know
77. Common Mistakes We See Business Owners Make
Ever wondered how to steer clear of the most common pitfalls as a business owner?
In this episode, we tackle everything from opening separate business bank accounts and maintaining proper bookkeeping, to avoiding the pitfalls of rapid business growth and budgeting effectively for accounting and legal services. Hear our tips on setting aside funds for taxes and simplifying tax preparation, including the practice of scheduling a projection meeting with your CPA. Prepare to equip yourself with knowledge that can save you from costly mistakes and ensure your business thrives from the start!
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And when we see people do this, they normally are missing lots of things, lots of expenses, and we go down the list and say we don't see this on here, Did you have that? And they have to go back, sift through all of their personal transactions for the year and try to find that. And it's just a mess.
Speaker 2:Welcome to what your CPA Wants you To Know.
Speaker 1:Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket.
Speaker 2:I'm Carson Sands.
Speaker 1:And I'm Taryn Sands.
Speaker 2:I'm a CPA with over 10 years of experience helping people start and grow their businesses.
Speaker 1:And I'm an MBA with a specialization in marketing and entrepreneurship. Taxes suck and we want to make sure you don't pay more than your fair share.
Speaker 2:We're here to share everything your CPA wants you to know in a fun and easy to way. Let's get started.
Speaker 1:Let's do it Okay. Today we have a little bit of a different episode. We are going to talk about some things that we've seen during tax season and we see all the time with our clients that own businesses. So I actually had Carson write down five mistakes he sees people make over and over again and I also wrote down five. So we're going to talk about that in the episode and see if maybe we have some of the same ones.
Speaker 2:So there could be five things, because we might have had all the same ones we do think alike or there could be 10 different ones, so we'll see.
Speaker 1:I do think this is a good time of year to learn some things like this and get a little organized, because if you're a new business owner, it's definitely a little overwhelming at first when you're getting everything set up for the business. But then you have to also focus on all of this fun stuff like taxes and bookkeeping and all that. So our downloads are actually usually up in the summer and maybe that's because all of you are learning something over this little bit of downtime. Between the next time you have to get everything ready for taxes again. Okay, so what was the number one thing you see people do or number one mistake you see?
Speaker 2:I put not talking to a professional, either an attorney or a CPA, before you start your business. And I also put a side note on that that if you don't talk to a professional, you could at least read a book similar to the one that we wrote about new businesses and what they need to do, but something like that or talk to a professional before you make a lot of mistakes in the beginning.
Speaker 1:Oh, I do think that is a really good one. I actually did not have that one, but I think it's like you don't want to jump in without just teaching yourself a little bit. There's a lot to learn and we'll talk about all those today, but just anything that can give you a good overview, whether that is purchasing our new business guide or sitting down and spending the money to talk to someone who can make sure that you're crossing all your T's and dotting all your I's at the very beginning. So my number one I just did mine based on what's important, and I just said that most new business owners don't plan for taxes, but that also does apply to lots of business owners that we see.
Speaker 1:I think that taxes can be very shocking in the beginning, but they can also be shocking as you continue to grow, because in the beginning, you might have all these expenses and your CPA might tell you okay, you owe like a thousand bucks. That might be less than you had owed previously, but then, as you continue to grow, maybe you're making a lot more profit or you just don't have as many upfront expenses as you did in the beginning. Then people get really shocked by taxes. And if they don't have a good system for setting aside a certain amount as the year goes on, then they get really shocked whenever we tell them what they owe at tax time.
Speaker 2:Yeah, that can be a big shock, because the expenses are gone, you have everything you need and as you climb up the income tax brackets, the percentage that you pay goes up as well, and that can be quite a big shock to people.
Speaker 1:So what you want to do here is to make sure you have a plan and you can discuss that with your CPA, or what's the rule of thumb. You normally tell people to set aside for taxes.
Speaker 2:When you first start and your income is lower, 25% is probably okay, but you might want to bump that up to 33% as you keep going, as your income gets higher, especially if you're a Schedule C business, because you have to worry about self-employment tax and income taxes. Now, when your income gets past a certain level, of course, if you have a good CPA, they would be converting you to an S Corp. Then you just have to worry about income taxes again, but you still need to keep an eye on that. At that point you could probably go back to 25%.
