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How To Prepare for the Upcoming Tax Season
Tax season is upon us, and it can seem daunting, to say the least. This can especially be true for self-employed small business owners who may not know where to begin. While some may be anxious to file as soon as they can, others drag their feet as long as possible. No matter which kind of person you are, filing taxes is inevitable for all of us. However, the more prepared you are before you attempt to file, the easier the entire process will be. As a small business owner, a preparedness checklist before filing taxes is a must.
Hiring the Right Accountant for You
Accountants are plentiful, but that does not mean they are all the best options for your business or budget. A good accountant would work with you on your finances year-round. The effort should be beyond preparing a financial statement, or just completing your taxes, especially if you are a small business owner. Tracking your incoming, your budget, and your gross and net profits should be something they are able to assist with. A high-quality accountant should make sure you are not experiencing cash flow problems as well. For these reasons and many others, choosing an accountant should be a crucial part of your business model, and the sooner you choose an accountant to help with the books, the better.
Keeping Organized Business Records
As a small business owner, you likely already know solid record keeping plays an integral part in your business’ overall success. However, well-organized books can also make tax season considerably easier and help ensure you receive all the tax deductions you are entitled to. Inadequate record keeping also puts your business at risk for an audit. The IRS can audit your taxes years into the future, so making sure your books are in order could save you a lot of headaches when tax season arrives. A good accountant can help you suggest affordable and efficient software programs to make bookkeeping more straightforward and user-friendly.
Be Sure To Claim All Income Reported to the IRS
When filing your taxes, be sure to claim the same amount of income shown on your 1099-MISC form. The IRS receives a copy of your tax forms before you file, and if the income amounts do not align, your business will likely be audited. Even if you do business where you do not receive a 1099 form, you still need to report your income. Not doing so is a fast way to flag the IRS to potential fraud. These rules also apply to state taxes, the rules of which vary from state to state. An experienced accountant will be able to assist you in knowing and understanding your local tax laws and filings.
Differentiating Between Your Gross and Net Incomes
Gross and net incomes can be tricky for new small business owners who are just starting out. Not understanding the difference between the two can quickly spell trouble for the future of your business. Gross Income is the money your business receives for goods you sell or for services you provide. However, every business has expenses, and those expenses need to be taken into account to determine your company’s profits properly.
Gross Profit is your business’ profit margin, and it may vary depending on what product you sell and how much it costs to produce that product. For example, if you sell your product at $200, but it costs you $100 to produce, then your Gross Income would be $200, and your Gross Profit would be $100. Make sure to take the time to consider the cost of the materials; the person-hours spent in production may bring your Gross Profit down to only $50. You most likely will have other expenses that are not directly related to the production of that product, such as rent, utilities, office supplies, etc. Subtracting those expenses from the Gross Profit will yield your Net Income. Your Net Income is basically the money that will end up being taxable and the basis for what you get to keep. Make sure you are taking the time to price your product or services correctly and, in doing so, are establishing a cornerstone of any successful business model.
Classifying Your Business Correctly
Improperly classifying your business can quickly send your business down the wrong road. Misclassified companies often miss tax deductions and end up overpaying when tax season rolls around. The classification you choose for your small business will significantly affect your tax return, so there is a lot at stake regarding getting it right. It would be wise to consult your accountant or possibly an attorney in your state before officially determining your small business’ tax classification. The classifications for businesses are as follows:
- Limited Liability Partnership
- Single Member LLC
- Multi-Member LLC
- Sole Proprietor
- C Corporation
- S Corporation
- Limited Liability Company
Keeping Business and Personal Expenses Separate
The practice of separating business and personal expenses is not just good for your profit margins, it is an excellent idea for your tax filings. If you neglect to separate bank accounts, you are running the risk of both a professional and personal IRS audit. Even if you correctly claim your business’ income, if the IRS notices a mixing of funds, they will likely look deeper into your finances. When starting up a new business, always open a new bank account and credit card, which is easily separated from any personal cards and accounts you may already hold. All business expenses should be run strictly through business accounts. Following these rules will also ensure a much smoother tax filing.
Managing Your Payroll
Managing payroll for your small business’ employees can be a difficult task, one that may be best handled by someone who is not already in charge of running a company. Hiring a payroll specialist or outsourcing to a payroll company are smart options. Still, anyone hired to assist in your business should be vetted for experience and possibly past customer or employer reviews.
It is not unheard of for small business owners to outsource their payroll management to a more minor third party in an attempt to save money. However, this choice may be an unnecessary risk. If the proper amount of payroll taxes are not being paid, your business will still be billed for the missing payroll tax payments. The IRS has been known to monitor payroll taxes quarterly, so it is in your business’ best interest to keep up on the payments.
Work With Your Accountant to Finely Tune Your Business Plan
Knowing how much to invest in your professional and personal future can be confusing. However, an experienced accountant should be able to guide you through the process of setting you and your business up for financial success and security. After choosing an accountant you can trust, you can ask for advice on how best to grow your business. Your accountant may advise you to invest in your retirement fund rather than take a personal bonus from your business or whether certain choices are financially preferable , such as buying or renting office space. Saving money everywhere possible can ensure success and a hassle-free tax filing.
Using Capitalization Rules to Your Advantage
The laws surrounding tax capitalization can vary by business classification. All businesses require investments and purchases, big and small. If you buy equipment, materials, vehicles, or property for your business, then tax capitalization can save you considerable money via tax write-offs. Questioning your accountant about what purchases save money can help you productively invest in your company’s future.
Understand Your Business’ Tax Filing Deadline
Single Member LLCs, Sole Proprietors, and businesses that conclude their tax year on December 31st have their tax filing due on April 15th every year. This date is the same for all personal tax returns. Knowing when your company taxes are due can help you create a payment plan for whatever you owe and ensure you avoid late fees and penalties from the IRS.
Partnerships, Multi-Member LLCs, S Corps, and C corps all have a tax deadline of March 15th. Your business’ classification may determine your taxes being due a month earlier than you had planned. Mark your calendars in advance and take note if the 15th of March or the 15th of April fall on a weekend or holiday. If they do, you will have until the following business day to file your taxes without fear of penalties.
Determine if You Will Need a Tax Filing Extension
Self-employed small business owners often lead hectic lives, and sometimes things can get away from us. If tax season comes up without you realizing it, you may be tempted to do a rush job on your tax filing. The wise business decision would be to fight that temptation and file for a tax return extension instead. Rushing through your tax return can all but ensure mistakes are being made. Hopefully, these mistakes are small, but you run the risk of missing something big and being hit with an audit. It is best to avoid filing incorrectly and give yourself several additional months. As long as you submit an extension form on or before the tax deadline, the IRS is usually willing to grant extension requests to both personal and business tax filers. Keep in mind that the extension process is for additional time to file the return itself and NOT an extension of time to pay any tax that you owe. If you expect to owe tax with your return, do a quick guess of what you think you will owe and send that payment with the extension.
How Do I Learn More?
To learn more about preparing for tax season, contact the experts at NASE. Our licensed professionals will be happy to answer any questions you have.