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People often conflate payroll and income taxes because employers withhold both of them from their employees’ paychecks. However, there are notable differences between the two payroll deductions that you should understand for tax planning purposes.

In simple terms, the payroll tax is a flat tax on employee wages that both employers and employees have to pay. 

Meanwhile, the income tax is a progressive tax on all earnings, and only the earner is responsible for paying it.

Let's take a closer look at how these taxes work, the differences between them, and their impact on employers and employees.

What is Payroll Tax?

The payroll tax includes the Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), and State Unemployment Tax Act (SUTA) taxes. Surprisingly, it’s more burdensome for most Americans than the individual income tax.

The payroll tax applies to gross pay from employment, including salaries, bonuses, and tips. It’s a flat tax, which means the rate is the same at all applicable income ranges. There are caveats to that, but we’ll discuss them in the next section.

The FICA tax includes Social Security and Medicare taxes. While it applies to employee earnings, employers are responsible for paying half of the burden.

Note that FICA taxes are essentially the same as the self-employment tax. However, self-employed people are both employers and employees, which means they have to pay both roles’ liabilities.

FUTA and SUTA taxes apply to employee wages also, but are primarily an employer payroll tax. Employees typically aren't responsible for paying them, as they help fund unemployment insurance for employees.

How is Payroll Tax Calculated?

The FICA tax equals 15.3% of wages, bonuses, and tips. 12.4% goes to the Social Security Administration, and 2.9% is for Medicare. Employers and employees split FICA equally, so each pays 6.2% to Social Security and 1.45% to Medicare, or 7.65% in total.

The FUTA tax is 6% of the first $7,000 of compensation for each employee. However, employers get a 5.4% tax credit as long as they pay their requisite SUTA taxes, which effectively lowers the rate to 0.6%.

SUTA tax rates vary between states and individual businesses, so check your state government’s website if you need to find yours.

Payroll taxes are flat, but there are exceptions at higher earnings levels. For one, the Social Security portion of the tax only applies to the first $147,000 of compensation for single filers in 2022, though that number updates annually for inflation.

The Medicare portion of the tax applies to all earnings levels, but employees pay an additional 0.9% Medicare tax on income past a certain level. In 2022, that threshold is $200,000 for single filers.

You should use payroll software to calculate your liabilities, but here's an example to demonstrate the rules. Consider a single employee with a $225,000 wage in 2022. They’d have to pay 6.2% Social Security tax on the first $147,000, which equals $9,114.

They’d also have to pay 1.45% Medicare tax on all $225,000, which equals $3,263. In addition to withholding tax for the employee portion of these tax liabilities, their employer would have to match them. As a result, both parties owe $12,377 so far.

Assuming the employer pays their SUTA taxes and qualifies for the FUTA tax credit, they’d also have to pay 0.6% on the employee’s first $7,000 of taxable wages, which equals $42. The total employer payroll taxes without SUTA are therefore $12,419.

Finally, the employee would owe an additional Medicare tax of 0.9% on the $25,000 they earned beyond the $200,000 threshold. As a result, they’d owe another $225 for a total liability of $12,602.

Accurately tracking your cash flow is essential for proper tax planning. Use our free small business accounting app to organize your financial records automatically!

What is Income Tax?

While the payroll tax only applies to income from an employer, you owe income taxes on just about everything you earn during the tax year. For example, in addition to employment income, that could include:

• Earnings from a side hustle
• Interest on a savings account balance
• Ordinary dividends on taxable investments

Again, unlike the flat payroll tax, federal income taxes are progressive. That means you pay a different tax rate for each earnings range. For instance, the first $10,275 a single person earns is taxable at 10%, but the next $31,500 is taxable at 12% in 2022.

There’s a common misconception that earning more can bump you into a higher income tax bracket, causing all of your income to be taxed more, but that’s not the case. Entering a new tax bracket just means your next dollar is taxable at a higher rate.

While everyone in the United States is subject to federal income taxes, you may also have to pay state income tax or even a local income tax, depending on where you live. State and local taxes can be progressive or flat.

Unlike payroll taxes, the federal government doesn't use your individual income tax dollars for specific programs. They may go toward supporting healthcare, military, education, transportation, or a wide range of other government expenses.

How is Income Tax Calculated?

Once again, the federal income tax is a progressive tax, which means that higher income ranges have higher tax rates. These are the 2022 federal tax brackets.

2022 Federal Tax Brackets

Source: IRS

Unlike the payroll tax, there are ways to reduce the amount of income taxes you’ll owe in a year besides earning less. That’s because you pay income taxes on your net taxable income rather than your gross wages.

In fact, you can lower your net taxable income in two ways:

• Above-the-line deductions, like contributing to traditional retirement accounts
• Either itemized deductions or the standard deduction

For example, say a single filer earns $75,000 in gross income, contributes $6,000 to a traditional Individual Retirement Account (IRA), and takes the standard tax deduction, which is $12,950 in 2022. Their net taxable income would be $56,050.

They’d pay 10% federal income tax on the first $10,275, 12% on the next $31,500, and 20% on the remaining $14,275. Their total liability would be $7,948. If they didn’t reach that via income tax withholding, they'd pay the difference when they file their tax return.

Whether you’re an employer or an employee, you need to pay the proper payroll and income taxes to stay on the good side of the Internal Revenue Service (IRS). 

As a result, it’s best to get help from a Certified Public Accountant (CPA) if you have a complex tax situation.

Software can help you organize your financial records and make tax time much less stressful. Fortunately, Lendio offers free accounting software for small business. Give it a try today!

*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

Accepting different forms of payment is critical to the success of a small business. The good news is that there are more ways than ever to accept payments from your customers. Each payment option comes with a set of risks and benefits. And you can choose more than one. 

Some might carry hefty fees for using them while others are more susceptible to fraud or theft. Choosing the right payment method for your business is tricky but you can balance the pros and cons based on your business’s needs and customers’ preferences.  

Credit Cards and Debit Cards

The study found that about 42% of consumers prefer to pay for purchases using their debit cards. Another 29% of consumers preferred to use their credit cards to make payments. Cash came in last place at 23%. 

