Are you an e-commerce business owner?
Many business owners who own small online businesses often decide to do their own accounting manually. Most of them do it to save on the cost of hiring an accountant, as understandably, as they usually don't have too many transactions which can be tough to keep track of.
However, most of them are not aware that if their accounting is not done accurately, it could potentially land them hefty tax penalties and loss of tax savings.
Here, we'll share some common mistakes made by online business owners, so you can avoid these expensive mistakes if you are doing your own accounting:
Many of you might be getting your supplies from China, and here's one problem faced by many of our clients who are also e-commerce sellers – their suppliers from China often don't provide invoices, and transactions sometimes can involve third parties, which makes it complicated to get clear invoices.
Sometimes, to get proper invoices, sellers might even have to pay extra fees and the entire process is just too confusing (and at times too costly).
But you know that if you don't have clear invoices, you might not be able to declare your expenses properly during tax filing season, so you might end up paying extra taxes.
Also, even if you manage to get a commercial invoice, is it enough? What are the other documents you need to support your transaction records?
We often advise our clients to keep their transaction records as detailed as possible so that they are able to use those documents as evidence to support the tax-deductibility of their expenses.
These are the four documents you should be keeping for your transactions:
Commercial invoice or pro-forma invoice
Payment proof for the goods
Custom Official Receipt
Most of our e-commerce clients also often find it tough to keep track of real-time data of their sales, especially if they are selling on platforms like Shopee and Lazada, as there might be pricing differences on different platforms, or they might run different promos.
Often, their bookkeeping ends up very disorganised. This gets worse if they don't reconcile their accounts timely. And in the end, this might cause them to wrongly declare their fees and overpay their taxes.
We usually advise e-commerce sellers to purchase computerised accounting software that they can use to connect directly with their Shopee or Lazada accounts and derive real-time data so that they get the most accurate record of their sales as well as save time on all the manual work.
And if they are working with us to do their accounting, we will help them sort out this data and ensure that their bookkeeping and accounting are in order, so that their expenses are optimised during tax filing.
If you are doing your own accounting most of the time and prefer to hire a freelancer to help you file your taxes during the tax season or to tidy your accounts only when you feel that there's a need, here's what you should know.
First of all, most of the time, when you hire freelancers to do your accounts, they are usually bookkeepers – who are different from accountants.
Bookkeepers: Anyone who knows how to record and sort out your daily financial transactions such as sales, payroll, bills. Accountant: In addition to the above, they also make sense of this data, analyse it and advise you on how you can save costs. Also, the Accountants Act 1967 stipulates that no person shall practice or declare themselves as either a Chartered Accountant or licensed accountant unless registered with the Malaysian Institute of Accountants (MIA).
Here's an overview of the main differences between a bookkeeper and an accountant:
The cost of bookkeeping services from an accounting firm and a freelancer is the same!
If your business is a small side hustle with less than 50 monthly sales transactions, a freelance bookkeeper might be the most cost-effective option in this scenario.
And if you are relying on a freelance bookkeeper to file your taxes, the taxes will be filed under your name (as the director of the company or even as a Sole Proprietor), which means that it is difficult to hold your freelancer responsible for these mistakes. This can actually happen often if they are not meticulous enough. And this also means that more often than not, you would be paying the penalties for their mistakes.
It would take time to find one whom you can trust, who is responsible and capable of managing your accounts with a high level of accuracy. This takes a lot of trial and error, and a lot of our clients have wasted a lot of time and money on irresponsible accountants and bookkeepers. Business owners have chalked up 5-6 figures' worth of penalties just because of wrong tax filing!
One business we know of faced a RM 90k penalty because the freelancer didn't advise the business owner to submit a CP204A for the increase in sales in the last financial year.
To avoid these potential penalties, you can hire a tax consultant to file your taxes for you. A tax consultant who is licensed under the Ministry of Finance will be able to help you file your taxes under their name and profession. As their reputation is very important to them, you can usually trust them to provide high-quality work.
Their services usually cost from RM 600, but this investment can potentially save you 5-6 figures' of penalties and give you peace of mind when doing your tax filing!
You can usually find tax consultants in an accounting firm too.
Do you know that if you choose the right business structure, you can potentially save up to 100% in taxes for three years?
Most clients we know who have been selling goods on e-commerce platforms like Shopee or Lazada started off as Sole Proprietors as it's easier. Over the years, as their businesses grow and they start earning good revenue, they start to realise that they are paying more in taxes, due to the tiered tax structure of Sole Proprietorship.
That's when they start thinking, should they incorporate a company (Sdn Bhd) to save taxes?
If you are thinking about this, you are not alone. Many e-commerce sellers often don't know whether the time, effort and money spent to incorporate their company (Sdn Bhd) would be worth the tax savings. This is because they don't know how to optimise specific costs so as to gain the maximum amount of tax savings legally.
Let's do a quick comparison of the tax rates for Sole Proprietorship and Sdn Bhd:
Sole Proprietorship: Your taxes are tiered, whereby you are taxed up to 21% of your chargeable income for the first RM 100,000, followed by 24% for the next tier and so on.
