As a business owner, you’ve probably laid awake at night wondering, “Where did all my profit go?” or “Am I saving enough for taxes?” You’re not alone. These questions plague entrepreneurs everywhere, and today we’re going to tackle the most common bookkeeping questions that come across my desk.
1. “I See the Profit on Paper, But Where Is It Actually Going?”
This is perhaps the most frustrating experience for business owners – seeing healthy profits on your P&L statement but not feeling it in your bank account. The key lies in understanding the difference between profit and cash flow. While your P&L shows revenue and expenses, it doesn’t tell the whole story of money moving through your business. There’s always money flowing in and out that isn’t related to revenue or expenses, which is why looking at your Balance Sheet and Cash Flow Statement is crucial.
2. Is Becoming an S-Corp Worth It?
The answer? It depends on your profit levels. Here’s a quick breakdown: once you’re consistently profiting around $70-75k or more, an S-corp structure could save you significant money in taxes.
For example, if you’re profiting $100,000 as a single-member LLC, you might pay about $15,000 in self-employment tax. As an S-corp, paying yourself a $55,000 salary would result in roughly $8-9k in employer payroll taxes – potentially saving you $5-6k in taxes. However, this is a complex decision that requires professional guidance, so make sure you work with a tax pro to help you make the switch at the right time.
3. Do I Need Both a Bookkeeper and an Accountant?
Think of it this way: your bookkeeper is your day-to-day financial manager, while your accountant is your annual guide to taxes + planning. Your bookkeeper handles regular transactions, reconciliation, and keeps your records accurate. Your accountant focuses on tax strategy, business structure, and bigger financial planning. Together, they form a powerful team supporting your financial success.
4. What’s the Best Way to Pay Myself?
Your business structure determines your payment method. You’ll either take owner’s draws (transferring money from your business to personal account) if your biz is a sole proprietorship or single member LLC, or pay yourself a salary through payroll if you’re biz is a S-Corp. If you’re using payroll, consider using a service like Gusto to manage the complexities of taxes and withholdings. (You can calculate how much you should be paying youself with this simple tool!)
5. What Software Should I Use for Bookkeeping?
We recommend Xero for its user-friendly interface, reasonable pricing, and excellent customer service. It easily connects with your bank and integrates with popular payment platforms like Stripe and Square.
6. Do I need to keep all my receipts?
While the IRS requires you to keep records of business purchases, they don’t have to be physical. Simply take a photo of your receipt, store it in Google Drive with a clear naming convention (Vendor, Date, Amount), and you’re good to go.
7. How Much Should I Keep in Business Savings?
We recommend maintaining two separate savings accounts:
- A tax savings account with 25% of your monthly profits
- An emergency fund with 3-6 months of expenses (Remember, building this savings takes time. Start with small, consistent monthly transfers and build up gradually.)
- Bonus: Essential Business Bank Accounts
If you want to expand further, set up these key accounts to organize your finances:
- Main checking for income and expenses
- Tax savings account
- Emergency fund
- Fun fund for business investments or saving for something in particular
- Optional: Separate payroll checking account
🎬 Want to dive deeper into these topics? Watch our detailed video explanation here.
Remember, while these answers provide a general framework, every business is unique. Consider consulting with financial professionals who can provide advice tailored to your specific situation. Want to chat more? We would love to help!
The content in this blog post is provided for general informational purposes only and should not be considered professional tax or legal advice. The author is not a Certified Public Accountant, and no assurances can be made regarding the outcomes or consequences of tax returns, IRS actions, or any financial decisions based on this information. Readers are strongly advised to consult with a qualified tax professional or legal advisor for personalized guidance specific to their individual circumstances. The author expressly disclaims any liability for decisions made based on the information presented in this blog post.