To avoid alienating customers, many small businesses offer credit and debit card payments. It comes with pretty significant benefits: 

• Customers find it convenient, quick, and easy to manage
• Payments show up quickly, which improves business cash flow
• Extra payment options help to expand your customer base
• Debit card transaction fees are low. (These can vary based on the merchant) 
• Improves security by reducing the risk of carrying large amounts of cash
• Helps facilitate larger purchases

• It could be expensive. Card issuers like Visa, Mastercard, Discover, and American Express charge a fee for each transaction processed. According to Reuters analysts, credit card processing fees cost small business owners 1.5% to 3.5% on average.
• You’ll need to pay for costly equipment or software. This might include card readers, virtual terminals, Point of Sale (POS) machines, and merchant services. 
• Customers may process disputes with their bank that result in chargebacks on the business. Chargebacks can hit your account unexpectedly. 

Mobile Payments

Such as food trucks, construction, or landscaping. 

All of these require a way to process payments without being tied to one location. All it takes is a smartphone and a mobile card reader. 

Mobile payment options allow the use of several payment methods to receive money from a small business customer. 

• Money transfer applications (Zelle, Cash App, or Venmo)
• Digital wallet payments facilitated by NFC technology
• Mobile card reader payments
• Mobile POS systems

Online Payments

• eChecks
• Credit card and debit card payments
• Digital wallets like Apple Pay, Android Pay, and Google Pay
• Money transfer apps (Venmo and Zelle)
• Money transfer services like PayPal, Square, and Stripe

This isn’t exclusive to businesses that only exist online. Physical storefronts can accept payments online too. Here are some of the reasons why small business owners are quick to adopt an online payment system: 

• Payments hit your bank account fast. This helps the business improve cash flow. 
• Your customers have more ways to pay. They’re more likely to buy from you again when there are plenty of payment options. 
• Top-notch security. Online payment gateways offer features that keep your clients’ information secure, like two-factor authentication and encryption. This gives you theft and fraud protection. 
• Online payment gateways take tasks off your plate. There are fewer bank visits to deposit cash. You can manage transactions and money transfers in one place. And most times, the system will automatically send a receipt to the client. 

Lendio

• Integrated payment processing with Stripe, PayPal, and Square
• Accept debit and credit card payments from Visa, Mastercard, Discover, and AmEx 
• Accept bank transfers as payment
• Manage income and expenses
• Create and send invoices

Accepting digital payments can be costly with other services, but it doesn’t have to be with Lendio's software. 

Drop the expensive per-transaction fees. With a reasonable monthly fee for their Plus version, you get a 1% discount on each transaction fee for card payments and bank transfers.

Businesses that need mobile solutions can use their free small business accounting app to manage invoices from wherever your business takes you. With Lendio's software, you can:

• Easily check on the status of invoice payments 
• Track expenses and income with minimal effort
• Take receipt images with your phone and directly upload them into your account

ACH Payments

When the customer goes to check out with their purchase, they supply their bank account information, which may include their account number, routing number, and the name on the account. Then they authorize the business to withdraw the total purchase amount. 

ACH payments are often used to satisfy recurring billing obligations. Customers can choose to set recurring payments as well. Common examples of businesses that accept ACH include: 

• Childcare providers
• Property management
• Health and wellness businesses

If you don’t have a bank account that’s suitable for receiving multiple ACH payments, it could result in high bank fees or holds on your account. 

Cash

As mentioned in the earlier study, cash was the least preferred payment method for customers. That doesn’t mean it’s obsolete though. 23% of people still prefer it when the option is there. Cash transactions come with two big pluses. 

• Immediate payment means no waiting around for transfers.
• There are no fees for accepting cash.

• More susceptible to theft. Cash requires extra security measures and protocols to stay safe until you can make it to the bank.
• Extra equipment is needed to store it. Registers and locking safes are essential for cash businesses. 
• Your merchant account could have deposit limits that restrict the amount of cash you can deposit daily or monthly. Going past the limit could be costly. 
• Only accepting cash may drive away customers who only carry cards. 
• Cash-heavy businesses are a big target for tax audits. Excellent accounting records are needed to stay in the clear. 

Checks

• Date
• Payment amount
• Who the check is payable to
• Customer signature
• What the check is for

Accepting checks as a form of payment requires a business account and a predetermined policy for how checks are handled. For protection, the SBA recommends: 

• Only accepting in-state checks from familiar banks
• Requiring checks to be written for the exact amount
• Using a third-party to check verification

Cryptocurrency

Some benefits include: 

• Accessing a different type of clientele that values transparent transactions.
• Increased purchase amounts. A Deloitte study found that customers who use crypto make 2X larger purchases compared to credit card users.
• Real-time money transfers that are secure and verifiable. 

Its value is considered more volatile and there’s a lot more that goes into hosting these payments. 

• Conversion pricing and tax considerations make accounting challenging
• The value of the currency fluctuates wildly
• You’ll need to hire a third-party payment processor
• Accepting these payments might be more expensive than others

What Are The Best Payment Methods For Small Businesses?

B2B companies, like commercial vendors or property management, might go for checks or ACH payments. Meanwhile, construction companies, salons, and landscapers need to have mobile and online payment options. 

Still, you’ll need to consider the cost of offering each option. Processing fees, penalties for rejected payments, and the price of equipment will impact your bottom line. 

With that being said, determining the best payment method requires you to analyze three factors: 

1. Customer preferences
2. Business requirements
3. Cost compared to profits

It’s possible to offer more than one option to help expand your customer base and increase sales. It may take trial and error to see which ones are the best. Checking around with entrepreneur peers in your industry can help as well.

*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

The income statement and balance sheet are the two most important financial statements. Together, they create a comprehensive picture of your business’s finances that managers, investors, and creditors can use to facilitate various processes.

Despite being integrally connected, income statements and balance sheets have some significant differences. Let’s explore those differences to help you better understand how each report works.

What Is a Balance Sheet?

A balance sheet is a financial statement that presents a snapshot of your company’s assets, liabilities, and equity on a specific date. As a result, it’s also known as the statement of financial position.

Balance sheets are structured around the accounting equation that states:

Assets = Liabilities + Equity 

You can always use that formula to make sure your balance sheet is accurate. If your equation doesn’t balance, something’s wrong.

Because of its subject matter, analyzing your business’s balance sheet is the best way to assess your liquidity and solvency. Those terms refer to your company’s ability to convert assets into cash and to pay its debts, respectively.