Speaker 1:Whatever you do, if you set aside weekly or monthly, however you do that, you just need to make sure that you know where you stand for the year, what your profit is and if you have enough to cover the taxes. So, moving along, what was your number two mistake?
Speaker 2:Number two this is another one for new businesses, which I didn't intentionally do all new business ones, but that is when people tend to make the most mistakes. So not opening a separate business account and by that I mean a bank account in your business name, and not using your personal account to run your business?
Speaker 1:So I kind of had that. Mine was don't do bookkeeping from the beginning or don't understand why it's important, so that kind of goes hand in hand with opening a business bank account. So can you just tell everyone why they need to open a business account and what that has to do with taxes and bookkeeping?
Speaker 2:Sure. So the business bank account is probably the most important because, yes, not having accounting and bookkeeping in place from the beginning can be a pain down the road, but all of that can be fixed if you have a separate bank account at the very least, because we can go back and look at every deposit and every transaction coming out of that bank account and know that it was business related, as long as you're doing that part properly, and you can always get caught up. So even if you weren't keeping track of your books properly all along, it's a lot easier to get caught up if you do have a separate bank account. If you're running everything through one bank account, like your personal bank account for your business and your personal items, then it would be so hard to go back because there's certain expenses that maybe are specific only to the business, but there's going to be plenty of expenses where it's impossible for you to know if that was a personal expense or a business expense.
Speaker 1:And when we see people do this, they normally are missing lots of things, lots of expenses, and we go down the list and say we don't see this on here, Did you have that? And they have to go back, sift through all of their personal transactions for the year and try to find that. And it's just a mess. It makes everything so much easier if you just open up a separate account for that and understand that proper bookkeeping helps you save money in taxes.
Speaker 2:Because the thing people miss when they don't do proper bookkeeping it's not income. There's not that many deposits. All the income will be accounted for pretty easily. It will always be expenses that you're missing, and then you're just going to pay taxes on money that you didn't actually make.
Speaker 1:And no one wants to do that that I know of. Okay. So my number three was that many businesses that we see grow too quickly and that means a couple of things, but basically getting started and feeling like they have to purchase everything that they think they might need, hire a lot and just spend a lot of money right from the start. That does work out sometimes, but what we often see is people spend way too much money in the very beginning, which puts so much pressure on them to have a really good first year, and a lot of new businesses don't make a profit in the first year. So it is way less stressful on the business owner to grow slowly and just try to make things work with as little overhead as possible the first few years so that you can actually give your business time to grow and to prove your concept. So we see that a lot and that's really huge mistake. So if you can grow slowly, we totally recommend doing that.
Speaker 2:It's very similar to my number three, which was too much capital upfront.
Speaker 1:Exactly.
Speaker 2:Now this can be unavoidable. Let's say you're going to start an excavation business. Excavators aren't cheap. You have to spend quite a bit upfront for a business of that sort, but for the most part we see people do it even in service based businesses where there's very little that needs to be spent up front. What can you do without spending money up front? Do you have to get an office space? Now, if you're a doctor, yeah, you probably don't want to see people in your home and you need. I'm sure there's rules for the way that their treatment rooms have to be set up and everything. But if you're an engineer probably not Just like accountants you could probably operate that from home. You just need a computer and also advertising. I see people try to spend a fortune in advertising from the beginning, but they don't even have any work to do, so they could be advertising for themselves for free until at least they get everything going.
Speaker 1:Yeah, we see a lot of people spend a lot of money up front on very strange things. So if you can, it is just best to spend as little as possible in the very beginning until your business gets profitable and you feel more comfortable and less risk making those purchases.
Speaker 2:Okay, so that was my number three, which was like your number two, and your number three was like my number two, so let's skip. What's your number four?
