Today, I have a guest post.
Running your own business means you have many responsibilities, including managing the day-to-day operations and even paying quarterly and annual taxes. The best thing you can do is work with an accountant throughout the year to help you keep track of your business profits and losses. Of course, you should also work with them to help you prepare your taxes. Making financial decisions that affect your business and personal life without a consultant can put your business at risk.
Every business should know a few things when it comes to taxes. So here are tax preparation and advice tips for businesses.
Find the Right Accountant
Accountants do more than prepare your taxes; they should work with you throughout the entire year to track your income and expenses and make sure you’re not experiencing cash flow problems.
If you don’t have enough funds to hire an accountant full-time, you can work with one on a consulting basis. However, consultants have other clients, so answering your questions and concerns might not be their number one priority. When you hire an accountant as your employee, they’ll be available throughout the entire workday to help answer your questions and ensure your finances are in order.
Claim Your Income
When you prepare your taxes, you’ll be giving the IRS a copy of your 1099-MISC forms, which allows them to match your reported income against the information they’ve received. The income you report should make the income reported in any of the 1099 forms you’ve received. Not claiming all your income can put you at risk of an audit. Even if a client you work with doesn’t send you a 1099, you should report the income to ensure you’re following the rules, even when others are not.
Any money you receive is considered income by the IRS. This includes business income and money earned through investments, such as stocks and cryptocurrency.
Recording keeping isn’t something you should only do once a year; instead, you should maintain proper records year-round to ensure your tax return is correct. Without maintaining your records, you might lose track of all the deductions you can claim. In addition, every business should have at least a basic version of tax software to help them track expenses.
Additionally to maintaining records, you should also aim to digitize everything you can to help you avoid losing necessary documentation. For example, each time you get a receipt, you should scan it and keep it in a folder on your computer or within your tax software, giving you a single place with all of your expenses organized.
Keep Personal and Business Expenses Separate
Mixing your personal and business expenses can make record-keeping and taxes difficult. If the IRS audits your business, they’ll also have to look into your personal expenses because you haven’t separated the two. You should always have a separate bank account for your business to accurately track your expenses.
Know Which Taxes You Should Pay
Regardless of whether they’re employees or business owners, all people need to pay annual federal and state taxes. Business owners should also pay annual taxes to cover their self-employment taxes. In addition, depending on the location of your business, you might also be subject to other taxes, including municipal and property taxes. If you’re not sure which types of taxes you’ll need to pay, consult with an accountant who can tell you what you need to be prepared for.
Understand Net vs. Gross Income
Small business owners should understand the difference between net and gross income. Net income is how much you make overall, while gross income is what your adjusted income is subtracting deductions. For example, if you sell a product for $10 and it costs $1 to make and ship, your adjusted gross income on that product is $9. Understanding your gross profits can help you understand how profitable your business is.
Classify Your Business Correctly
Classifying your business correctly can help you avoid overpaying in taxes. Each classification has a different effect on your business and how much you’ll pay in taxes. If you’re not sure which classification is right for you, consider consulting with an attorney and accountant to help you understand the different tax and legal implications.
Know the Common Deductions
Understanding the common tax deductions can put you in a better place to take advantage of them during tax season. They can also help you reduce your tax burden quarterly. Consult with your accountant to learn which types of expenses are tax-deductible so you can begin reducing your taxes as soon as possible.
You can also invest in tax software, which automates the process of tracking standard deductions. Instead of learning the different types of deductions, your tax software will automatically reduce business expenses from your tax liability to help you pay less on your quarterly and annual taxes.
Know When to Pay
You should always know when you have a tax payment due. Annual taxes are easy since they’re always due in mid-April. However, quarterly payments are due each quarter. All important tax items have due dates you should remember to help you avoid late penalty fees.
Donating a portion of your income to charity can help you reduce your tax burden because it reduces your taxable income. If you can’t donate money, you can always donate clothes, shoes, and products. Whenever you donate, keep a receipt to help you remember how much to deduct from your tax returns.
Preparing for Tax Season
Tax season can be difficult for small businesses that don’t keep organized records year-round. Understanding your profits and spending habits can make tax season less stressful while providing you with important financial information all year long. Accurate record-keeping allows you to pull profit and loss reports at any point in the year to help you understand how to save money and earn more revenue.
Remember, being a small business owner requires you to take on many different types of jobs, including being your own bookkeeper. However, you should always work with a qualified accountant to ensure you’re following all of the IRS guidelines for tax season 2022.
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys San Diego life, traveling, and music.