For example, a prospective lender might use your balance sheet to calculate financial ratios like your debt-to-equity ratio, which equals debt divided by equity. If it’s too high, the lender might decide you’re over-levered and can’t afford more debt.

Notably, because your balance sheet can only document a single day at a time, users of financial statements often compare one balance sheet to another for greater insight.

For example, you could compare your balance sheet on 12/31/2020 to your balance sheet on 12/31/2021 to determine how much your cash reserves grew during the calendar year.

What is Included in a Balance Sheet?

Your balance sheet should document your company’s assets, liabilities, and equity. Here’s what each one of those terms means and what kind of accounts they include.

Basic balance sheet components:

• Assets
• Liabilities
• Equity

First, your assets are the resources your business owns that you expect to provide some future economic benefit. Typically, that means you’ll be able to generate cash by selling or using them in your business.

Depending on how long you expect to hold an asset before realizing its economic value, it can be current or long-term. If you can turn it into cash within a year, it’s a current asset. If it’ll take longer, you have a long-term or noncurrent asset.

Current assets include accounts like cash and cash equivalents, inventory, and accounts receivable. Long-term assets include fixed assets like property and equipment.

Second, your liabilities are the debts you owe to third parties like lenders and suppliers. They represent fixed obligations that you have to fulfill. You can use them to get financing without giving up ownership of your business, though too much is dangerous.

Liabilities can also be current or long-term, but you often have to split accounts between the two. For example, the mortgage payments on your rental property due next year would be a current liability, but the rest of your loan is a long-term liability.

Finally, your equity is whatever you have left after subtracting your total liabilities from your assets. Also known as your net assets or net worth, it’s what the owners or shareholders of the business would receive if they were to liquidate the company.

Equity accounts include things like owner contributions, shares of company stock, and retained earnings.

What Is an Income Statement?

Your income statement measures your company’s revenues and expenses over a given period. In simple terms, that means it tracks what you earn and spend to calculate your financial performance. As a result, it’s also referred to as the profit and loss statement.

Income statements are structured around the equation that states:

(Revenue + Gains) - (Expenses + Losses) = Net Income 

In simple terms, it documents how much money you earned during a period, how much you spent, and how much is left over.

Because of this, an analysis of your income statement is typically the best way to gain insight into your company’s profitability. Beyond the obvious calculation of your net income, you can also use it to review things like your gross profit and net profit margin.

Unlike balance sheets, income statements capture information over time, so even one of them can help you analyze your company’s trends. However, it’s still a good practice to compare them across multiple periods.

For example, you might compare your year-to-date income statement to your income statement from the same months last year. You’d be able to determine whether you’re on pace to beat your previous numbers.

What’s Included in an Income Statement?

Your income statement should include your business’s revenues, expenses, gains, and losses. Let’s explore each of those in turn.

First, your revenue accounts sit at the top of your income statement. They include everything your company earned from its day-to-day operations during the given period.

If you’re on the cash basis of accounting, that only includes money you’ve collected. However, if you’re on the accrual basis, it may also include money you’ve earned but not yet received.

Next are your expenses, which can fall into two categories: direct and indirect.

Direct expenses are involved in creating your product or providing your service. They’re also known as your cost of goods or services sold. Subtract them from your revenues to get your gross profit.

For example, say you sell custom wooden chairs. Your direct expenses would include the price of each chair’s raw materials and the labor costs you pay your craftspeople.

Your indirect expenses or operating expenses come next. They contribute to your business, but they aren’t directly involved in your product or service.

For example, advertising and administrative expenses are both indirect costs. Subtract them from your gross profit to get your operating income.

Finally, gains and losses go toward the bottom of the income statement. When you sell something, they equal the difference between your proceeds and your cost basis. Your cost basis usually equals your purchase price minus any accumulated depreciation.

For example, say you buy a building for $200,000. After three years of depreciation, its cost basis is $175,000. If you sell it for $225,000, you’d show a $50,000 gain on your income statement. If you sell it for $150,000, you’d have a $25,000 loss.

What is the Difference Between an Income Statement and a Balance Sheet?

Your income statement tracks your revenues, expenses, gains, and losses over time to arrive at your net income. Meanwhile, a balance sheet displays your total assets, liabilities, and equity on a specific date.

Now that we’ve covered how these two financial statements fit into your general financial reporting, let’s highlight their most notable differences and review them in greater detail.

Accounts

One of the fundamental differences between the two financial statements is that they hold different accounts. Income statements measure your revenues, expenses, gains, and losses, while your balance sheet documents your assets, liabilities, and equity.

They’re also structured around separate accounting equations, which are:

• Income statement: (Revenue + Gains) - (Expenses + Losses) = Net Income
• Balance sheet: Assets = Liabilities + Equity

Knowing why these accounts go together and how they relate to one another is critical to understanding how money flows through your business.

Timing

Another fundamental difference between income statements and balance sheets is that they measure different lengths of time. Namely, income statements cover extended periods, while a balance sheet can only ever document your position on a single date.

That seems like a superficial point, but it impacts their utility significantly. In fact, it’s one of the main reasons you need to use both statements in conjunction to draw meaningful conclusions.

In simple terms, your balance sheet tells you where your business is on a given day. Your income statement tells you exactly what you did to get there. One without the other tells an incomplete story.

Uses

The most practical difference between income statements and balance sheets is that they fulfill different functions for users of financial statements.

Generally, income statements are better for analyzing your business’s profitability. You can back into your net income for a period by comparing your balance sheet before and after, but you need your income statement to dig into the details.

For example, you can use one to facilitate your cash flow forecasting or review a variance between a budgeted and actual operating expense.

Conversely, balance sheets are better for analyzing your business’s liquidity and solvency. For example, say your business is currently making interest-only payments on a long-term loan that ends in a balloon payment.

A potential investor could see from your income statement that you have enough total revenue to cover your current monthly obligations. However, that would be dangerously misleading if they didn’t also look at your balance sheet.

They'd likely also want to review your long-term loan amounts and compare them to your cash reserves to have an accurate picture of your company’s ability to pay its debts.

In addition to tracking your business transactions, accounting software can automatically generate your financial statements! Fortunately, Lendio offers free accounting software for small businesses. Give it a try today!

FAQs

How Are Balance Sheet and Income Statement Related?

The primary connection between your balance sheet and income statement is that your net income flows from your income statement into the retained earnings account on your balance sheet.

