April 15th
When you saw that date was your first thought one of worry (or even panic)? Did you get a little knot in your stomach?
If so, you’re not alone. That’s how most people react to the thought of “tax day”. Here are a few solutions for a stress free tax season .
BE AWARE OF DEADLINES
New business owners in particular are susceptible to missing tax deadlines because they are accustomed to filing annually on or before April 15th each year.
They’re often surprised to learn that filing dates can be different for business owners, who file annual returns on one of two dates, either:
- On or before April 15th for single member LLCs filing business taxes along with their personal 1040 return, or
- On or before March 15th for S-Corps and partnerships
While the tax returns are due on the 15th of either March or April 15, businesses may have tax payments due in advance of that date.
Businesses showing profits should be making estimated quarterly tax payments throughout the year. Not making those payments if you are generating a profit opens you up to potential penalties. Since it’s rarely in your interest to pay a penalty, Melanie recommends you make those quarterly payments.
For income generated in a given year, estimated quarterly tax payments will be due April, June, and September of the current year, and January of the next year. Payments are typically due on or near the 15th, but the dates can vary if the 15th falls on a weekend. You can always verify due dates for estimated quarterly payments on the IRS website.
SYSTEMS AND SOFTWARE ARE LIFE-SAVERS
Set yourself up for success by creating easy-to-follow systems and workflows. Melanie recommends getting into the habit of doing the same set of tasks in the same way at the same time each day, week, or month to build your skill set and create a familiar pattern that’s easy to follow.
Accounting software is a life-saver. While there will be a learning curve when you first begin using it, the time you invest on the front end will pay off a thousand times over the life of your business. Accounting software allows you to easily track and manage your business. It also makes it easy to calculate the taxes you owe.
Not sure which accounting software is best for you? Melanie recommends Quickbooks Online because it integrates with so many other programs and apps. That’s one of the reasons it’s the best-selling accounting software available, and one used by many CPAs. Another option Melanie mentioned is Xero. Both of these programs which offer several different monthly subscription options, so you can select the one that’s the best match for your business.
When deciding on accounting software look for a double-entry system (yes, Quickbooks qualifies). And while it’s convenient to have software systems that integrate with other systems you use, the best solution for you is the one that you will actually use.
ORGANIZATION IS EVERYTHING
Track everything. Every penny that comes into your business, and every penny that goes out. This is easier than it sounds if you utilize accounting and document storage software.
Digitizing your business receipts is easier than ever and can really streamline your tax process.
Let’s say you’re at lunch with a client. Simply snap a photo of the receipt. Later, you can upload the photo to your accounting program and the receipt can be attached to the transaction – in this case, a lunch with clients. Receiptbank and Expensify are two easy-to-use apps that make tracking business receipts a snap.
Some receipt storage solutions will allow easy receipt storage and even allow you to pull statement copies (i.e. bank statements or utility statements) directly to your filing system. Hubdoc is a great solution if that’s the case.
And when it’s time to begin working on your tax return gather all your documents, forms, and receipts in one location. Have a copy of your previous year’s tax return handy as you begin work on this year’s return.
KEEP ON TOP OF YOUR BOOKKEEPING
Melanie finds one of the biggest roadblocks to a stress-free tax season is not having your “books” in order. Each month make sure all your transactions have been input and be sure to reconcile your accounting software to your bank statement. Make sure all business transactions flow through your business bank account, so everything is captured in one location.
If you’re finding it a struggle to keep up with the day-to-day or month-to-month bookkeeping tasks, consider outsourcing this. Bookkeeping is at the heart of your business and mistakes made here can have big impacts on the bottom line of your business – and your ability to easily file your taxes.
PAY AND SAVE AS YOU GO
Owing money for taxes can be a big “ouch” if you don’t have the money set aside to cover the obligation.
Most business should be making estimated quarterly payments. If you’re doing a good job estimating, you’re less likely to owe money come April 15th.
The mechanics of having money available when your taxes are due can vary, depending on your business. If you’re an entrepreneur receiving income every time sales occur, create a bank account that exists solely for the purpose of depositing tax payment (see the Profit First post). Every time you are paid, first pay a percentage of your gross check into the tax account. Only after you have set aside money for taxes can you pay yourself.
I recommend most businesses set up a separate bank account to move these tax savings to. Having the money there and specifically ear-marked for your tax obligation will be a HUGE stress reliever come tax time.
AVOID CO-MINGLING BUSINESS & PERSONAL
Always keep your business and personal expenses separate. While it might be tempting to merge the two if you are short on funds for some reason, or don’t have the right credit card with you, resist the urge! It’s important that no personal transactions run through your business account, and vice versa.
View everything through the lens of a potential audit. If you can’t explain why something isn’t a legitimate business expense, it likely isn’t one. Unsure about what is legitimate for your business? Melanie recommends checking with a professional!
If you have already run a number of personal expenses through your business, not to worry. You can simply move these expenses into an “owner’s draw” or “shareholder’s distribution” account to mark them clearly as personal expenses.
KNOW YOUR STUFF (or find someone who does)
There are a number of things you should know about your business in order to have a stress-free tax-filing experience. Here are some of them:
- What deductions do you qualify for and are you maximizing your deductions?
- Are there tax credits you can take advantage of?
- What forms should you use to filereturns?
- What method do you use to file – Online? By mail?
- How much estimated tax should I be paying?
- How do new/changing new tax rules affect you?
- Have you maxed out your retirement contributions?
- Is it appropriate to ask for a filing extension, and how will that impact your situation?
If you’re not a tax professional, you likely don’t know the answers to these questions. And not knowing the answers is likely costing you money.
It’s important to find the right tax professional for your business, whether you’re a new solopreneur or the owner of a large, well-established business.
AVOID SURPRISES BY PLANNING AHEAD
No one – and I mean no one wants to be surprised at tax time. Tax planning can be one of the most important things you can do to eliminate unhappy surprises.
One of the most important services Melanie offers her client is a tax planning session. This critical session involves a review of your business and your preview tax returns. From the data provided, Melanie creates an assessment for the coming year based on the expectations of the business.
This assessment allows Melanie to create a projection for the year’s tax liabilities, including those important estimated quarterly payments.
Each quarter, Melanie reviews performance data with her clients, and recommends any necessary changes to their tax plan.
The goal is not only to eliminate surprises such as a big tax bill. It’s also to avoid clients receiving large and unexpected refunds. Ideally, clients neither receive nor owe funds when they file their annual taxes. While receiving a refund might sound appealing, the reality is that keeping your money in your business, working for you, is far better than having that money sit – interest-free – at the offices of the IRS.
UH-OH … I OWE
Owing money on your taxes doesn’t have to fill you with dread. If you’ve been setting aside money regularly you should be in good shape.
If you didn’t set aside enough and you don’t have enough funds on hand to pay the bill, don’t simply ignore the problem.
Prepare a realistic payment plan that you can propose to the IRS. Look at other alternatives as well, including a business loan or line of credit to pay the tax obligation. And then be sure you have a plan for next year that addresses the situation you found yourself in this year.
Were you less prepared this year than you hope to be next year? All too often, people find that they are unprepared for their tax bill – in fact, I suspect the fear of owing taxes is one of the big reasons people procrastinate on filing them!
Take advantage of the tips provided in today’s post, and discover the joy of a stress-free tax season!