The Christmas holidays aren't the only thing to think about this time of year if you are a business owner. It's also time to close the business books and get ready for the New Year. Most of what you need to do is financial in nature.
Read this overview of year-end activities and use it to create a checklist for your childcare program.
Finalize Expenses and Income
There are several things to do to finalize expenses and income so you can begin readying your tax documents.
- Invoice for any unpaid bills: Obtaining payment is vital for having up-to-date income and expense statements. Don't wait, do this now.
- Send reminders for unpaid invoices: If you have clients who are delinquent in paying for your services, follow up as soon as possible so you can be paid.
- Write off bad debt: Hopefully, you won’t have any, but if you have delinquent accounts and have made sufficient efforts to collect payment, you may need to do a write-off.
- Record all your business expenses and separate any personal expenses: If you use a personal credit card for business expenses, make sure you're doing it right. Catch up all your expense accounting, so your accountant or tax preparer has the correct information.
- Pay vendors and contractors if needed: Remember, they need to do their end-of-year documentation, too. Pay any contractors in full before you close the books.
- Update your mileage log if you use a vehicle for business.
- Reconcile your bank accounts: After you get all expenses and income recorded, make sure everything from your accounting software matches your official bank statements.
High-quality childcare management software has applications to keep your accounting in perfect order, as well as to allow you to send invoices, reminders, and document delinquent accounts.
Update Fixed Assets
A fixed asset is something that lasts longer than a fiscal year, for example, an office computer. If you purchased new long-life assets this year, you might have forgotten to update your asset list.
Also, run a depreciation report. The IRS uses this report to determine how much of an asset’s life has been used in a year. Whatever that amount is, you can write it off as a tax deduction.
Depreciation is somewhat like a mortgage amortization. An asset has a set number of years that it is considered useful. The amount paid is divided by the number of useful years to determine how much depreciation can be written off each year.
Assets can include office equipment, playground equipment, furniture, and other requirements for your facility. Ask your accountant for assistance in finding out what to depreciate.
Ready Your Payroll
If you expect to pay bonuses, now is an excellent time to determine how much. When you pay them, be sure to withhold payroll tax for the current year.
As you complete the payroll for the current year, check to make sure your payroll tax liabilities match your quarterly payroll returns. If there are any discrepancies, resolve them before closing your books.
Also, the Tax Cuts and Jobs Act resulted in lower taxes for many wage earners. Obtain an up to date tax schedule if you did not do so earlier in the year. It’s possible your employees had a little too much withheld, but better that than not withholding enough.
Roll over any paid vacation or paid time off if you provide it.
The IRS made changes to the W-4 for 2020. To get ready for next year’s payroll, be sure to have any new hires fill out the new form as well as any current employee updating a W-4 for the next tax year. It isn't required for current employees who are not making any changes.
Another point to check off is verifying all employee contact information, so they receive their W-2s. Do the same for contractors, so they receive timely and complete Form 1099s. Make sure all the information you have is correct. It may help to send an email to all current and former employees who worked for you in 2019.
If you send paper copies of employee W-2s to the Social Security Administration, be sure to fill out and sign Form W-3. You do not need this form if you file W-2s electronically.
Finally, make sure you are classifying all workers correctly. If you classify an employee as an independent contractor, the IRS will place severe penalties on your business. An independent contractor is treated as a separate business entity, and you only have the right to control the result of the work. The contractor controls when and how it is performed.
An employee, on the other hand, performs work at your direction, making you an employer. You control how and when the work is performed. If you are uncertain, check with someone well-versed in employment law.
Back-Up Your Data
You absolutely do not want to lose any of your financial data. Back up every required document and statement in secure storage. Here are some recommendations:
- Verify your profit and loss report or income statement.
- Verify your balance sheet.
- Run a cash flow statement and key tax reports for your tax professional or accountant.
- Create a back-up file or export the data to a back-up device or service.
For paper files, this may mean off-site storage of annual documents, some of which must be kept for several years. Electronic data should be consolidated into a company file, and everything backed up to a reliable storage device or service.
If you use cloud-based childcare management software with financial applications, contact the vendor to get the details on how your electronic files are backed up and how you can retrieve them in the event of a loss or disaster.
You may need that information later if you are audited or to reconcile errors. Ask your tax professional how long each piece of information must be stored before you destroy it.
Close the Books!
Closing the books means locking the date beyond which no further changes may be made. For electronic files, you can set a password so users cannot go in and make changes to this year's records — that way, the administrator and accountant can access the data without users creating discrepancies.
Closing the books is easy when you use a childcare management solution or other software for accounting and data recording. If you are still using manual processes and paper records, closing the books gets complicated quickly. You may need the services of an accountant or another professional to help you.
If you haven’t made the move to digitize your business processes, the difficulty of closing books manually is one more reason to do so.
EZChildTrack is not a tax service. Any advice in this post should be verified with a tax professional. However, you should now know enough to get started on your end-of-year activity. Don’t forget to have a happy holiday once everything is complete!