However, that’s not the only link between the two statements. You’ll also find that transactions often affect both your balance sheet and income statement simultaneously.

For example, say you use some of your cash reserves to pay a debt. You’d have to decrease your cash and debt accounts on the balance sheet, but you’d also have to increase your interest expense on the income statement.

Which Is More Important, Income Statement or Balance Sheet?

Neither the income statement nor the balance sheet is more important than the other. Each one's significance is situational and depends on the user, what information they’re looking for, and why they need it. In many cases, they’re equally necessary.

For example, say you’re applying for a loan, and your lender reviews both of your financial statements to determine whether you’re likely to pay back the account.

Using your balance sheet, they might check your debt-to-equity ratio and compare your current assets to your current liabilities. However, they’d still want to review your income statement to see if you have enough cash flow to afford more monthly payments.

What Comes First, Income Statement or Balance Sheet?

In theory, the income statement comes before the balance sheet. Your net income, which is the final result of your income statement, flows into your retained earnings, a balance sheet account.

That said, it’s something of a chicken and egg situation in practice. These two financial statements work in tandem, and you’ll often need to adjust them simultaneously to track your activities.

For example, say you pay your office’s rent with cash. You’d need to reduce your cash account, then increase the rent expense account. Of course, cash is on the balance sheet, while rent expenses go on the income statement.

*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

When it comes to taxation, a limited liability company (LLC) is the most flexible type of business entity. It lets you elect to be taxed in several ways, including the tax treatment that’s usually only for S corporations.

If you’re interested in the potential tax savings of making that election, here’s everything you should know before deciding, including the pros and cons involved, the eligibility requirements, and the specific impact on your taxes.

Benefits of an LLC Being Taxed as an S Corp

There’s only one legitimate benefit to treating your LLC as an S corp for tax purposes, but it’s significant. Making the election lets you reduce the portion of your business’s earnings that are subject to self-employment taxes.

In fact, besides earning less money, changing the tax classification of your business is the only way to pay less in self-employment taxes. Many of the deductions that reduce your income tax burden, like traditional retirement contributions, won’t help you here.

By default, filing as an LLC means that 92.35% of the net earnings from your business activities are subject to self-employment taxes, also known as FICA taxes. Your net earnings equal your gross revenues minus your tax-deductible business expenses.

The standard self-employment tax rate is 15.3%, of which 12.4% goes to fund the Social Security program, and 2.9% goes toward funding Medicare. As you can imagine, reducing your earnings subject to a 15.3% tax can generate some significant savings.

For example, say your LLC generated $100,000 in net earnings in 2021. Using the default LLC tax treatment, you’d owe $14,130 in self-employment taxes. (92.35% x $100,000 x 15.3%)

However, choosing to be taxed as an S corp might allow you to pay self-employment taxes on just 75% of those earnings, in which case you’d only owe $10,597 in taxes and save $3,532.

How Do LLCs Get Taxed?

When you file as an LLC, the default tax method doesn’t require you to pay any taxes at the entity level. Instead, all your company’s net earnings flow through to your personal return, where you’ll incur some income and self-employment taxes on the amount.

There are some slight variations depending on the number of owners your LLC has. Here’s how it works in each scenario.

Single-Member LLC Taxes

A single-member LLC has only one owner. By default, these are disregarded entities for tax purposes. As the owner, you pay taxes on the business’s net earnings the same way you would if you were a sole proprietor.

That means you generally don’t have to file a separate tax return for your company. Instead, you report your revenues, expenses, and net earnings on your Internal Revenue Service (IRS) Form 1040, Schedule C.

Like a sole proprietorship, you have to pay the 15.3% FICA tax on 92.35% of your net earnings from self-employment. You’ll also owe federal and state income taxes on your net earnings after a few additional deductions.

Multi-Member LLC Taxes

Multi-member LLCs have at least two owners. They’re also disregarded entities for federal income tax purposes, but the owners pay taxes on the business profits as if it were a partnership rather than a sole proprietorship.

That means the owners have to file an IRS Form 1065 for the business to report its partnership income, even though the LLC pays no taxes at the entity level.

In addition, the partnership must issue a Schedule K-1 for each LLC member, which reports that individual’s portion of the company’s profits or losses. Each owner’s percentage is fixed and should be in the LLC’s operating agreement.

Then, at the personal level, each owner has to pay self-employment taxes on 92.35% of the net earnings on their K-1. Finally, they’ll owe federal and state income taxes on their K-1 net earnings minus allowable deductions.

Pass-Through Entities

If you’ve read through guidance about legal entity structures, you’ve probably come across the phrase “pass-through entity.” In simple terms, that refers to companies that pay no taxes at the entity level. Instead, all income passes through to the owners.

Single-member and multi-member LLCs are both considered pass-through entities by the IRS, as are sole proprietorships, partnerships, and S corporations.

Pass-through entities contrast with C corporations, which must pay taxes at the entity and owner levels, leading to the infamous double-taxation problem. C corps have a flat tax of 21% on all net earnings in 2022.

For example, say you’re the sole shareholder of a C corporation that generates $100,000 in net earnings. You would have to file a separate return for your C corp using IRS Form 1120 and pay $21,000 in corporate taxes.

Subsequently, you could keep the remaining $79,000 in the C corp or distribute some or all of it. Your distributions typically count as dividends subject to long-term capital gain taxes but not self-employment taxes.

How Does an S Corp Get Taxed?

Like LLCs, S corporations are pass-through entities. That means they don’t owe any taxes at the corporate level. Instead, earnings from the business flow through to the shareholders according to the percentages in the operating agreement.

Each shareholder must then pay federal and state income taxes on the amount distributed to them after accounting for individual reductions, like contributions to traditional retirement accounts and the standard or itemized deductions.

However, they don’t have to pay self-employment taxes on the S corporation’s net earnings. Instead, S corps must treat their owners as employees and pay them a reasonable salary. Only those wages are subject to the FICA payroll tax.

In addition, the S corporation and the business owner split the 15.3% tax, with each picking up 7.65% on their returns. As a result, you avoid paying FICA taxes on the rest of the S corp’s net earnings distributed to you.

Naturally, this incentivizes you to pay yourself as low a salary as possible to minimize your self-employment taxes. However, that’ll get you in big trouble with the IRS. Your salary must be “reasonable,” and the IRS won’t hesitate to call you on this.

