The holiday season is already upon us and with it comes the far less popular tax season. As a small business owner, you may find the notion of preparing your taxes stressful, especially if this is your first year running a business. Let us be the first to assure you: that’s perfectly normal.
Below you will find a short guide on how to prepare for the perils of tax season and follow best-practices to maximize deductions, minimize liability, and be prepared for any potential IRS audit.
Let’s start with the easiest to implement, yet hardest to maintain, step:
Step 1: Stay organized all year long
As the old saying goes, “An ounce of prevention is worth a pound of cure,” which couldn’t be more accurate when it comes to your taxes. But staying organized throughout the year with your paperwork is only difficult if you don’t know which documents to look out for in advance. Luckily, we’ve got you covered with this handy list.
In order to file in your return, be sure to save your:
- Income statement
- Balance sheet
- Bank and credit card statements
- Payroll documents
- Business tax return for last year (if you have one)
- Partnership agreements
- Accounting documents
- Asset purchase details (for expensive items like computers)
- Depreciation schedules (of previously purchased assets)
Step 2: Know what you owe
Whether your company’s an LLC, C Corp, S Corp, or B Corp, there are several different types of taxes you need to be familiar with as a small business owner.
Let’s go over the main categories:
1. Income taxes
All businesses have to file an individual annual income tax return, with S corporations being a notable exemption since those earnings are classified as personal income and are taxed accordingly.
2. Estimated taxes
All freelancers, independent contractors, and small business owners who expect to owe at least $1,000 in taxes need to estimate and pay quarterly taxes, typically on the 15th of April, June, September, and January of the consecutive year.
3. Employment Taxes
Self-employed people have to pay self-employment taxes, which cover their Social Security and Medicare taxes. While employees share this expense with their employers, self-employed individuals must cover the full amount (15.3% of their income).
Step 3: use tried and true digital tools to prepare your small business taxes
It goes without saying that paying your small business taxes is required by law. You can either do this independently or hire a professional to file your taxes for you. According to the National Society of Accountants, the average cost of preparing taxes for a small business by an accountant ranges from $184 a year for a Schedule C, required for sole proprietors, to $826 a year for a corporation.
If you cannot afford a bookkeeper, there are various helpful software-based options for tracking business expenses out there. These include QuickBooks, which allows businesses to categorize expenses, take photos of receipts, and keep track of estimated taxes due, among other more advanced functionalities. It also syncs seamlessly with Melio.
If you’re already using Melio to make payments, you can also categorize all of your expenses and export a CSV file with the information required to file your annual 1099 forms directly from our platform. And, if you have employees, platforms like Expensify can help your team stay organized when it comes to receipts and reimbursements.
Keep in mind, however, that as your business grows or you have an increasing number of depreciable assets to factor in, having a knowledgeable tax preparer can be the difference between business tax-success and defeat. It’s important to always remember how much your time is worth and which tasks are better delegated elsewhere.
While taxes are definitely not the most enjoyable part of owning a business, we hope you take our strategies to heart and discover your own ways of reducing both tax-related hassles and unexpected surprises come next April. Good luck!