There’s a famous saying by Benjamin Franklin that “in this world, nothing can be said to be certain, except death and taxes.”
This is a true statement, especially when it comes to business. Small businesses are not exempt from the burden of preparing and filing accurate tax returns. The National Small Business Association (NSBA) has found that small business spends at least two weeks of full-time work preparing federal taxes. This equates to around 80 hours in small business tax preparation.
Preparing to file taxes can be very stressful for small business owners, especially when they haven’t been adequately prepared. With the right small business tax preparation and strategy, tax season doesn’t have to be burdensome for small business owners.
The stress, however, will only be relieved if, as a small business owner, you start preparing for your business taxes as early as possible. Leaving small business tax preparation until the last minute can be a recipe for disaster. Even though preparing your small business to pay your taxes isn’t exciting, it’s an essential responsibility in your business.
Before you start preparing for tax season, you need to understand the type of tax return that’s required to be filed for your business. This will be determined by the legal structure of your business. For instance, if you’re self-employed, you’ll need to report your business income and tax on a personal tax return. This filing process is different from filing taxes for small businesses that are incorporated.
The following are some ways that you can get started with small business tax preparation:
1. Keep a note of tax deadlines for your small business tax prep
Tax return due dates are publicized for the most common types of tax. However, you must also be aware of the different types of business taxes that your small business is responsible for all year round.
Getting up to speed with the different dates for your small business structure will help you to retain the right records and also the necessary budget to pay your taxes that are owed. As well as knowing the federal tax deadlines, you must also be aware of tax deadlines for your particular state. You can check out the IRS calendar for self-employed people and for businesses. This will give you information about what you need to do each month in relation to filing your federal taxes. To find out about your state’s small business tax deadlines, check out this link here from efile.com, which has provided links to every state’s tax deadlines and refund status.
2. Compile accurate records for your small business tax preparation
The way you’ve compiled records for your small business –
in terms of its financial dealings – will determine whether it will be difficult or easy for you to prepare your small business taxes.
Your records should show factors like income, credit and expenses that are declared on your tax return. All the entries you provide on your tax return must be evidenced by accurate records. If necessary, your records need to be available for inspection by the IRS if they make a request to do so.
The IRS provides a list of documentation you should keep for your small business in relation to tax. If you have filed tax returns previously, you need to keep a record of these as well as the following documentation:
- Credit card receipts
- Canceled checks
- Petty cash slips
- Business credit card account
- Professional service fees
- Bank records
- Business receipts for different subscription services and membership sites.
Keeping accurate and timely records is something that has to be habitual in your business for small business tax preparation. You can keep hard copy documents in a physical area of your business or you can use document scanning apps – for example, Dropbox – to store them electronically.
If you’re an entrepreneur or you run your small business from home, you may be eligible to claim home office deductions on some of your expenses – for instance, your mortgage and your utility bills. Always keep a record of the utility bills you’ve paid, even if you pay your bills online.
You should also keep accurate records of any work-related trips that you’ve made when you have used your personal vehicle. For example, some of the records you need to keep in relation to travel include repairs to your vehicle and fuel costs.
3. Use the correct tools for small business tax preparation
As preparing for tax season is mostly based on immaculate record-keeping, how you decide to keep your records will have a huge impact on how easy (or difficult) it is for you to prepare your small business taxes.
Using systems like spreadsheets or other manual processes can lead to confusion when it’s time to reconcile all of your accounts to compile your small business taxes. You can use automation for small business tax preparation. For example, if you run a restaurant, you should consider using an automated inventory system to ensure that you keep the right details of all the transactions you’ve carried out throughout the year.
Using automated systems also helps you to make a budget to forecast your future needs. Automating your inventory management prevents you from keeping too much stock in your small business. This can increase your financial burden because you will need to pay to store your extra goods.
Another important part of preparing your tax return is employee pay. Given that the IRS has advised that around 33% of employers make errors in relation to payroll, it’s recommended that you automate your payroll function to prevent you from manually calculating timecards.
You’ll be liable to pay a fine to the IRS if you incorrectly calculate your employee’s taxes. Also, you can be sued by your employees if your small business has made mistakes with respect to their wages.
Manually recording information in relation to your tax return is a dicey strategy. Your small business will be liable to pay hefty fines and penalties for any incorrect information. You need to ensure that your automated systems can be integrated so that all your records reconcile for better tax preparation for small business owners.