There’s some inherent subjectivity to this requirement, but an easy rule of thumb is to pay yourself a wage equivalent to the market rate for the services you provide your company.

For example, say you’re a freelance bookkeeper, and your S corp generates $90,000 in net earnings. In your city, a bookkeeper with your experience level typically earns $65,000, so you pay yourself an equivalent salary and take the rest as distributions.

For more guidance on what constitutes reasonable compensation for an S corp shareholder-employee, check out the IRS resource and consult with a Certified Public Accountant (CPA).

Using software to track your company’s cash flow makes calculating your taxes much easier. Fortunately, Lendio offers free accounting software for small businesses. Give it a try today!

How an LLC Being Taxed as an S Corp Works

If you elect to have your LLC taxed as an S corp, you’ll follow the same taxation rules outlined in the section above. You must pay yourself a reasonable salary subject to FICA and income taxes, then pay income taxes on distributions of the remaining profits.

To be taxed as an S corp, you must complete and file IRS Form 2553. To qualify for the tax treatment during a tax year, you generally must do so no later than two months and 15 days after the start of the year.

For example, if you’re using the standard calendar year, you must complete and file Form 2553 by March 15th. Alternatively, if you started your business partway through the year on June 1st, you’d have until August 15th.

If you make the election on time, your LLC will receive S corporation tax status for the entire tax year and all future tax years unless you file additional paperwork to revoke the election.

Note that if you elect to have your LLC taxed as an S corp, your legal business structure is still technically an LLC. Remember that when considering issues like personal liability protection and specific state requirements.

Requirements for an LLC To Be Taxed as an S Corp

For an LLC to be taxed as an S Corp, you must meet some fundamental IRS eligibility requirements in addition to filing the forms as discussed in the previous section. These include the following:

• Be a domestic entity
• Have only allowable owners

• May be individuals, certain trusts, and estates 
• May not be partnerships, corporations, or non-resident alien owners

• Have no more than 100 owners
• Have only one class of stock; for LLCs, all owners must receive equal rights for distribution and liquidation
• Not be an ineligible entity (i.e., certain financial institutions, insurance companies, and domestic international sales corporations)

For more detail on these requirements, you can look at the IRS instructions for Form 2553.

Disadvantages of an LLC Being Taxed as an S Corp

There are a few potential disadvantages to electing to have your LLC pay taxes as an S corp. Typically, the most significant ones to consider are the following:

• Retirement contributions: Filing as an S corp rather than an LLC may reduce the amount you can contribute to some of your tax-advantaged retirement accounts.
• Higher tax preparation fees: Because filing as an S corp requires an additional income tax return for your company, you’ll usually pay an accountant more to complete your taxes each year.
• Reasonable salary mistakes: The IRS can decide the salary you paid yourself wasn’t high enough and reclassify some of your distributions to wages after you file your return. That will increase your S corp tax liability and may cause you to owe back taxes, penalties, and interest.

Most disadvantages of having your LLC taxed as an S corp come from increased paperwork and complexity. There are more moving parts to consider, which may cost you additional time or money.

Should You Choose an S Corp Status for Your LLC?

Choosing to elect S corporation status for your LLC often comes down to a simple calculation at lower incomes. If you'll save more money from the tax benefits of the election than you’ll spend on the increased costs to maintain the entity, it’s often worth it.

However, the decision becomes increasingly complicated the higher your earnings are and the more income streams you have.

For example, if you have W-2 wages from a job with another employer, it may reduce your self-employment tax savings from electing S status.

Ultimately, making changes to your small business’s tax treatment is a significant decision and can have repercussions beyond the scope of this article. As a result, you should always consult with your CPA before filing the election.

Using software to generate your financial statements makes tax time much easier for you and your accountant. Fortunately, Lendio offers a free small business accounting app. Give it a try today!

*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

Invoices and bills are basically the same things, right? Not really. Although they’re both commercial documents, they have distinct differences between them and are used at different times during a business transaction. 

As a business owner, you may have heard the term “bill” when someone refers to an invoice or vice versa. And at some point, you’ve likely had to send both of these items to your customers. 

We’ve already discussed the differences between an invoice and a receipt in our article, Invoice vs Receipt. Today we’ll dive into the differences between invoices and bills.

What Is an Invoice?

Simply put, an invoice is a request for payment. A business will issue this to its customers after providing products or services so they can collect payment for what was supplied. It includes information such as: 

• An itemized list of products and services 
• Total amount due
• Payment terms (Net 15, 30, 60, etc.)
• Invoice date
• Invoice number
• Company contact details
• Customer contact information
• Payment due date

Including these sections lays out clear details on what’s expected of the customer and when so there’s no confusion about what the invoice is for or when the payment is due. And if a problem arises, the customer can get in contact with the business for questions.

Invoices are common use for businesses such as contractors, freelancers, and vendors. A sales invoice also comes in different forms. You might see a paper invoice, email, or PDF. The most effective way to send a professional invoice is by using accounting software. 

With Lendio’s free mobile app, you can send invoices digitally so you always have a record of what you’ve sent. Sending invoices and keeping good records of them is important for three reasons:

1. It helps the business keep track of inventory. Inventory accountants match up purchase orders with invoices to verify inventory and income in the accounting process. 
2. It’s a legal document. Invoices prove that your business provided products or services. If you aren’t receiving payment from a client, the invoice and other subsequent documents can be used to enforce payment through the legal system. 
3. Outstanding invoices are apparent. Invoicing multiple customers gets confusing without accurate records. Using invoicing software can alert you to unpaid invoices. It takes the guesswork out of getting paid and improves cash flow. 

What Is a Bill?

A bill is a request for payment too, but it’s a bit different. Think of how you might ask for the bill when visiting a restaurant. You’re obviously not going to tell your waiter that you’ll pay for your food in 30 days. That’ll get you some strange looks and a visit from the manager. 

Instead, you pay for the meal right then and there. Billing covers a one-time transaction and requires immediate payment. It acts as proof that goods and services were provided the same way invoices do. Instead of accepting payment on a future date, it’s expected right away. 

Billing is a common practice with several types of establishments. Places like retail stores, restaurants, nail and hair salons, or hotels. When you see the bill, it’ll have a few key categories that are common for this type of document. 

