General Questions
What's the difference between bookkeeping and accounting?
Bookkeeping involves recording daily financial transactions and maintaining financial records. Accounting is a broader field that includes analyzing, interpreting, and reporting financial information to stakeholders. Bookkeeping is a crucial first step in the accounting process.
How long should I keep my tax records?
Generally, you should keep tax records for at least 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. However, there are some situations where you may need to keep records longer. For example, keep records of assets for 3 years after you dispose of them.
What's the difference between cash and accrual accounting?
Cash accounting records income when you receive it and expenses when you pay them. Accrual accounting records income when it's earned and expenses when they're incurred, regardless of when money changes hands. Accrual accounting gives a more accurate picture of a company's financial health but can be more complex.
Tax Questions
What's the difference between a tax deduction and a tax credit?
A tax deduction reduces your taxable income, while a tax credit directly reduces your tax bill. For example, a $1,000 tax deduction might save you $200 if you're in the 20% tax bracket, while a $1,000 tax credit would reduce your tax bill by the full $1,000.
Do I need to pay estimated taxes?
You generally need to pay estimated taxes if you expect to owe $1,000 or more when you file your return. This often applies to self-employed individuals, independent contractors, and those with significant income from investments or rental properties.
What business expenses are tax-deductible?
Many business expenses are tax-deductible, including office rent, employee salaries, business travel, office supplies, and marketing costs. However, expenses must be both ordinary and necessary for your business to be deductible.
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Bookkeeping Questions
What's a chart of accounts?
A chart of accounts is a list of all the accounts used to organize the finances of a business. It typically includes asset accounts, liability accounts, income accounts, and expense accounts. It's the foundation of an organization's accounting system.
How often should I reconcile my bank statements?
It's best to reconcile your bank statements monthly. This helps catch any discrepancies or errors quickly and ensures your financial records are accurate and up-to-date.
What's the purpose of double-entry bookkeeping?
Double-entry bookkeeping is a system where every transaction is recorded in at least two different accounts. This system helps ensure accuracy by requiring that debits always equal credits. It provides a more complete picture of a company's financial health and makes it easier to prepare financial statements.
Small Business Questions
Do I need an EIN (Employer Identification Number)?
You need an EIN if you have employees, operate your business as a corporation or partnership, file employment, excise, or alcohol, tobacco, and firearms tax returns, or have a Keogh plan. Sole proprietors without employees can use their Social Security number instead of an EIN.
How do I choose between forming an LLC, S-Corp, or C-Corp?
This decision depends on various factors including liability protection, tax implications, and administrative complexity. LLCs offer flexibility and personal asset protection. S-Corps provide pass-through taxation but have ownership restrictions. C-Corps face double taxation but offer the most robust structure for large or growing companies. It's best to consult with a tax professional or lawyer to determine the best structure for your specific situation.
How do I handle payroll taxes?
As an employer, you're responsible for withholding, depositing, reporting, and paying employment taxes. This includes income taxes, Social Security and Medicare taxes (FICA), and unemployment taxes. You need to withhold these from employee paychecks, match certain contributions, and regularly deposit these taxes with the IRS. Many small businesses use payroll software or services to help manage this complex process.
Remember, while these answers provide general guidance, tax and bookkeeping situations can vary greatly depending on individual circumstances.
