As a business owner do you scramble at tax time to gather all of your business expenses? Do you file extensions every year because you didn’t keep your records up to date throughout the year? If it’s too late for the current tax season, apply these tips this year to make sure that next year’s tax time is easier for you. Filing taxes for a small business can present special challenges, but here are some strategies to reduce tax stress for business owners.
1. Get Organized and Keep Accurate Records
Getting and staying organized throughout the year is the key to being ready at tax time. Here are some great ways to streamline your organization system: (For more, see: How Can I Tell Which of My Business Expenses Count as Write-Offs?)
- Use accounting and payroll software to stay organized and avoid payroll tax penalties.
- Go paperless.
- Set up a filing structure on your computer or server that works for your business. As documents come in, save and file them accordingly.
- Download electronic bills from vendors. Ask your vendors to email your receipt instead of giving you a paper copy.
- Take photos of your receipts and go paperless. Your accountant does not want a shoebox of receipts and you want to make sure that you included all of them. Find an app (I use Scanner Pro by Readdle) to scan, track and manage your receipts so that after a business lunch all you have to do is snap a picture of the receipt and get rid of the paper copy. Scanner Pro has integrations with Box, Dropbox and Evernote that will automatically upload scanned receipts to a designated folder for accurate recordkeeping.
- Group your vendors into expense categories for easier tracking. For example, a category for office supplies, a category for utilities, a category for meals and entertainment, etc.
- Download and save your bank and credit card statements.
- Keep your business accounts separate from your personal accounts. If you don’t have separate bank accounts for your business and personal, at least have a separate credit card for your business so you can more easily track your business expenses.
- Stay on top of your bookkeeping throughout the year by making sure to categorize expenses (or have your bookkeeper do it). This will help not only at tax time, but also with strategic business planning throughout the year.
- Review your bookkeeping, financial and investment account statements each month.
- Never delegate bill payment. While bookkeepers should be empowered to pay small bills, set an amount like $250 that they cannot go over without your approval.
2. File and Pay Taxes on Time
File and pay your taxes on time to avoid interest and penalties. By keeping accurate records throughout the year, this should be no problem. Put reminders in your calendar to pay these before the deadline each quarter. The penalty for filing late is 5% of the unpaid taxes for each month or part of the month that a tax return is late. And if you don’t pay your taxes by the tax deadline, the penalty is ½ of 1% of your unpaid taxes. If you owe both, the maximum you’ll pay is 5%. (For related reading, see: 7 Small Business Tax Tips & Strategies to Know.)
As a business owner, you file quarterly income taxes because taxes are to be paid as you receive income and no one else is withholding those taxes and paying them for you throughout the year. If you owe self-employment tax, make sure that’s included in your quarterly estimated tax payments too.
3. Don't Miss Out on Tax Deductions and Credits
Work with your tax preparer to educate yourself on what deductions and credits you may be eligible to utilize. There are over 300 potential tax deductions available for business owners. Don’t wait until the end of the year to make sure you’re maximizing and doing everything necessary to qualify for these deductions. Some of the most common deductions for businesses include:
- Home office deduction or rent on the business property.
- Vehicle expenses.
- Salaries and wages.
- Contract labor.
4. Keep a Forward-Looking Approach
After tax time, schedule a time to meet with your tax preparer. Your tax preparer should be either a Certified Public Accountant (CPA) or an Enrolled Agent (EA). They should review your return and ask the following questions:
- Is my business operating in the most appropriate business structure?
- Should it be an S Corporation, LLC, C Corporation, Sole Proprietorship? This is a question your tax preparer can answer based on your business type and revenue model.
- Am I properly paying myself from the business? For most entity types, the federal government expects you to pay yourself via payroll so you don’t avoid payroll and Social Security taxes. I use Gusto for payroll.
- Should I run the accounting on the cash or accrual basis?
- Are there other expenses I could deduct?
- Do all of my freelancers actually qualify for a 1099 versus a W2?
- Should I set up a company retirement plan to save on taxes and attract and retain employees?
Implementing these strategies throughout the year starting today will help you avoid getting lost in the shuffle of tax time. (For related reading, see: Starting A Small Business: Taxes.)
Disclosure: Hilary Hendershott Wealth Management, LLC (“HHWM]”) is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by HHWM in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of HHWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.