Bookkeeping & Taxes for Startups
By Rock Health Intern Jess Hershfield
Having a basic knowledge of accounting practices is vital to the health of any start-up. And tracking finances and understanding how your business stands economically is key to keeping your business afloat. In order to teach our start-ups the most important elements of accounting 101, Rock Health welcomed Richard Croghan and David Sage, of Moss-Adams LLP, to introduce us to the complicated world that is accounting.
First and foremost, our start-ups learned the basics of business records:
- Keep good records: Seems obvious, right? But be sure your records are complete and thorough
- Keep business records separate from personal records
- Keep copies of all organizational documents
- Maintain accurate records of investments made in Human Resources, and all payroll records
You should be sure to keep all of the following financial records to ensure you cover all of the basics:
- Equity Agreements
- Contracts
- Stock option grants and exercises
- Bank Statements
- Deposits
- Receipts
- Credit card statements
- Tax filings
Our guest speakers could not stress enough the importance of keeping all of these documents, organized in a fashion that is easily recoverable, and up-to-date.
In order to guarantee accuracy of keeping these documents, Richard and David highly recommended utilizing business software. They agreed, the small price is worth the time you would otherwise spend trying to follow accurate accounting practices. For general accounting, they recommended QuickBooks or Excel. For payroll services: Quicken Payroll, PayChex, or outsourcing to an accounting firm.
Next, Richard and David took us through the reports that we should include in our accounting practices.
Income Statements: Shows how the revenue (from sales of products and services sold) is transformed into net income (after accounting for expenses taken from revenues).
- Cash basis: Includes income when it is actually received
- Accrual basis: Includes income when it is earned, but may not have been received yet
Balance Sheet: A snapshot of your company’s current financial position, taking into account assets versus liabilities
- Cash Flow Statement: Monitoring how much cash is coming in versus how much is going out. This document is essential for planning and budgeting.
- Equity Statement: Describes ownership share of the company
- Revenue
- Expenses
- Meals & Entertainment
- Depreciation
- Compensation
- Stock compensation
- Cash
- Accounts receivable
- Fixed assets
- Other assets
- Accounts payable
- Other liabilities
- Equity
- Federal Form 1120 is due on March 15th, but can be extended to September 15th
- California Form 100 is a minimum tax of $800, but you may get an exemption for your first year of business. Due on March 15th, can be extended to October 15th
- Other states have “Nexus,” or the taxes you are responsible to pay if you are doing business in other states other then your business’ location. Nexus taxes vary by state.
- Employee Income Tax Withholding – Federal and state (payroll taxes will help calculate this for you)
- Social Security (12.4%/10.4%) and Medicare (2.9%), other Taxes (FICA) is half paid by employer (6.2% +1.45%), half paid by employee (4.2% +1.45%). Periodic deposits required- quarterly, monthly semi weekly.
- Federal unemployment – Employer pays 6% of the first $7,000 wages, credit for CA unemployment
- State disability insurance – Employee pays 1% of the first $95,585 wages.
- San Francisco payroll tax – 1.5% of payroll assessed on payroll more than $250,000
- Secretary of State Fee
- Delaware Franchise Tax – Due March 1st. There are 2 methods of calculating- try both and find the best alternative: assumed par value & authorized shares
- Sales and Use Taxes (http://www.taxes.ca.gov/Sales_and_Use_Tax/index.shtml) – Tangible personal property
The two most fluid statements are income statements and balance sheets. Let’s look at some of the items included in each:
Income Statements:
Balance Sheet:
Richard and David ended their discussion by describing a few other important tasks that must be completed. First, they relayed the importance of picking a year-end. You want to have a goal for where you see your company at the end of the year, so sit down and create that goal. Secondly, they stressed bank account reconciliation at the end of every month. Just like your personal checkbook, make sure you are keeping on track. Along with that, make sure you are accurately budgeting your finances. Thirdly, you must stay on top of contract management, and make sure you have collected copies of every signed contract. And lastly, ensure accurate records of stock options, keeping track of ownership shares.
Next, we moved onto taxes. We know, no one likes the topic of taxes, but everyone has to pay them, so you better learn which taxes you must be on top of. So, here is a list of the most common corporate and employment taxes you will be responsible for and links to learn more about them:
Corporate Taxes
Employment Taxes
Other taxes
Remember, taxes are based on net income (except in California), so if your business is currently not making any income, you may not have to pay taxes.
So, is your head now spinning with all of this tax rhetoric? Don’t be afraid to ask for help! We know it is a complicated topic, but it’s worth spending the time, and the little extra money to make sure you are up to date on your accounting.