Empower Your Small Business for Tax Season
This article is for informative purposes only and should not replace seeking tax assistance and advice from a professional.
For many people, tax time is a dreaded time of year. Gathering all the relevant paperwork, understanding the often-confusing documents the IRS requires you to fill out, and trying to take advantage of all the tax breaks you qualify for can quickly become overwhelming. When you add small business finances to the tax mix, it's no wonder tax professionals have a steady stream of clients seeking tax preparation assistance.
Whether you're paying a professional or tackling taxes on your own, the work you do beforehand can empower you for a successful season.
Starting Your Small Business Strong
The key to a successful business begins before you even get started, said Lori Stahl, a tax practitioner and owner of Tip Top Tax, located in Knob Noster, Missouri.
“Research before you start,” Stahl said. One of the biggest mistakes any business owner or entrepreneur can make is to dive in without knowing exactly what they are getting into. Once you know there is a market for your business, you can build your team and choose your business entity (sole proprietor, LLC, S-Corp, etc).
Having your business squared away is one foundational piece of easy accounting and tax preparation. The more organized your business is, the easier the paperwork becomes, whether you handle it yourself or hire a professional.
Empowering Success with a Foundation of Bookkeeping
Organization is the key skill in keeping your small businesses finances manageable throughout the year. And different practices (or services, if numbers aren't your jam) fulfill different functions for your business.
Bookkeeping generates data while business accounting turns the data into information, said Steven Gearhart, a certified management accountant and principal at SG Accounting and Consulting, LLC. The groundwork accomplished by bookkeeping and business accounting often make the transition to tax accounting smoother for whoever is preparing your small business's tax return.
Bookkeeping tracks the money coming in and going out of your business, while business accounting analyzes the data to show a picture of the health of your business. Business accounting generally wants to show that a business is profitable, with minimal expenses. Tax accounting, however, often focuses on claiming all the expenses and deductibles possible so as to have less taxable income.
“There's a different kind of way in which tax is treated that doesn't necessarily inform the business owner how their business is doing,” Gearhart said.
When it comes to filing your small business tax return, you'll need to keep proofs of your expenses handy, in case you are audited.
“The big thing is to keep track of the revenue coming in and the expenses going out,” Stahl said. Filing receipts, invoices, and expenses on a regular basis makes it easier when it comes time to prepare your tax documents. Categorization is the other key, Stahl said, so making a habit to categorize and keep on top of recurring expenses, such as office supplies and gas or mileage, can set you up for a smoother tax season.
Know Your Tax Deadlines and Forms
When most people think of tax season, they think of April, when personal taxes are due. But businesses can have different tax deadlines, as well as different tax forms. So just because you've figured out your personal tax return doesn't mean the return for your small business will be a breeze.
For a sole proprietor who files a Schedule C with their personal tax return, the deadline remains mid-April.
In general, partnerships and S-corporations will have tax deadlines of mid-March. This gives you time to file your return and get the K-1 form from your small business, which will be required for your personal tax return.
Occasionally, if a valid reason can be provided, S-corporations are allowed to determine their own fiscal tax year (in the same way bigger businesses and corporations are allowed to do). If your S-corporation has a fiscal year that is different than the calendar year, its tax return will be due by the 15th day of the 4th month following the end of the fiscal tax year. So if your fiscal year ends in June, your business taxes would be due by October 15.
If your small business hires any independent contractors to do work, you need to know when to have them fill out a W9 form. You are required to provide a 1099 form to all contractors who have been paid $600 or more during your tax year. The 1099 allows them to report their earnings on their personal tax returns, and also allows you to log the wages correctly under your business expenses. If you will need to provide a 1099, you'll need the contractor to fill out a W9 beforehand.
Break the Process into Bites
Bob Gramann has owned and operated small businesses for more than 15 years. In the beginning, his wife helped him with bookkeeping and taxes, but looking back the one thing he wishes he'd done differently is hire a tax professional sooner.
A tax professional is often able to recognize tax breaks and write-offs that a person might otherwise miss—a common occurrence for small business owners, Gramann said. A tax professional maximizes the return Gramann is able to get.
“It's well worth my money every year to pay him,” he said.
Gramann's advice to other small business owners (and individuals filing personal taxes, too) is simple: “Don't procrastinate on doing your taxes,” he said.