4. Ensure employees are properly classified for small business tax preparation
In your small business, have you hired contingency workers who are:
- Not incorporated?
- Not employees?
- Have been paid $600.00 or more?
Your contingent workers should also complete a Form W-9. This form is important because it helps you to make a request for the tax information from your contingent workers. You can use the information provided on the W-9 form to submit the 1099-MISC form to the IRS. If you have people who are classified as employees, you will need to file a Form W-2.
On this form, you will have to complete details, such as:
- Other payments
You must ensure that all of your employees’ details are accurate when submitting the W-2 form. You can check out the IRS website to ensure that you are aware of the different classifications of workers.
Failing to classify workers accurately can result in a huge fine for your business. You need to classify your workers correctly to avoid penalties.
5. Small business tax preparation requires you to reconcile bank accounts
You need to assess your bank account statements in relation to the business records. Compare your bank statements and business transactions very carefully to ensure that everything on the two records match. If you find any inconsistencies, you need to handle this matter straightaway.
If you’re outsourcing your small business tax preparation to a bookkeeper, you’ll still need to reconcile your bank accounts yourself. When you outsource your tax preparation to a professional and you provide them with unreconciled accounts, you’ll end up paying more money because it will take the professional more time to reconcile your accounts.
6. Make sure you benefit from end-of-year deductions during your small business tax preparation
If you want to reduce the amount of tax you’re eligible to pay, ensure that you’re aware of the deductions that can reduce your tax liability. Property taxes and internet services are just some of the things that you can claim deductions on.
The following are different ways you can claim deductible expenses to reduce the amount of tax you your small business pays:
- Take into account depreciation by using capital cross analysis. Depreciation of equipment you use, like computers and machinery, can be classified as deductible expenses.
- Nonprofit contributions can also be deductible expenses. If you’ve given cash, equipment or property in donations, you can be eligible to receive tax deductions for your small business.
- Providing perks, like a company holiday party, may qualify as a deductible tax expense. You’ll need to meet specific criteria in order for your business celebrations to qualify for being tax deductible.
When filing tax deductible expenses, be sure that your record-keeping is up-to-date and accurate, so you can provide evidence that what you’re claiming to be tax deductible is genuine and is a normal business expense.
7. Budget for your small business tax payment plan
Be prepared to make payments for your small business tax. You can choose from different payment options when paying your tax. For example:
- You can make payment in full.
- You can have a short-term payment where you pay in 120 days or less.
- You can enter into a long-term payment where you pay your tax in more than 120 days.
The best scenario is that you would have already put aside a certain percentage of your profits during the year. This will ensure that you won’t have difficulties making your small business tax payments. However, if you haven’t set aside your required tax payment and you feel that you’re unable to pay the amount due, contact the IRS as soon as possible to agree on a payment plan.
8. Confront any complexities straightaway
While preparing for tax season as an entrepreneur or a small business owner, you may realize that some important documents are missing. This could be a very stressful situation and it could be tempting to forget about it and leave it until the last minute.
However, it’s important to deal with any issues that crop up straightaway. If you’ve outsourced your tax function to a professional, you need to explain the difficulties you’re facing. If the tax professional is experienced, they’re likely to have dealt with such issues before. They will be able to advise you as to the best course of action to take.
If you feel that you won’t be prepared in time, rather than trying to dodge the IRS, you need to contact them to find out whether you can get an extension. If you don’t get an extension, you’re likely to accrue interest on your late tax payment. Here are some forms to use to ask for an extension when filing your taxes:
- Form 7004 can be used for S corporations, C corporations and partnerships.
- Form 4868 can be used for individuals.
Conclusion: How to prepare small business for taxes
Planning ahead is imperative when preparing your small business for tax season. Taking small steps throughout the year will reduce the pressure when it comes to filing your tax return.
Firstly, educate yourself about what needs to be done in relation to your small business taxes. If you’re having difficulties, you can outsource your tax functions to a professional. However, you should also be clear on what’s expected to ensure that the professional is doing what they’re supposed to do.
Plan ahead to prepare your small business for tax season to ensure that taxes won’t be a burden on your business, cause you extra stress and take your time and attention away from different parts of your business.
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