Is Your Business Paying Too Much in Sales Tax……. Or Too Little?

I’ve been doing bookkeeping for some time now, and I’ve seen my share of messy books that required extensive, and costly, cleanups. One of the more common pain points I’ve come across that give small business owners without an accounting background involves dealing with sales taxes. The first thing you should always do is follow up with your state taxing agency to determine if you need to remit sales taxes. Most stated only require businesses that sell physical products to collect sales taxes. If your business is like mine where you only provide services, you don’t have to worry about sales taxes. If you do sell products, you are legally required to collect sales tax on behalf of the state.

If you use an accounting platform like QuickBooksOnline, you can integrate with your state agency to record automatically into your accounting records. You’d still have to make the payment. That leads me to one of the biggest pain points I see in books I’ve had to clean-up. QBO has a wonderful feature where you can make entries using bank feeds. Once you integrate your books with your bank account, the entries automatically feed into your books. You have the option to “Add”, “Match with an existing transaction”, or “Exclude”. This feature is also great for reconciliations.

Example

Let’s say you sell a widget for $100, and your state has a sales tax rate of 7%. You would collect $107 from your customer. $100 is revenue to you and $7 is a Sales Tax Payable on your books. The issue I’ve seen is that the business recorded the entire $107 as revenue, especially ones that categorize transactions using the bank feeds. You can use the bank feeds, but you need to split that transaction between revenue and Sales tax payable. Remember that sales tax does not belong to you. It belongs to the state. Now, states relying on businesses to collect taxes on their behalf is an additional administrative burden to all business, but that’s a discussion for another day.

You may be asking yourself what the consequences are of recording the entire amount as revenue. One is you are overstating your revenue, thus increasing your tax liability to Uncle Sam. Another is you’ve inflated your cash reserves, which could lead to issues when planning for expansion. Once you’ve realized that you must send some of that cash to the state, and you’ve already spent it on something else, like payroll, you could find yourself in a cash crunch. I know some businesses roll the dice on this issue, not yours of course, but you can be sure that the state will come looking for its money eventually. A third, which is kind of related to the second, is that your books could be showing higher income, but it doesn’t translate into cash. That’s another pain point I encounter with small businesses. “My PNL statement shows all of this revenue, but I never seem to have any cash!” That will be a post for another day. You end up with a double whammy: you’re paying income tax on cash that you don’t have.

If you’re not an accounting type, and most small business owners are not, do yourself a favor and outsource to a professional bookkeeper. Not only does it free up your time to do what you do best and build your business, it also saves from potential big costly headaches described earlier. Chances are you hate accounting anyway! In addition, there is a good chance that you’ll end up hiring someone like me to clean up your books, which is even more costly. Sales taxes are only one example. There are many other potential pitfalls that can screw up your books if you do your own bookkeeping.

Do yourself a favor. Hire a pro.

Keeping the books is a necessary evil. You must do it, not only to pay the taxman, and avoid penalties, but to answer this one simple, but important question: How do I know If my business is making money? I’m sure you want to know that answer to that question, don’t you? Of course, you do. You’re in business to make money. It’s simple as that.

If any of this sounds like you, as always you can contact me for a free consultation.

Dream Big. Think Big. Go Big.