How Your Small Business Can Prepare for Tax Season
July 22, 2022 | Last Updated on: July 25, 2022
July 22, 2022 | Last Updated on: July 25, 2022
Of course, last yearâ€™s tax preparation season just ended. Thatâ€™s the point.
The time to plan for the NEXT small business tax season is before the prior tax filing year ends. If you wait until the end of the year, itâ€™s too late.
Thatâ€™s right: Thereâ€™s no such thing as tax season. You have to pay attention to your tax situation all year long.
Whatâ€™s important is that you track everything, every day, ideally in one place. You should have every business income and expense recorded, whether or not you think itâ€™s tax-critical or not. Keep track of all invoices, bank statements, financial records, receipts, and sales slips. It will keep you from having to search and scramble next spring, prevent costly tax errors, and get you all the deductions and credits you deserve.
Here are some other things you can do to prepare for the next tax year NOW.
How do you maintain your books?
A spreadsheet can be enough to handle financial record keeping for some very small businesses and self-employed people. If it works for you, keep doing what youâ€™re doing.
However, a spreadsheet isnâ€™t robust enough for companies that have grown out of the startup phase. There are many cost-effective accounting software and bookkeeping systems designed for small businesses, including:
Each package offers different features, so you should be able to find one that will work for your business. Some even come with tax software capabilities, which include built-in tax forms for both your federal and state taxes. No matter which you select, if you use it consistently all year, youâ€™ll be well-prepared to complete your taxes in the spring.
If you already have an accounting system, ask yourself: Do you have gaps or inefficiencies in your financial tracking process? How could you make things better or more efficient? In short: Is your bookkeeping method serving you well or leaving you feeling frustrated? The time to get things right is now, not next spring.
Once you set up your accounting or bookkeeping software, you must choose an appropriate accounting method for your business type. The most common methods available to small businesses are cash and accrual.
An accounting professional can advise you on the method better for your business.
The IRS expects you to pay taxes as you earn income during the year. Payments can be in the form of estimated tax payments or withholding. The filing schedule for corporations and other types of business entities differ. The good news is that the IRS offers a tax calendar you can use on your desktop. You can also receive email notifications from it or sync it to your work calendar. It takes the guesswork out of when you need to make your tax payments.
Also, if you have employees, you must plan for your Federal income tax withholding, social security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes throughout the year. Finally, if an independent contractor works for you and earns more than $600, you also need to file Form 1099-MISC by January 31.
On top of creating confusion at tax time, mixing your personal and business finances can prevent you from qualifying for a small business loan or building an independent credit profile for your company.
Itâ€™s a wise move to set up a separate business structure for your organization, such as becoming a sole proprietor, corporation, limited liability company (LLC), or partnership. Then open business bank accounts and implement an accounting system. At the very least, use a unique credit card to track business expenses.
Failing to separate your expenses throughout the year could cost you many hours of sorting through bills and statements to determine which are personal and business transactions.
While youâ€™re at it, maintain a separate business calendar. It will help you recall meetings, travel, and other business activities and sync expenses up to them.
Many small business owners benefit from having a professional handle their taxes. A knowledgeable accountant can make the most of your deductions and credits, which typically change yearly and can be almost impossible to keep up with. Working with a certified public accountant (CPA) or other tax pro could decrease your stress during tax season and pay off by helping you minimize your tax burden.
The worst time to determine what federal tax deductions youâ€™re eligible for is when it comes time to use them in the spring.
Many small business owners donâ€™t claim all the deductions theyâ€™re allowed because they donâ€™t have the records to prove they qualify for them. Deductions you may be eligible for include:
A tax professional can help you plan now for the small business deductions you may be able to take in the spring.
If you can, claim a credit rather than take a deduction for an expense. A credit will typically lower your tax liability more than a deduction. Check what credits you can get on IRS Form 3800 or with your CPA. Credits are rare and come with complex rules. Two popular credits:
IRS tax credits arenâ€™t easy to qualify for, but they can pay off in a big way.
Donâ€™t make common mistakes that can get small businesses flagged by the IRS because it seems like youâ€™re trying to break tax laws.
Did you receive a big tax refund this year? Taxpayers who do basically give the U.S. government a big interest-free loan. Adjust your withholding so you get a smaller refund next year.
Tax season really isnâ€™t a season. Itâ€™s a year-long activity. Use these tips so youâ€™re 100 percent ready to complete your income tax return next year well ahead of the due date while maximizing your deductions and avoiding red flags.
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