Organizing Business Finances for Tax Season: A Step-by-Step Guide
Tax season can be crazy stressful for small business owners. Trying to gather up all your receipts, paperwork, and whatnot while also running your business can feel super overwhelming. But with some planning and organization, you can make tax time way smoother for your business. In this detailed guide, we’ll walk you through the key steps and best practices for organizing your business finances before tax time rolls around.
Step 1: Keep Thorough Records All Year Long
Organization is a major key when it comes to recordkeeping for your small business. Here are some particular tips for keeping detailed records that’ll make tax time less of a headache:
- Save receipts: Keep hard copies or digital scans of all receipts for business expenses. Sort them by category and date. I keep a shoebox for each month’s receipts.
- Track mileage: Log your business mileage all year using an app or written mileage log. Record the date, miles driven, purpose, and route for each trip. I use Everlance to track all my mileage automatically.
- Manage invoices: Use accounting software or an invoicing program to send, track, and archive all invoices. This creates a paper trail for money coming in and going out. QuickBooks makes this easy.
- Note payments: Record any payments made in cash, present them in pay stubs. Get signed receipts when possible for your records.
- Track employee expenses: Have employees submit expense reports for any purchases made for the business.
Thorough recordkeeping all year means you won’t be scrambling to find stuff when it’s time to file taxes.
Step 2: Register a Separate Business Bank Account
Keep your business money completely separate from your personal finances. Try to avoid mixing personal and business transactions. The IRS requires you to differentiate the two. Having separate accounts makes taxes way easier. When opening your business account, pick a bank with helpful services to manage your account. Many have mobile apps and online portals to download statements, which keeps you organized. You may also want a business credit card to further separate personal and business spending. Just be sure to pay that balance off each month to avoid interest!
Step 3: Set Up an Accounting System
You need an accounting system to track income and expenses in your business. This gives you the info you need for filing taxes and managing cash flow.
Small business owners have a few options for an accounting system:
- Excel spreadsheets: Easy to set up for very small business owners, but can get complex as you grow.
- Accounting software: Programs like QuickBooks Online and Xero offer invoicing, reporting, etc. Prices range from $10-$70 monthly.
- Hiring a bookkeeper: They can maintain your books month-to-month. Costs vary based on services.
Choose the option that particularly fits your budget and needs. Consult an accountant to ensure your system meets IRS requirements.
Step 4: Know Your Tax Obligations
As a business owner, it’s key to know your unique tax responsibilities so you can plan accordingly. Here are some of the main tax requirements:
- Income taxes: Your business structure determines how your income is taxed. An accountant can ensure you choose the optimal structure.
- Employment taxes: business owners with employees must withhold income and payroll taxes for the IRS.
- Sales tax: If selling products, you must collect and remit state sales tax. Keep detailed records of taxable sales.
- 1099s: You must issue 1099s to any contractors paid over $600 annually and file forms with the IRS.
Knowing these obligations ahead of time allows you to budget for taxes and avoid penalties.
Step 5: Review Financials Monthly
Take time each month to review your business financial statements, bank statements, and accounting reports. Doing this:
- Catches any errors early so you can fix them
- Gives you insight into your business performance
- Helps you track expenses and cash flow accurately
- Allows you to make budget adjustments as needed
Note any details that could impact your taxes, like large expenses, tax payments, and income trends. Staying on top of the numbers makes tax time less intimidating.
Step 6: Meet With Your Accountant Early
Schedule a preliminary meeting with your accountant 4-6 months before your tax deadline. This gives you plenty of time to gather docs and address any issues before filing.
Discuss the previous tax year and prepare for the year ahead. Be sure to cover any major business changes, like:
- New business structure
- Big increase or decrease in revenue
- New expenses like equipment, vehicles, or inventory
- Taking on employees
- Changes in bank accounts or credit cards
Your accountant can highlight the records you need to provide. Meeting early gives you time to collect everything in an organized way.
Step 7: Gather All Relevant Tax Paperwork
In the months before tax time, start gathering all your tax-related docs, including:
- Bank and credit card statements
- Invoices issued and received
- Receipts for all expenses
- Mileage logs
- Loan statements
- Proof of estimated tax payments
- 1099s issued to contractors
- Payroll records and pay stubs
- Lease/rental agreements
- Records of business assets purchased
Organize everything digitally or in folders by category and date. Contact vendors for duplicate copies of any missing docs. The more organized your paperwork, the faster your taxes can be prepared.
Step 8: Use a Tax Prep Checklist
A tax prep checklist helps ensure you don’t miss any critical info for your accountant. Build your own, or ask your accountant for one.
It includes:
- All W-2 and 1099 forms
- List of dependents
- Income statements
- Balance sheets
- Profit and loss statement
- General ledger
- Bank and credit card statements
- Receipts for expenses
- Mileage logs
- Records of tax payments
- Retirement plan contributions
- Details on business assets and inventory
Review the checklist to double-check that you have everything your accountant needs for maximum deductions and an accurate return.
Step 9: Plan for Tax Payments
Don’t let a big tax bill ambush you! As part of your tax planning, estimate your income taxes, payroll taxes, and self-employment taxes. Set aside funds each month in your business checking account so you have the cash ready. The IRS requires quarterly estimated payments for self-employed folks, so factor these in. Proper planning prevents the stress of a huge lump sum payment at tax time. Know your obligations and make payments throughout the year.
Step 10: File an Extension If Needed
If April comes and your tax docs aren’t ready, don’t freak out! You can file for a tax extension, giving you an extra six months.
To get an extension, file IRS Form 4868 by the tax deadline. This extends your due date to October 15. You still need to estimate taxes owed and make a payment by April 18 to avoid late fees.
Filing an extension provides breathing room if your records aren’t quite ready. Just try to particularly avoid making it a habit, as the IRS may flag recurring extensions.
Step 11: Consider Hiring Tax Pros
As your business grows, consider hiring tax professionals to handle more complex accounting, prep, and filing. Some options:
- Bookkeeper: Handles monthly reconciliations, transaction recording, financial statements, and sales tax filings. Rates range from $30-$100 per hour.
- Enrolled agent: Licensed tax specialists who can represent you in an IRS audit. Fees range from $150-$300 per hour.
- CPA: Advises on taxes, prepares complex returns, and minimizes liability. Costs $100-$500 per hour.
- Tax attorney: Represents you if you have an IRS dispute or need tax debt relief. Rates from $250/hour or more.
Look for providers experienced with small business taxes. Their expertise can save you money long-term.
Bottom Line: Staying Organized Pays Off
Preparing business taxes as a small business owner always feels challenging. However, implementing consistent organization and documentation makes the process way smoother. Tax season will be here before you know it! Follow these particular steps, and you can file your small business taxes with confidence.