• Total amount plus sales tax
• Date of purchase
• A list of what was purchased
• Number of items purchased

Before handing over a payment method, the buyer reviews the charges listed on the bill for accuracy. If any errors appear, there’s a chance to discuss that with the vendor and have them corrected before making a payment. 

Once the payment goes through, the service provider issues a receipt to the buyer proving that they completed their purchase. If the buyer decides to contact customer service to return the merchandise, a credit memo is created to process the return and account for inventory. 

The Differences Between an Invoice and a Bill

Invoices and bills might still seem pretty similar at this point. They’re both issued after a service or product is provided. They both include similar information. And they’re both proof that goods and services were rendered, but not yet paid for. A receipt confirms payment for both. 

They have a lot of similarities, but there are several differences too. To truly understand whether a document is an invoice or a bill, you have to ask yourself a few questions. 

One Time or Every Time?

One of the main differences between an invoice and a bill is the circumstances they’re issued under. Invoicing happens when there’s a recurring need for goods being supplied by the business. They’re made for long-term interactions. 

For this reason, many businesses have recurring invoices. They’re sent on a billing cycle where the customer might have the option to set up recurring payments. 

This makes the invoicing process easier for everyone. The frequency of invoices is agreed on ahead of time by both parties. 

While invoices can be issued for one-time transactions, it’s not typical. Bills, on the other hand, are issued for one-and-done transactions. Each time you visit a dentist's office, hotel, or restaurant, you get a bill at the end of your visit. 

These are short-term transactions that usually aren’t recurring. Since payment is due immediately, your transaction ends once you have a receipt in hand.

When Is Payment Due?

Businesses that send invoices have set an agreed-upon date that payments are due with each customer. Invoice payment terms consist of net 30, 60, or 90 days, so a business is essentially extending credit to the person or company making a transaction with them.

Bills don’t have the option to pay later. Instead, you have to submit payment in the form of cash, credit card, or debit when the bill is given to you. When the payment goes through, a receipt is printed and handed to you as confirmation of the purchase. 

It’s helpful to have invoices in a situation when you’re running a business that makes large supply orders every month based on projected sales. The funds for the supply order might be based on the income from the sales you’ve made. 

So a net 30 arrangement with a vendor would help you continue to meet customer demand while regularly getting the supplies you need to stay in business. 

Some projects may require a 50% deposit for services rendered before starting work. In these cases, term invoices also account for advance payments made by the customer. 

What Kind Of Information Is Included?

A crucial point in the invoice vs bill comparison is the level of information included in the document. Since invoices are used for purposes like taxes, legal proceedings, and financing, they have to contain very specific information to meet legal document standards. 

Standards like a unique invoice number, the word “invoice”, and/or contact details for the business and the buyer. This is all in addition to the information we mentioned earlier.

The same information isn’t required to be on a bill. Traditionally, bills contain limited information about the transaction. There’s no need to include customer details, payment terms, or a due date since it’s being paid now. 

Who’s Sending It? 

The biggest difference between an invoice and a bill is who’s sending it.  If you’re on the receiving end of an invoice, then it would be a bill to you because it’s a request for payment that you have to fulfill. However, if you’re the one sending it to a customer, it would be an invoice. 

This is one of the few situations where the two terms could be used interchangeably. As a customer, you get a bill and you’re expecting a receipt after paying. If you’re the business issuing the request for payment, then you’re the one sending the receipt after getting paid.

Overall, invoice and bill are two distinctly different terms. Invoices are used by businesses and bills are usually received by customers. While they might be used interchangeably, it’s important to know the difference and when to use both.

Limited liability companies (LLCs) are the most flexible business structure for tax purposes. While that versatility can be advantageous, it can also complicate figuring out the right way to take money out of your business.

If you’re the sole business owner of a limited liability company, here’s what you should know on how to pay yourself with a single-member LLC. We’ll cover each option, when they’re appropriate, and the tax implications of the most common approach.

Can a Single-Member LLC Pay Themselves?

You can pay yourself from a single-member LLC in multiple ways, but there’s a required method for each situation. It primarily depends on how you elect to treat your small business for tax purposes. You have three options:

• Default: If you file no additional paperwork, your single-member LLC is taxable as a sole proprietorship. That means you must pay yourself exclusively through the owner's draws.
• S Corporation: If you file Form 2553 with the Internal Revenue Service (IRS), they’ll treat your LLC as an S corp for tax purposes. You must pay yourself a reasonable salary, but you can also take any remaining profits as distributions. 
• C Corporation: If you file Form 8832 with the IRS, they’ll treat your LLC as a C corp for tax purposes. You must pay yourself a salary that equals reasonable compensation if you’re involved in the day-to-day operations. However, you can also pay yourself whatever business profit is left over by issuing dividends.

Whichever taxation method you choose, you’ll always be able to pay yourself from your single-member LLC. However, the methods you use to transfer the funds differ, as will their tax consequences at the personal and business levels.

This article focuses on paying yourself from a single-member LLC the default way. Once again, in that case, you’re a sole proprietor for tax purposes and must pay yourself with LLC owner’s draws. You can’t take a salary, distribution, or dividend.

How Do I Pay Myself From My LLC?

Assuming your single-member LLC receives the default tax treatment from the IRS, you’ll need to pay yourself with the owner’s draws. That sounds formal, but there’s no official way to do this. It just means taking money out of your business to pay yourself.

In practice, business owners can complete an owner’s draw in any of the following ways:

• Writing yourself a check from your business account
• Withdrawing the funds in cash from your business bank account
• Electronically transferring funds from your business to your personal account

Ultimately, it doesn’t matter which method you use to transfer your LLC profits to yourself. It’s simply a matter of convenience. The tax consequences are identical, and the transactions show up in your accounting records the same way too.

To document an owner’s draw, you will need to decrease your business’s cash balance and retained earnings accounts by crediting the former and debiting the latter.

Unlike a salary, owner’s draws don’t have to follow a schedule or stick to a fixed amount unless you set them up as a guaranteed payment in your operating agreement. As a result, you can adjust them to match your business's cash flow throughout the year.

Using software to track your business transactions makes maintaining your financial statements much easier. Fortunately, Lendio offers free accounting software for small business. Give it a try today!

How Are Owner’s Draws Taxed?

