Starting a business is a large financial responsibility. The Internal Revenue Service expects business owners to keep track of all transactions and report income and expenses on an income tax return. When you run a business that receives cash payments, it is crucial that you develop a system that keeps your payments organized for tax reporting purposes. An organized reporting system can ensure that your taxes are filed correctly and reduce the likelihood of an audit.
Employ a cash register system to keep track of your sales. A cash register will manage the amount received for all cash, check and credit card payments, while maintaining a total for each account. When you receive a payment, indicate the amount and type of payment when entering the transaction into the register. At the end of the business day, you can close the register and print a detailed sales report that displays the total cash received.
Reconcile the accounts at the end of each business day. Count the drawer and subtract the beginning balance. Compare the amount of cash in the drawer to the amount listed on the daily sales report. If the amounts differ, attempt to locate the difference. You might have to recount the drawer several times to find the mistake.
Use an accounting ledger to document your daily cash intake. Most businesses use an accounting program, such as Intuit QuickBooks and Sage 50. When you initially set up the program, create an account for cash, checks and credit card payments to keep each method separate. Enter the cash, checks and credit card payments into the proper accounts. Accounting programs keep track of sales and allow you to view and print reports of your cash sales for the year.
Deposit the cash into a bank account and retain the deposit receipts for your records. Businesses that collect large sums of cash each day should deposit the cash daily. Businesses that collect small sums of cash can deposit every few days.
Print a report from your accounting software at the end of the tax year. The report displays the total cash, checks and credit card payments that your business received throughout the year. Report the total amount in the "Income" section of Schedule C, Schedule E, Form 1120, Form 1120S or Form 1065. Although the IRS does not require you separate payment methods when reporting on your income taxes, having a detailed report will provide evidence in the event of an audit.
- If a cash register system is not practical for your business, implement an invoice system. Create an invoice for each transaction. Write down the name and contact information for each customer for further verification.
- If your business receives a cash payment of more than $10,000 in the course of a 24-hour period, the IRS requires you to file Form 8300 within 15 business days to record the transaction. For more information, refer to the IRS article titled "Regarding Reporting Cash Payments of Over $10,000" (see Resources).
- If your business is being audited by the IRS, each daily sales report from the cash register, annual income report done on the accounting software, and bank deposit slips are all the proof that you need to present to the auditor.
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