How to Make Tax Season as Painless as Possible
Running your own business is full of all sorts of perks: Working at home in sweatpants. Setting your own hours. Calling all the shots.
But if you aren’t careful, there’s one area that can cause you a lot of stress: figuring out your taxes.
When you work in a traditional job, your taxes are often as simple as reviewing your W2s. It’s a bit more complicated for small businesses. Between income taxes, sales tax, and all the required documentation that goes with submitting your year-end taxes, it can feel more like herding cats than simply checking off a box.
Having made the transition from salaried full-time work to running a small business myself, I know some of the common areas where people get stuck. One of the best things I learned: it always helps to talk to an expert.
That’s why I asked finance writer and tax guru Katherine Gustafson about what small business owners and online sellers can do to make tax time easier. Here’s what she recommended.
Pay Your Estimated Taxes
Love paying taxes? Ok, that was a joke - few people actually enjoy this process. But considering how important it is to get your estimated taxes paid, it’s worth getting right.
Estimated taxes get paid more frequently than once a year. With this approach, you pay them four times per year (once per quarter).
The good news is that filing and paying estimated taxes is simple when you get it down to a personal system that works for you.
- Set aside some money for estimated taxes every month. How much? Tough to say exactly. Freshbooks recommends setting aside at least 30% every time you get paid to cover your bases.
- Keep your records as accurate as possible. Gustafson recommends noting what you paid in estimated taxes the previous year. This number is important because if you underpay relative to this amount, you may owe a penalty for underpaying estimated taxes. But if you paid estimated taxes of at least 100% of the tax shown on your return from the prior year, you may be able to avoid this.
- Separate your estimated tax funds. It’s tempting to believe that you can keep a portion of your business checking account aside for estimated taxes. Call it a sort of “mental savings account.” In practice, it’s easier said than done. Consider signing up for a business savings account to separate the money you use for estimated taxes so it’s out of sight (and out of mind).
According to Gustafson, paying estimated taxes four times a year is the number one thing you can do to ensure tax time goes smoothly. Crunching the numbers before April will be much easier if you aren’t worried that you’ll owe a massive tax bill because you didn’t file estimated taxes properly.
Once you get in the habit, it’s not too difficult. The actual form - 1040-ES [PDF download] - is one of the simplest you’ll ever fill out with the IRS.
Keep Impeccable Records
With a good record-keeping system in place, you shouldn’t have too much work at the beginning of a new calendar year. It all comes down to how accurate your books are.
“You should be keeping exacting records of what each of your clients pays you so you can ensure that the amount they report on your 1099 at tax time is correct,” said Gustafson.
How do you do this? Study, don’t cram.
If you were one of those people who crammed all night before a test - when you should have been studying a little bit throughout the semester - it’s going to come back to bite you come tax-time. I recommend getting set up on a cloud-based accounting system so you can tabulate your totals as you go.
Here are a couple of options:
- Wave is a free, cloud-based accounting system that lets you handle invoices and bookkeeping from a single source. They also include hands-on support whenever you have questions about getting your books set up in the software.
- Freshbooks is designed for business owners, so it’s an intuitive way to start your bookkeeping. You’ll notice it’s easy to integrate into your business banking account so you can start categorizing income the same day you set it up.
The key is automating your processes. The more you can automate your bookkeeping systems, the happier you’ll be when tax time hits.
If your systems are accurate, you may even know all of your key numbers by midnight on New Year’s. This way, when you receive your year-end tax documents, you can compare them to your records to immediately check for discrepancies.
Another key to making your life easier? Don’t limit your automation to income. Track what’s going out, too. A service like Expensify or Neat’s receipt scanning apps will automatically organize your expenses and store your files on the cloud.
Hire Tax Help
If you have a straightforward business that you run as an individual sole proprietor or a single-member LLC, you may be able to do your own taxes. But how do you know when it’s time to turn to a pro?
There are two basic requirements to hiring tax help:
One: Can you afford it?
Two: Do you want to avoid headaches?
“Paying a pro can be worthwhile to avoid aggravation and mistakes, giving you peace of mind. Professionals also can help figure out what might advantage you, such as incorporating as an S-Corp or contributing to a retirement fund like a SEP-IRA,” said Gustafson.
In other words, a tax preparer can improve your quality of life - and the quality of your business. Can you save money on your tax bill by contributing to a SEP-IRA? Are you better off as an S-Corp? Are there legitimate deductions you haven’t thought of?
It’s rare you can find someone that may save you on headaches and money, but a good tax advisor might.
Don’t Wait Until the Last Minute
Your small business taxes are no joke. Getting them wrong can result in fines and penalties - not to mention headaches.
“Do yourself a favor,” Gustafson says. “Start on your taxes as early as you can.”
If you do that, you’ll not only feel better about your company’s finances, but you’ll have peace of mind that lasts all year.