Taking an owner’s draw from an LLC is generally a non-taxable event. However, that doesn’t mean you don’t pay taxes on the amount. Instead, you incur your tax liability on those funds prior to the owner's draw, so the transfer is mostly irrelevant.

Single-member LLCs taxable as sole proprietorships are pass-through entities in the eyes of the IRS. That means the IRS disregards them for tax purposes, and you won't pay any corporate tax for the company.

As a result, your business income is taxable at the personal level whether or not you withdraw it. The tax liability for whatever money you generate automatically flows through to your personal tax return.

Because you're not taking a salary, you can't pay your taxes through withholding from your payroll. Instead, you'll need to make estimated tax payments each quarter throughout the year.

Here’s an example to demonstrate how it works. Say you’re the sole LLC member of an LLC taxable as a sole proprietorship. In 2021, you earn $100,000 in net income through your business.

At this point, you already know you’ve generated $100,000 in taxable earnings and would owe income tax and self-employment tax on the entire amount.

You then decide to take $75,000 in owner’s draws and leave $25,000 in the business bank account to cover upcoming company expenses. However, that doesn’t impact your tax liability for the year. You still pay taxes on the $100,000 of earnings.

Do I Need To Pay Payroll Taxes?

If you own a profitable single-member LLC, you’re going to owe payroll taxes. However, the portion of your income subject to them varies depending on your business entity's tax treatment.

Remember, "payroll tax" is a term that includes multiple subsidiary taxes. Generally, the most significant payroll taxes are the Federal Insurance Contributions Act (FICA) taxes: 12.4% tax for Social Security and 2.9% tax for Medicare.

If your single-member LLC is taxable as a sole proprietorship, you’ll need to pay FICA tax on your business’s net earnings each year. Whether you pay yourself via owner's draws or keep the money in your company, your FICA tax liability will be the same.

However, it’s more common to refer to these taxes as self-employment taxes in this situation since you’re not actually running payroll. That said, these are the same taxes that businesses running payroll incur on any wages paid.

For example, if you file an election to treat your single-member LLC as a corporation, you’ll generally need to pay FICA taxes on your reasonable salary.

Consider Consulting a Tax Expert

The average independent contractor has a more complicated personal tax return than the typical employee. As a result, it’s often worth engaging a Certified Public Accountant (CPA) as a small business owner, even if you’re operating as a sole proprietor.

If you’ve formed a single-member LLC and want to optimize the way you pay yourself for tax purposes, your business is almost certainly complex enough to warrant hiring a CPA.

The price of their services is a tax-deductible business expense, and they’ll likely save you enough in taxes to justify the cost. Consider getting expert tax advice today!

Accounting software makes tax time much easier for you and your CPA. Fortunately, Lendio offers a free small business accounting app. Give it a try today!

*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

Debt collection is arguably one of the least fun parts of running a small business. While most people would rather avoid it at all costs, it will actually cost you to avoid it. There are a few things you can do to make this process easier for yourself and your customers. 

In this article, we’ll go over eight successful debt collection techniques you can employ to make the most out of your aging accounts receivable. 

Tip 1: Maintain Consistent Contact

It’s about the methods you use as well. Knowing what form of communication your customers respond to the best and what time they’re able to take your call is an important part of the debt collection process. 

One of the best debt collection strategies is the omnichannel approach. This approach essentially uses all known methods to contact your customer at the right times. This includes:

• Email
• Phone calls
• USPS mail
• Mobile app
• Automated texts

An example of this is sending a reminder email with a link to an online payment portal. The chance to resolve the payment issue through an online portal or a mobile app is extremely helpful in getting unpaid debt off your books. 

Tip 2: Make Payment Terms Clear

If your client then has complaints or is confused about the terms of the agreement, you can quickly address those concerns so there’s no further issue. With unclear terms and no contract, it will be much more difficult to enact debt recovery practices with success. 

As a best practice, you shouldn’t begin any work without a signed contract in place that provides specific details on:

• What you’re being paid for
• How you’ll be paid
• When payment is due
• What’s considered late 
• Any consequences for late payment

Tip 3: Make Paying Easy

When your payment process is inconvenient, it obstructs your ability to get paid on time. That impacts your cash flow. Streamline your bookkeeping and your payment process with accounting software. 

Tip 4: Have Empathy, But Keep it Professional

Showing empathy when customers are going through a rough time helps maintain your relationship with them and allows you both to come to a solution on the overdue payments. This might result in offering them a payment plan to help them get caught up. 

Other times you’re dealing with someone who is actively trying to avoid paying. It’s important not to make any assumptions about the customer’s situation. Try to be customer and solution-oriented. Have empathy towards the customer, but be direct about resolving the issue.

If they get abrasive during your conversation, you still have to keep a level head. Professionalism is part of your reputation. Unlike professional debt collectors, you’re likely not trained to handle verbally abusive or belligerent debt collection calls. 

You can take some tips from them though: 

• Don’t take it personally
• Keep your cool
• Don’t let consumers waste your time – be direct. 
• Suggest a call back later

Tip 5: Keep Good Records

• Friendly payment reminders
• Past due payment notice
• Final Notice
• Direct Customer Contact
• Letter of Demand

If payment is still delayed after that reminder, there should be a past due payment notice sent. Include the amount they still owe and politely request payment at the earliest possible date. 

Still no payment? Time to send a final notice. Your customer is no longer within the terms of payment you both agreed on. This contact attempt will be more firm than the previous ones, it should still include the amount of debt and a request for payment by a specified date. 

If you’re not making headway after the first three collection efforts, then direct customer contact is your next move. A phone call or visiting your client in person may help resolve the issue. At the very least, you may be able to confirm their contact info and address as the same. 

Next up is the letter of demand. This is not to be taken lightly. A letter of demand is sent by certified mail (to confirm that the customer received it) and you’ll keep a copy of the letter for yourself. This one is very direct and firm in its request for immediate payment. 

Tip 6: Centralize Your Debt Collection

Centralizing your debt collection information allows others in your company to view the collection details for each consumer debt. With a collection team backed by a central database system, your debt collectors can:

• Get automated dials
• Notify when an account needs review
• Send alerts when issues arise
• Quickly view and search receivables information
• Increase the number of successful collections

Tip 7: Check Customer Credit

When the nature of your business requires you to extend credit to your customers, you should check their credit references and see if there are any red flags on their credit. It doesn’t have to be a hard inquiry, but you should at least know if they have delinquencies with other businesses. 

