Common Mistakes: Missing Income

It's here!! The end of the year is just around the corner, and today I wanted to talk a little bit about one of the really common mistakes that can leave you vulnerable to potential audit risk: not claiming all of your income (or missing a key source of it)!

I have a lot of clients who are trying to make it really easy for everyone who wants to pay them to go ahead and pay them. Makes sense, right? They've got Cash App, and they've got Venmo, and they've got PayPal, and they use all of these different merchant services to try to catch that money. It's a lot of different directions of money coming at them and it's really easy to miss some of the details if they're not recording it properly. So, what are some of the risks? What are some of the problems here?

 First of all, each of those entities report how much money they collected on your behalf to the IRS. For example, PayPal is going to tell the IRS how much they collected from you down to the penny and if you don't file something similar to that corresponding income, then that is a red flag that would leave you open for some audit risk.

Second of all, if you're not carefully tracking those dollars and the actual breakdown of the money they collect, you may be missing some of your deduction opportunities. A lot of those services collect transaction fees for using them. For example, you collect $100 from your client using one of these payment services. Then they slide about $4 off the top for this fee, and then they pull another $14 off the top to something else, perhaps you have a short-term loan through them, and so you're actually seeing $82 deposited in your bank account. If you're not capturing all of the nuances of that transaction, you're missing out on some major opportunities for your deductions, because obviously, those fees are tax deductible.

So, it’s very important that you understand the exact terms and the detailed nuances of each transaction of the deposits coming into your bank account so that you're able to capture every bit of that for accounting purposes. If you don't see the whole picture, you may not even notice that some of those services are charging such high fees. You may decide you no longer want to use them or that some of them have such a burden of recordkeeping and process associated with it, that it no longer is worth your time to utilize them.

When my clients come to me with these sorts of setups, where they're collecting money from every which angle and every possible avenue, we talk about what are the most useful ones? What are the ones that are really serving your clients and really serving you? How do we narrow down the ones that can serve everybody the best as we certainly don't want to lose sales because we've closed one of the avenues for payment? But the truth is, people will find a different way to pay you when they truly want or need your item or services.

So, we can try to be thoughtful about the platforms that we're going to use, make sure we understand their terms, their fee structure, their processes, and what that might cost us in time, energy, and/or data to record our business properly. We want to choose the best suite that streamlines your processes, but still allows you to capture as many sales with the best user experience that you can get for your clients. These are just some of the conversations that we have during the VIP Accounting Overhaul in a Day.

A lot of my clients find that once they really focus on what the details are, they decide that some of them just aren't working the way they'd like them to anymore, and we come up with a much better solution that suits both them and their clients. Give us a call if you have any questions or concerns or you think you might be missing some of your income (or deductions) on your tax return, if your records and your processes aren't holding up the way you’d like them to, or if you're afraid that you're leaving yourself open for potential audit risk. Thanks, Laura