How to Prepare Your Small Business for Tax Season

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How do you prepare your small business for tax season? Many of you are thinking about this because a new year has begun. Others of you are playing catch up or filed an extension in order to get your bookkeeping where it should be. 

There is much to think about when you prepare your small business for tax season. You can always make tax season easier on yourself by having an accounting system in place, keeping up with your bookkeeping, and understanding your small business deductions.

The tasks I have listed below are for anyone planning ahead in their business or attempting to prepare for tax season now.

Prepare your small business for tax season by keeping up with your bookkeeping and understanding your small business tax deductions.

Organize Paperwork

In January 1099 forms, W2 forms, and quarter four estimated taxes are due, which means you need to keep track of any important paperwork you will receive or have completed for the income tax year.

Although individual receipts are not given to your tax advisor they do assist you in any record keeping and qualified tax deduction expenses. Receipts are necessary to show proof of qualified tax deduction expenses. 

Having any and all paperwork organized helps when submitting your forms and information to your tax advisor. 

Accounting Software

I believe having accounting software for your business is important. I know there are business owners who disagree with paying for an accounting software.

However, free and inexpensive accounting programs are not going to give you statements, reconciliation options, the ability to track inventory, and other necessary add-ons your small business needs in order to be successful.

It is natural to have human error; therefore, working with an accounting software helps you catch mistakes and discrepancies. Programs like Excel will not provide a Profit and Loss Statement, comparison reports, or notable income statistics.

You would have to create Excel sheets to give you statements and reports your business needs for factual data. Whereas accounting software will provide the statements and reports with the categories and transactions you record.

I personally use QuickBooks accounting software for bookkeeping. There are other accounting software like Xero and FreshBooks to solve small business bookkeeping needs.

Separate Personal Expenses From Business Expenses

You see this everywhere, but it is true… separate your personal expenses from your business expenses.

No one wants to be the target of an IRS audit. Make things easier on yourself and run all of your business income and expenses through a business account. 

Plus, your bookkeeping will be cleaner and easier to navigate when reconciling bank statements every month. Expenses paid through a personal account can be forgotten or not tracked properly.

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Record and Reconcile Business Transactions

Throughout the year it’s imperative to track all of the income you’ve received, expenses you’ve paid for, and any other transactions necessary to prepare for tax season.

It is common for bank feed to synchronize with your accounting software. Nonetheless, it is essential to reconcile your account totals and transactions with the actual monthly statements for checking, savings, credit card, PayPal, and other payment platforms.

Compile a Profit and Loss Statement

A Profit and Loss Statement is also called an Income Statement. An Income Statement is just that, it shows you how much your small business made.

You want to start by categorizing your small business income and expenses for accurate bookkeeping.  Your CPA or tax advisor will be grateful for the assistance.

Categorizing includes type of income, subcontractors, cost of goods, office expenses, and other expenses your small business may qualify for.

Not sure how to finish off a fiscal year? My free End of Year Checklist will help you get started.

Understand Qualified Tax Deductions

Learn which expenses you can claim to reduce your small business tax liability. 

Qualified small business tax deductions are the expenses that can be deducted from your small business taxable income. 

Read my article to learn more about The Most Common Self-Employment Tax Deductions.

Get Help From Professionals

Yes, not hiring a professional to work with you on your bookkeeping and tax preparation saves money. However, most small business owners don’t start their business expecting the added work.

A small business owner should hire a professional who can help solve pain points in their small business bookkeeping.

Hiring a professional to help you with your bookkeeping and tax preparation is like hiring an administrative assistant, a social media manager, a project manager, or any other subcontractor or employee.

The idea is to take added work off of your plate to focus on managing your business. In addition, hiring a professional bookkeeper helps you achieve qualified tax deductions, gives you tax ready books, and can assist with federal and state forms and payments.

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Properly Calculate Wages and Payroll Taxes

Another important way to prepare for tax season is to be sure and record and calculate your payroll wages and taxes for qualified tax deductions.

It is smart to hire a professional payroll company who is trustworthy and will submit payroll taxes on behalf of your company. 

Ask questions before choosing a payroll company like can you submit multi state payroll, will you submit taxes on behalf of my business, will I receive payroll reports for my bookkeeping, can you submit direct deposit for my employees, etc.

The IRS will check regularly to ensure payroll taxes are submitted for your business.

Estimated Tax Payments

The IRS requires estimated tax payments if you owe $1,000 or more at the end of the year. 

While filing your taxes you can ask your accountant, CPA, or tax advisor to give you estimated tax amounts based on that year’s tax return.

You can also use the IRS estimated tax calculation to help determine if you owe estimated tax payments.

Many small business owners will place money in a savings account or a separate business account to save for taxes due. If you’re not sure how much to save, consider setting aside 25% to 30% of your business net income until you talk to a professional.

Adjust for Next Year Tax Season

Once you’ve finished this year’s tax returns, fix any of the missing gaps in your record keeping. A completed year of record keeping on an income tax return gives you a better knowledge of any estimated taxes due for next tax season. 

Keep tax return records based on the IRS recommendations. You and your small business can be audited for many years after you file your tax return.

Talk to your Accountant and prepare for Income Tax Season!

Prepare Your Small Business for Tax Season

Tax season is never an easy time of year, especially for business owners. Accurate bookkeeping will not only help your business with sales and budget, but it will also give your tax advisor what they need to file your income tax returns. 

I always suggest starting your bookkeeping as soon as your new business venture begins.

If you need help from a professional schedule a Zoom call with me. We can work together to clarify your business needs and streamline your process so Navigate with Price can continue to keep your bookkeeping up to date.

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