Speaker 1:My number four is that they do not budget for accounting services. Are you ready to start your new business, but you're just not sure what is needed to get your business started legally, like all of the paperwork, your EIN, your LLC, all of that. You may have a brilliant business idea, but there is so much more to starting and running a new business that no one tells you about but every single person has to do, no matter what type of business they're starting. To make this very frustrating process simple, we created a step-by-step checklist to help you get started so you know what you need to do legally to start your business your EIN, your LLC, your bookkeeping, saving for taxes. If you want to make sure that you're doing everything correctly and you're moving forward, knowing all about those important due dates and filings and all of the tax things that you really should know before you just jump into entrepreneurship, this new business starter kit is exactly what you need. We designed this to help simplify the complicated process of the paperwork and the filings at the very beginning, and most entrepreneurs don't have extra hours to research all of these steps. Our new business starter kit helps you file the necessary paperwork and set up the required processes to start a new business, step by step. If you want to grab a copy of this today, just check out the link in the show notes.
Speaker 1:Now back to the show. I think sometimes new business owners don't, because they've never paid for things like a business tax return or they've never gotten to a situation like maybe getting an IRS letter where they have to pay their CPA to contact the IRS and sort some things out. So they're just not aware of that. So it is very good idea to put in your business budget accounting services and legal services, because that is not just something that pops up, it is definitely a yearly expense. You don't want to be surprised every single year when you pay for your tax return or you pay to get help from your CPA, whether it's bookkeeping help, consulting help, whatever. You're going to have to have some sort of your budget for accounting and legal services.
Speaker 2:Right, and one thing to remember about that is that the IRS tends to put the burden of reporting and paperwork on businesses as much as possible.
Speaker 2:So if you've only ever filed a personal tax return I mean everything comes to you, whether it's from a brokerage statement, from your investments then all the information is very consolidated for you to easily be able to put that in your tax return. Or if it's 1099 interest from your bank, or if you're a contractor, then the business gives you a 1099 for your self-employed work, your W-2. All of these things are set up to make an individual's tax return much simpler. But as soon as you have a business, all of that burden becomes your problem. So if you are doing payroll, if you're doing it yourself, great. But if you can't do it yourself, you're going to have to pay somebody, and that's a lot of paperwork to keep up with your sales tax. You could do that yourself, but if you don't, that's a lot to keep up with as well, and so these costs add up. So you need to make sure you have a good budget for that or be prepared to learn how to do all of that yourself.
Speaker 1:Exactly.
Speaker 2:Did Exactly. Did you have that one on your list? I think it ties in a little bit to my number one, where you don't talk to a professional from day one, and my number four, which is overpaying taxes because you're not doing tax planning and tax projections.
Speaker 1:Oh yeah, that's a good one.
Speaker 2:Now dollar for dollar. Taryn mentioned not having a budget for an accountant, but even if you have a budget for tax returns, that's not something you want to try to do yourself. But that's just CPA reporting history, dollar for dollar. The most benefit you can get when you hire a CPA is tax planning and tax projections, because they can spend a little bit of time looking at everything during the year and come up with all sorts of ways to save you on your taxes After the year's over. There's a few things we can still do after the fact, but not very many, so your options get very limited in that case. But it could be something as simple as it looks like you're about to have to replace this large asset. If you do it in December, you'll get that deduction earlier, and then we can worry about taxes for next year when it's next year. Or it could be something else like oh, it looks like your income's about to skyrocket. You're going to need to be an S-corp before it's too late.
Speaker 1:And this is a really great time of year to do that. Our clients that we love and have been with us for many years this is when they're booking those projections. They do it every single year and it's worth the money that they pay us to make sure that they're doing everything they can before the end of the year to reduce their taxes. So that would be when your CPA is telling you hey, you should make a purchase now, before the end of the year, if you're going to or like Carson said, switch to an S-corp. That is a type of meeting that I think people think of when they think of working with the CPA. That's when we're going to look over your books what you've made for the year, what's your profit. Now we can tell you what your taxes are going to be at this point, so you're prepared and tell you what you can do to decrease that number before the year ends, because, like Carson said, once the year ends, we're just creating a tax return based on what happened. There's nothing else to be done.