Sdn Bhd: You will be paying a flat company tax rate of 17% for the first RM 600,000 of your chargeable income.
However, most of you know might also understand there's a lot more to be taken into consideration for a Sdn Bhd, for example, your incorporation cost might range from RM 1500 onwards, not to mention you will need to appoint a corporate secretary costing around RM 1500-RM 2000 per year, other SSM compliance costs and so on, so you'll need to make the necessary calculations based on your revenue and the pros and cons of each structure.
But let's zoom out to look at the big picture. Is your goal long-term tax savings or short term savings?
Based on our Tax Optimising Methodology, using a step-by-step approach to declare a certain range of director fee, if your profits are more than RM 6,750 a month (or RM 81,000 a year), you would actually be able to enjoy more tax savings if you incorporate your company as compared to Sole Proprietorship (due to the tax rebate, which we will mention later on in this article).
This is something that most e-commerce business owners might find challenging to figure out on their own. And this is why we are here to help.
Also, did you know that there's currently a tax rebate of RM 60,000 over three years for newly incorporated companies? That means a rebate of RM 20,000 a year – even more savings! This is only valid if you incorporate your company and commence business latest by 31st December 2022.
With our Tax Optimising Methodology and tax rebates, you can actually save up to 100% in taxes in the first three years.
Want to find out how much tax savings you can get if you incorporate your company today?
Download our Free Tax Savings Calculator below.
Do you know that you can actually save up to 5-6 figures if you analyse your accounting data to develop better business growth strategies and cost-saving strategies?
We understand that most business owners like you are already very busy growing your business, and you might not have the time and expertise to analyse your data.
It is best to hire external help with the relevant expertise, so you don't need to spend time stressing over how to do so, and you can focus on growing your business.
Accounting firms usually have the knowledge and experience on how best to save costs for you at every single point in time as they manage a number of clients (many other business owners and e-commerce sellers like you) at the same time, so they would already have their latest best practices on cost savings that you can utilise.
These firms are also often made up of a team with different expertise, so they will be able to advise you on different aspects of your finances and accounts, such as tax planning, business structures that would be most suitable for your company based on your profits and business needs, etc. This would take time for you to learn and do on your own, and if you're relying on a freelance bookkeeper, they are usually unable to provide you with this level of advice.
Many of our e-commerce clients greatly value this advice, because it can mean savings of 5-6 figures. You would have already earned back the 3-4 figures you spent hiring your accounting firm for the job, and even more.
Accounting firms also often have advisory arms that can help you to grow your business to the next stage by planning with you a business model with your financial information, and improve your profits by removing unhealthy business practices you might have.
They can even help you with fundraising (such as providing crowdfunding process advisory, preparing pitch deck for investors, etc). And as they work with many other clients, they might even be able to provide you with merger and acquisition opportunities with other businesses, and provide you with a valuable business network based on their clientele. In short, your accounting firm is actually your outsourced CFO who can do regular performance reviews to understand your business' financial health well and can propel your business to the next level – yes, even for small e-commerce business owners like you!
Do you know that some sensitive expenses when wrongly filed can actually incur tax penalties?
Examples of these sensitive expenses include (but are not limited to):
Not all expenses are fully deductible, so you need to be careful to avoid unnecessary tax penalties, which can cost you up to 300% of your underpaid taxes from wrong filing.
Also, remember to keep all your receipts and invoices. Section 82A(1) and (2) of the Income Tax Act actually requires us to keep our receipts for at least 7 years. Under Section 119A of the Act, the offence of not keeping paper records for 7 years is a criminal offence, which carries a sentence of one-year imprisonment and/or a fine of RM300 – RM10,000!
LHDN does random audit checks once in a while at any time, so you can be penalised even after you have filed your taxes!
This is very commonly done by many small business owners. Often, to save time when paying for expenses, they don't differentiate between using their own money and money from their company.
Some even use the company's money to pay for their own personal expenses as well.
Although some of you might say, if you are a Sole Proprietor and whatever you earn goes into your own pocket anyway, we strongly advise against doing this, as it can complicate your accounts. This can also cause complications and inaccuracies when doing your tax filing.
We recommend establishing a petty cash fund that you can use for small expenses. You can allocate any amount to your petty cash fund that's suitable for your business needs. An amount around RM 1000-1500 would be reasonable.
As long as you keep a log of the petty cash transactions, it will make your accounting easier even when you use your own money to cover business expenses and vice versa.
Here's an example of a petty cash log you can use:
We hope our sharing above has given you a better understanding of the common accounting mistakes many e-commerce business owners make, so you can avoid them when you do your own accounting.
But we also understand, all the paperwork and calculations can be rather confusing and tedious to handle, not to mention you don't want to end up paying extra penalties due to wrong declarations!
And this is why we are here for you – we know that as a small and medium business owner, you want to focus on growing your business.
Our professional Chartered Accountant will be able to handle the painful bookkeeping and accounting work for you from just RM 300 a month. This is a fraction of the cost of an in-house accountant and comes with a much higher level of credibility than a freelancer.
In fact, the amount of money you save from working with us usually far exceeds what you're paying us.
What are you waiting for?