This can tip you off before you sign a contract and make your life a lot easier. 

Tip 8: Know When It’s Time to Call In The Professionals

A reputable debt collection agency works on your company’s behalf to resolve delinquent debts. Most collection agencies are paid on a contingency basis. Meaning that they only get a percentage of the debts they collect. 

Before choosing a debt collection agency to work with, it's best to look them up through the Better Business Bureau (BBB) and find out if they’re licensed and bonded within your industry. Once they’re vetted you can start reaping the benefits of working with them:

• They have trained debt collection experts 
• Their collectors can conduct debt collection negotiations
• They maintain good customer service on behalf of your business
• Higher rate of debt collection success
• Unmatched debt collection strategies

Overall, debt collection is a sensitive topic for most consumers who become debtors. As a creditor, it’s your responsibility to collect your debts to keep your business running. 

Remember to keep empathy and solutions at the forefront of your debt collection process for clients who’ve run into hard times. The process of collecting debt isn’t easy, but with the right resources and consistent communication, it becomes more effective. 

*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

While learning how to invoice as a freelancer, contractor, or another business owner, you may have heard the terms invoice and receipt used interchangeably. However, the two terms are meant for two separate steps within a business transaction. 

Both have distinct purposes behind when to use them. They even have completely different information on them. In this article, we’ll cover what the differences are and why it’s important for your business. 

What Is an Invoice?

An invoice can be used as proof that goods and services have been provided to a customer. The sales invoice is a request to the customer for payment. So an invoice is provided by a business before payment is made. 

This allows the business owner to claim rights to the payment they expect for the goods or services they provided to the buyer. 

A good invoice has several pieces of information that make it easy to maintain good records for you and the clients receiving your invoice. Compared to a receipt, there’s much more information included on an invoice. 

Any professional invoice should include the following fields: 

• The business name and contact information
• Client name, email, phone number, and address
• Invoice date
• Description of services or goods
• Line items
• Invoice number
• Due date
• Item price
• Any included sales tax or discounts
• Payment methods and options
• The total amount of the sale
• Payment terms (Net 30, 60, or 90)

To make the process of including all this information easier, many small business owners choose to work with invoicing software as opposed to a standard MS word invoice template. 

Invoicing software, like Lendio's software, enables small businesses to send professional quality invoices with customizable invoice templates. We even let you add your own logo and colors. 

Things like company logos, brand colors, and special fonts aren’t required, but they do help businesses present a polished appearance. 

As a best practice, business owners should include clear payment terms on their invoices, along with a statement of any applicable late payment fees. This discourages clients from sending delayed payments and disputes for unpaid invoices. 

If that’s not your style, you might choose to include a discount for early payment. 

What Is A Receipt?

Unlike invoices, an official receipt is only presented to the customer after payment, in the same way you only get a receipt from a store after your purchase.

Customers use receipts for multiple purposes: returning a defective item, finding contact information for the business, and proving they paid for something. 

Small business owners find receipts useful for some of the same reasons. It’s also used to track business expenses, acts as proof of invoice payment, and comes in use for tax purposes. 

Business owners also use sales receipts as proof of purchase when they’re applying for loans from banks or other financial institutions. Receipts have plenty of important information on them that fuels why they’re used for a variety of purposes. A typical receipt will have: 

• Items or services purchased
• The price of the items or services
• Any sales tax or discounts included
• Business contact information
• Purchase date
• Which payment method was used
• Receipt number or invoice number

Big difference from the invoice shown earlier, right? It clearly confirms when payment was made and what it’s for. The last four digits of the payment method are also located in the top right corner. 

Credit card payments are most common, but what about receiving cash? A cash payment would be recorded as cash along with the total amount paid and any change returned to the customer from the transaction. These details make it easy to process refunds if needed. 

The logo and brand colors on a receipt help identify what business the purchase was made from. All in all, much less information is required on a receipt compared to an invoice, but that’s not the only difference between them.

The Difference Between The Two

• Invoices have more information than a receipt. Invoicing involves customer billing information, payment terms, and due dates that receipts don’t have. 
• Invoicing happens before payment is received. It acts as a way to collect payment after completing a purchase order. 
• A receipt is proof that payment was made on an invoice. 
• Receipts are useful for tracking expenses, tax purposes, and making returns.
• Invoices are helpful in accounting and requesting payment. 

For example, an invoice doesn’t prove ownership of an item the way a receipt does. Possessing an invoice for an item has no legal backing for proving you own it. A cash receipt showing that you’re the buyer will help prove ownership. 

Even though an invoice doesn’t prove you’re the buyer, it can be helpful in qualifying for some forms of business financing. When you need to improve your cash flow, the invoices sitting in your accounts receivable can help you qualify for invoice factoring. 

Say you also receive a loan based on the outstanding invoices from your customers. Once customers pay off their invoices, you can repay the loan. 

Receipts can’t help you qualify for business loans, but they can help you get your taxes in order. Receipts are often needed to show that a business has paid the correct amount of money in taxes.  

Lendio’s invoicing software connects with an expense tracking system. Their receipt management app helps you keep all your business receipts in one place. In the event of an IRS audit, having those is extremely helpful in avoiding tax penalties.

Can An Invoice Serve As A Receipt?

For example, a client visits customer service for your company, attempting to make a return. If they show up with an invoice, there’s no proof that they paid for the product they’re returning. 

This makes it much more difficult to process the return since your employee is looking up the purchase based on the invoice number or customer name. Some point-of-sale systems can’t even process a refund without a receipt. 

When using invoices or purchase orders as receipts, it’s difficult to confirm if all invoices are paid. This is especially true for small business owners who do their own bookkeeping. Without receipts to match up with invoices, you might be missing out on a payment that’s behind. 

Why Are Receipts Important In A Business?

Not true. Your receipts have the power to protect you during an audit, confirm that you’ve paid for things, and even help you reconcile your books. It doesn’t stop there. They also help you keep your expenses in check which is a big deal when running a business. 

These are all very important functions that shouldn’t be neglected. Although it’s easy to forget about receipts and chalk them up as extra clutter, they’re important for maintaining good business records.

Overall, invoices and receipts serve completely different functions. While they’re referred to in the same context, it’s important to have both in your arsenal. Invoices act as a way to request payment while receipts prove that you’ve paid.