With the new year just beginning, now may be a good time to start thinking about tax season. Of course, before you start, consider checking in with a tax professional or accountant to know what's best for your own business.
After starting various businesses of my own, I thought I would just “wing" it and learn as I go, but I made a few costly mistakes that way. Here are the dos and don'ts I've learned along the way that I think are important to share:
1. Start educating yourself this tax season.
Even if you end up hiring a tax professional, you may still want to take the time to educate yourself. By reading books and blogs on tax tips and taking online classes, I now understand the value of certain tax structures and the importance of being able to make decisions that offset tax burden.
There are plenty of workshops and tax preparation classes (both online and offline) that can offer you further insight on what your tax preparer tells you to expect. This can help influence the actions you take so you can make better decisions for your business overall. For example, maybe you'll learn the different tax bases for having a regular office versus a home office, or hiring employees versus outsourcing them.
2. Keep the best records possible.
Everything about taxes is centered around documentation. Maintaining detailed financial records that explain every transaction—including where and how every cent was used or made—can help when tax season rolls around.
Using online software for invoicing, billing and expense records can help make it easier to keep detailed records. I digitize and store all receipts rather than spending hours hunting them down. This way, I don't miss out on any important tax deductions, and I have them available in case I'm ever audited.
3. Stay diligent on required tax paperwork.
You may think it's not important or that you have plenty of time, but you need to prioritize paperwork for each of your employees or freelancers.
First, you need to get a W-9, which includes your employee's social security numbers. Then you need to issue a W-2 for employees (or a 1099 form for freelancers) by a specific date, which has always been by the end of January of the new year. If you don't, you may be exposing your business to large fines and unwanted attention from the IRS. Also your employee or freelancer wants to report their earnings correctly, so they're relying on you.
I used to not give much thought to this type of paperwork because I thought my company was so small that it didn't matter. But it was actually necessary for reporting some much-needed offsets to income earned.
4. Avoid mixing business with pleasure.
It may be tempting to mix your business and personal accounts, but I don't advise doing it. If you mix your money, it may be more likely that you'll have to cover any business tax debts that the IRS determines you owe.
I make sure I keep my business credit card separate from my personal one so that I can pay for certain things without getting mixed up.
5. Use payroll software.
If you have employees, consider investing in some type of payroll software or using an accounting system that offers it as part of the package. This can help you make sure that regular employees get the appropriate amount of income tax and other withholdings taken out of their paychecks.
Much of the available software will walk you through each step come tax season, and have updated tax tables to help you. The software I use is easy for me to use without having to involve an accountant or outside payroll company.
6. Pay your quarterly taxes.
The good news is that your first year as a company means no required quarterly taxes. The bad news is that it may be the only free pass you'll get when it comes to taxes.
From then on, you'll need to file every quarter, no matter what type of legal entity you decided to form. Paying on a quarterly basis can help you budget more effectively; it can also help keep you from wondering how you'll make a big payment come April.
7. Know your deductions.
Another reason to consider conferring with an accountant is to discover what types of deductions you can take. You can also plan for larger purchases or retirement savings that provide some shelter from taxes.
This may help you determine how you'll spend your funding proceeds in order to expand your business without creating a significant tax burden that could eat away at that money.
8. Plan ahead for the tax season.
Planning ahead can help you make sure you have what you need—you don't want any bad surprises that could end up hurting your business.
Working with your CPA or tax professional can make you aware of the types of tax obligations or breaks you can get for the next six to 12 months. This can help move your business forward, rather than set it back. The more I work with accounting professionals, the more it's helped me create a long-term view of my businesses, well beyond just the tax aspect.
Read more articles on tax preparation.
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