Speaker 1:So that one was actually not on my list, even though that is a very good one. My final mistake was for new business owners too, and that's that they do not research sales tax requirements for their business. I feel like this is a ball that gets dropped a lot because people are too busy doing all the other things in our business and they forget to look up or look into whether or not they are required to collect and pay in sales tax. So if you're starting a new business, that is definitely something to look into right from the start, because those penalties for not doing that are very high.
Speaker 2:Yeah, you don't want to play around with sales tax or payroll tax, income tax. You can get a little bit of leeway and say, hey, I don't have the money, and they'll say, okay, well, pay it out over six years with some interest and everything will be fine. Whenever you don't pay sales tax, that wasn't your money. You took money from a customer and now you owe it to the, to the government, but you. It was never your money and so if you keep it, then they'll just come and close your business. They'll put a padlock on the door and they'll say you're not open anymore. So you definitely don't want to mess around with sales tax.
Speaker 1:And now, with a lot of these softwares, they are automatically taking the sales tax out of something. Maybe you're selling something online and they know it's a taxable product. They take the sales tax out until you have that money, but you don't look into your filing requirements and actually pay it back to the government, and that's when people get into these situations. So right from the beginning, you should be looking at if you need to collect sales tax when you're filing data and making sure that you're keeping up with those requirements.
Speaker 2:Yeah, I don't know if this is as common of a practice anymore, but used to businesses that were subject to sales tax, they kept a completely separate bank account just for the sales tax. So they would collect all the revenue and then the portion that was supposed to be sales tax, either weekly or even daily, they would transfer it over to the tax account to make sure that it didn't accidentally get spent. And that's a good way of reminding everyone that that's not my money.
Speaker 1:That's probably a good idea, but yeah, I don't see people doing that very much anymore.
Speaker 2:We don't even do that. So my last one is getting 401ks or health insurance plans through the business when you don't absolutely have to. Here's the thing. They'll tell you how much it will save you in taxes or they'll get you to ask your CPA that and it will save you a little bit. But it almost inevitably is going to cost you more in administrative fees and in the fact that now you have to provide health insurance or at least cover 50% of the health insurance for all these employees, and if there's a 401k plan, you have to do a certain amount of matching to meet the safe harbor rules. Once you add all that up, you're usually not saving enough in taxes is what it's costing you.
Speaker 2:Now it might be unavoidable. If you have a professional business, for example let's say you have an engineering firm and you're trying to recruit talent it might be impossible for you to get anyone to come over and work for you, unless if you have some of that in place, some of those benefits. But if you have any other type of business, I mean, sometimes it's worth just talking to some of your employees, especially if you only have a few, and say, hey, look, we could do that. Maybe some businesses are doing that, but I can afford to pay you more because we're not having all these extra expenses and, and you know, maybe they have a spouse, it's a teacher and they can cover them on health insurance and they don't even want your health insurance. Anyway, it's usually not a good idea, even though insurance agents and financial advisors will sometimes make it seem like it's just a really good thing and it's going to save you all this money. That's not usually the case.
Speaker 1:All right, I did not have that one on my list, not something that I thought about, but definitely if you're getting all this set up and you're a small business, those costs can be very significant.
Speaker 2:Well, that was, I don't know, between five and 10 things that business owners do wrong that you should try to avoid to have a stronger business.
Speaker 1:And my hope for this episode was that, if you are learning this summer listening to some of our episodes, and this episode would give you a good list or a reminder of things that you could do during the year to make tax time easier, to make sure that you're saving for taxes. If you need to make any adjustments to your bookkeeping or your processes that you're doing in your business, now is a great time to do that. Also a great reminder that now is a really good time to schedule a projection meeting with your CPA.
Speaker 2:Well, that's all we have for today. To schedule a projection meeting with your CPA. Well, that's all we have for today.
Speaker 1:So thank you so much for listening to what your CPA Wants you to Know. Podcast.
Speaker 2:This podcast is intended to provide accounting and tax information for educational purposes only. All tax situations are unique and should be handled with the assistance of a tax professional.