You don’t have to love tax season, you just have to be prepared for it and as a business owner, there are quite a few things you can do to make tax season a little less painful.
Preferably you should keep everything in one place. Everything should be recorded and dated: every expense and every income. You should have copies of all of your invoices, bank statements, receipts, and sale slips. If you hired an independent contractor and they were paid more than $600, you must file a 1099 MISC per contractor by January 31st so it’s important to keep their name, address and invoice for your records.
A great way to automate this is by setting up an accounting system. You can use software (e.g., FreshBooks, Excel, ZohoBooks, Xero, Quickbooks) or an actual person.
Pay Throughout the Year
The IRS expects businesses to pay quarterly if they expect to owe more than $1,000 in taxes at the end of the year. Businesses are able to repay in two categories: estimated payments or withholding. Employers must withhold for Federal income tax, Social Security, Medicare, and unemployment (Federal Unemployment Tax Act or FUTA). The IRS offers a prepayment calculator on its website.
Separate Business from Personal
Keeping expenses separate fortifies the liability protection given through business entities. Small business taxes are often heavily scrutinized and making sure that everything is documented, explained and properly presented will save you a lot of time and money if you are audited.
Work on Deductions and Credits Ahead of Time
Tax credits and tax deductions are two different monsters. Tax credits usually save your business more money than deductions, so in tax preparation, it’s important to make a plan if you want to take advantage of them. Common tax credits revolve around health care expenses and hiring veterans. A list of possible credits that your business may qualify for can be found on the IRS’ website, Form 3800.
Deductions come in many forms and since this is the most disputed part of business taxes, it’s important to properly document everything. Deductions can include:
property (not land or investments),
vehicles and mileage,
money paid into retirement plans,
continued education for self and staff,
charitable contributions, and
Avoid Possible Audits
Business tax returns are thoroughly reviewed and often times auditing, it’s important to be honest and exact about all deductions, costs, income and expenses pertaining to your business. Don’t classify an employee as an independent contractor and don’t over-exaggerate how much deductible expenses costs. Label each deduction carefully. If you cannot prove what you paid, exactly as you quoted it, you will be fined.
Be mindful of paying payroll taxes —the amount withheld from paychecks as well as what is owed. You are personally liable and responsible for paying the IRS.
After getting everything together, the only things that are left are choosing the appropriate forms and selecting a filing method. The IRS provides a flow chart of documentation needs per entity type. Remember to keep all documents and tax preparation materials for at least 7 years just in case and update any software or processes that didn’t work for your this tax season.