For years Gramann dreaded tax season, thinking he needed to start and finish a return in the same day. Now, even though he pays a professional to file his returns, he breaks his share of the work up into bite size pieces and allows himself a few weeks to get everything reviewed and ready to send.
Should I Hire Someone to Help?
You may be wondering which accounting professionals you should hire for your small business. That answer comes by considering what services are valuable to you, what you have the time and skill to do on your own, and how much you are willing and able to spend on accounting help.
Technology makes it fairly easy to keep copies of your expenses by scanning or taking pictures of receipts and through digital invoicing. So you may find it is easy to keep on top of the bookkeeping side of your business (money coming in and going out).
If you find that you can keep organized but you aren't sure how to understand how your business is doing financially, you may want to hire someone for business accounting.
Finally, if you struggle with filing your business's taxes (or you just don't like doing it, that's valid too!) or if you find yourself often subjected to audits or corrections on your taxes, it's in the best interest of you and your small business to hire a tax professional to help you correctly file your return.
When it comes to choosing whether to try your hand at filing your return or to hire a tax professional, you have to ask yourself some questions.
How comfortable are you with the tax process?
Are you confident in your understanding of deductions, expenses, and payments?
Do you have the time and inclination to do it yourself?
Stahl said one of the most important considerations is honestly assessing your understanding. Many of her clients miss out on the deductions available to them simply because they don't know about them or understand how to claim them. For this alone it is often well worth the money you will spend hiring a tax professional.
It's also important to know that, especially if you've done your taxes yourself, hiring a professional may lead to tax audits. If your taxes have been filed incorrectly or less correctly in years past, your current return may flag you for an audit. Although it's not ideal, it's better than continuing in wrong practices.
As a general practice, it is a good idea to have a tax accountant or other professional in your network just in case you have questions or run into problems. This doesn't necessarily mean you have to keep one on your payroll, but you should develop a relationship with someone so that you don't have to scramble when you need help. Remember, this relationship is an investment into your small business. It's well worth any money spent to ensure that you're empowering your small business for success.
“Taxes are really confusing for most people, so if you find somebody you trust they're worth the money that you pay them,” Gramann said.
4 Things to Do Year-Round to Prepare for Tax Season
However you're proceeding with tax season, these four tips will help make the process a little easier.
1. Save and organize receipts, invoices, and other paperwork throughout the year. Not only does this help you track your cash flow, it also allows your tax professional to prove business expenses and write-offs.
“If you were ever audited you want to be able to show that the expense you claim is a viable business expense,” Gearhart said.
2. Have one designated business credit card that pays all your business expenses and nothing personal. While it's tempting to chase the various points and perks available through different cards, having a single card designated for your business makes it really easy to track expenses, Gramann said. Plus, some banks will categorize expenses already—such as gas, dining, supplies—which streamlines the bookkeeping process as well
3. Separate your business and personal bank accounts.
“Don't use your personal bank account for your business,” Stahl said. Although it works for some sole proprietors who have minimal expenses, any bigger business that shares a bank account with your personal account is a headache waiting to happen and could result in paying more in taxes.
If you can't prove that deposits and expenses are (or aren't) business related when you have combined accounts, you may find yourself paying taxes on the birthday money you received from grandma, but not able to expense your office supply restock.
4. Consider paying quarterly taxes or setting money aside to offset your year-end tax payment. Quarterly taxes are payments made to the IRS four times a year based on your estimated owed taxes. A tax professional can help you calculate how much your payments ought to be, adjust your payments if you realize you're paying more than you need to, and help you file a return to claim any over-payments or apply them to the next year's estimated taxes.
Self-Employment Tax
When it comes to sorting out your taxes, self-employment tax can be an overwhelming and mildly terrifying prospect.
When you work for someone else as an employee (not independent contractor), your employer is responsible for making sure your social security and medicare taxes are withheld from your wages. When you employ yourself, you are responsible for those payments.
As a general rule, you will need to pay self-employment tax if you earn $400 or more from your work. If you expect to owe $1,000 or more in self-employment tax, you are required to pay quarterly taxes on your business income. Using the 1040-ES form, you can calculate your estimated taxes and quarterly payment amounts. Just like withholdings from another job, if you overpay on estimated self-employment tax, you'll recover the extra money when you file your federal tax return.
