Keeping accurate records is important for a variety of reasons, including taxes. Here is an example of how a $20 expense for office supplies could have saved the business owner over $556.

Say, Bob, a business owner, goes into the office supply store for some school supplies for his daughter.  While he is there, he sees something that would be great for his business.  So, when they checkout, they combine both the daughter’s supplies with his one item, which cost $20 (including tax) and pay for it on his personal credit card.

Bob forgets to record this item in his business records.  At tax time, Bob summarizes his income and expenses for the tax filing.  Keeping it simple, assume Bob files his business through his personal tax return.  Because he is self-employed, Bob has to pay self-employment tax on the net income earned through his business as well as federal income tax and state income tax.  Because Bob did not record the item in his records, his income is higher and therefore he paid more tax as follows:

Social Security tax (12.4 % for self-employed) = $20 * 12.4% = $2.48 more tax paid

Medicare tax (2.9 % for self-employed) = $20 * 2.9% = $0.58 more tax paid

Federal Income Tax (assume 28% bracket) $20 * 28% = $5.60 more tax paid

State Income Tax (assume 3.07% – PA) $20 * 3.07% = $0.61 more tax paid

That is a total of $9.27 taxes that would have been saved on that one $20 expense, which is 46% savings of the expense.

The $20 missed expense could have been recorded in a very simple record keeping system, just by writing it down or charging it on a business credit card.  The proper recording of the expense might have taken 1 minute to record, which is 1/60^th of an hour.  So the $9.27 savings in taxes works out to ($9.27 * 60 minutes) $556.2 per hour savings rate – not a bad rate for the use of your time.

For more financial business tips, sign up for my monthly newsletter.

Image Copyright: stillfx / 123RF Stock Photo