Follow these 5 tax time tips to better-understand deductions, tax credits, and staying organized.I have a confession: when I was in my first year of business, I was not as financially organized as I should have been. I am a Certified Public Accountant. I should have had it all together. But I was so focused on getting my business up and running that several financial-related items were pushed to the side. This made for a horrific tax season as I tried to get everything together. Many of you may have experienced something similar, but don’t beat yourself up. It’s easy to get laser-focused on marketing and other tasks to grow your business—after all, you need to make money, right? However, following these simple small business tax time tips will set you up for success come the April deadline.
1. Gather your forms and numbers as early as possibleAs a small business owner, you’ll need various numbers and forms to properly file your taxes. Of course, you’ll need the basics like your social security number, employer identification numbers, your income, and any expenses you can deduct. If you’ve received any 1099-MISC forms, you’ll also need those to report additional income. On the other side, you’ll need to report income you’ve paid to any vendors or contractors using a form 1099. Form 1099 is a required tax form that reports payments you make to vendors to the IRS. The basic guideline is that if you paid a vendor more than $600, you will need to issue them a form 1099 at the end of the year. However, there are a few more rules, so check with an accountant if you are unsure whether you owe a vendor a 1099. To save yourself some trouble at the end of the year, collect a Form W-9 from any vendors you work with that you think you might pay at least $600 to. That way, when you prepare the 1099 at the end of the year, you have all the information you need.
2. Understand the tax credits you’re eligible forMost business owners know they need to carefully track expenses to list all of their tax deductions for the year. Yet, some of the best tax advice is to also spend enough time searching for the tax credits you’re eligible for. Rather than deducting from your taxable income (what tax deductions do) tax credits actually give you money back on your tax bill. So, if you were to owe $10,000 after your tax filing, you could reduce your tax bill to $5,000 if you have $5,000 in tax credits. Tax credits can lower your tax burden and even give you a bigger tax refund if applicable. You can view a full list of business tax credits through the IRS. Some more common credits include the following:
- Credit for small employer health insurance premiums – If you provide health insurance to your employees
- Employer credit for paid and medical leave – If you offer paid familial leave to your employees
- Disabled access credit – If your business location is accessible to people with disabilities
- Retirement plans startup tax credit – You started a SEP, Simple IRA, or 401(k) for your employees
3. Track and report all business tax deductionsObviously, we all want to maximize our tax deductions, but you have to be sure to track certain expenses properly. This is particularly important for deductions like mileage and home office deductions that require extra documentation. For mileage, keep a log of any miles you drive on behalf of your business on paper or using a mileage app. You’ll give this information to your accountant at the end of the year. If you qualify for the home office deduction, be sure to track home expenses in one place. This includes rent or depreciation (if you own your home), utilities, cleaning costs, repairs and maintenance, and pretty much any other expense that relates to your office space. Track this all in one place, and your accountant can help you do the calculations. To report your small business tax deductions as a sole proprietor, you’ll need to include a schedule C form with your return. Keep in mind that you can file itemized busines deductions on top of the standard deduction you would likely take on your personal taxes.
4. Invest in an all-in-one business softwareIf you’re reading this post in March and April, my best tip for staying organized is to track everything in one place. If you’re using a lot of different software and spreadsheets, be sure to pull it all into one before you get started with your filing. For the rest of the year, invest in an all-in-one business software so that you taxes are much easier the next time tax season comes around. First and foremost, you want to be tracking income and expenses. Income is any payments you receive, either from services you provide or products you sell. Make sure to track income by type. For expenses, track all business expenses in one place and categorize these by type as well. Be sure to track the date, the person or company the payment is made to or received from, the amount, the type of payment (check or credit card), and any other relevant information (such as a description or transaction number) for each item. Having all this in one place will make it very easy to either fill out your tax forms or turn the information over to an accountant. Luckily, software such as HoneyBook will let you track all of your payments and expenses in one place while also syncing seamlessly with QuickBooks for more of your bookkeeping data.
5. Work with an accountant or tax expertThough it is possible to file your tax return on your own, it is something you should get help with if you’re confused. A professional tax preparer can give you more specific advice to your business, which isn’t easy to get if you just rely on a tax sofware. By reading more tax education like this post, you can come prepared to work with an accountant and ask the questions you need for a successful filing.
Final tax time tips for a successful filingFiling taxes is a stressful time for everyone, and owning your own business just makes it that much more complicated. But keeping in mind the tips above will help you stay organized and understand the most important priorities for filing your taxes: Deductions, credits, and bookkeeping. Beyond that, you can use these final tips to make your experience better this year:
- File securely – Always use a reputable tax service or tax professional, rather than trusting someone else to file your taxes.
- Protect your personal information – If you have printed files with your social security number, EIN, and other important numbers, be sure to shred them before disposing. If you open them electronically, ensure they’re password-protected on your computer.
- Lower your stress – If you feel yourself getting overwhelmed, take a step back. Refer to a tax-filing checklist to understand what you have covered and where you’re getting stuck. Read through tax education, or hire a professional.