How to Make Tax Time Less Stressful by @Pamela_Lund
by Pamela Lund | Featured Contributor
Tax time just passed so you don’t have to think about income tax again for a year, right? Sure, if you like being stressed out and cash strapped every April. If you always scramble to get all of your records together, have to frantically pull together cash to pay what you owe, or haven’t set your business up to maximize deductions you should start making changes now so next year goes more smoothly.
I’m not a CPA or an attorney so the advice here is based on my decade of experience owning a business, originally as an independent contractor then as an S-Corp. You should speak with a professional before you make any major changes but these tips will help you ask the right questions when you do so you get the most benefit.
Make Bookkeeping a Habit
Until I became a business owner I never balanced my checkbook or budgeted. Every month I’d sit down to pay my bills and cross my fingers hoping there was enough money to cover my expenses. If there wasn’t? Well that’s what credit is for, right? When it came time to do my taxes I had a pile of receipts and no organized record of deductions. Not only was this time consuming and stressful, I know I missed out on deductions which means I wasted money. While this might work for a salaried employee with one income stream, it’s not ideal for a business.
Basic bookkeeping will make tax time less stressful by consolidating all of your information in one place. Use an accounting program, such as QuickBooks or FreshBooks, to categorize your transactions so it’s easy to find deductions. Accounting programs also make it easy to send your CPA the financial reports they need to prepare your tax return. Even if you don’t know anything about financial reports, all you have to do is click a few buttons to run the right reports. No more gathering receipts, trying to remember which credit card you used to buy your laptop, or worrying about what you’ve forgotten.
Speaking of credit cards, keep your business and personal expenses completely separate to make bookkeeping as streamlined as possible. Once a week or so simply download your transactions and classify them, pay your bills, and reconcile your accounts so you never have to worry about your balances.
Consider outsourcing your bookkeeping if it’s difficult for you to stay on top of or if it’s particularly stressful for you. You should spend your time doing what you’re good at so you can maximize your productivity and profitability.
Hire a CPA
As business owners we wear a lot of hats (and we wouldn’t have it any other way) but there are some things that are best left to a professional. Business taxes are one of those things. A good CPA will advise you on more than just taxes but the peace of mind that comes with knowing your taxes are done correctly and with the maximum deductions possible makes the expense worthwhile.
Ask other entrepreneurs, your lawyer, or people in your networking group for a recommendation to find someone you can trust. It helps if they are familiar with your specific type of business but it’s not usually necessary.
Pre-pay Estimated Income Taxes
If you’re a salaried employee of your company you should already be paying the bulk of your income taxes with each payroll. If you’re a salaried employee but you’re not using a payroll service, consider using one so you don’t have to calculate payroll taxes and can automate tax payments to reduce the time you spend on payroll. There are numerous payroll services you can find with a quick search or QuickBooks has one that you can add on if you use their bookkeeping software.
If you have a pass-through business, like an S-Corp, you’ll need to estimate how much additional (distribution) income you expect your business to have beyond your salary and pay quarterly estimated taxes so you don’t have a big tax bill at the end of the year. Your CPA can help you estimate how much you should pre-pay but in most cases you should pre-pay what you paid the prior year unless you expect your income to change drastically.
If you aren’t paying yourself a salary and you expect to be profitable, you still need to pay income taxes before you file your return with quarterly estimated tax payments. Not only will you avoid penalties by pre-paying your taxes, you also won’t have the stress of a large tax bill.
Maximize IRA Deposits
You already know that you can and should deposit the maximum (currently $5500 for people under 50) in an IRA to reduce your tax liability. But, as a business owner you may qualify to have a SEP-IRA instead to which you can deposit an amount equal to up to 25% of your salary. As long as your salary is over $22,000 annually that’s more than the standard IRA limit so it’s worth looking into.
Keep in mind that you may have to give other employees, current or future, the same SEP-IRA benefits that you have. Check with your CPA before moving forward so they can advise you on the legal and financial impacts.
If you do set up an SEP-IRA, make sure to set aside 25% of your salary each month for the deposit or actually deposit it with each payroll so you don’t have to scramble at the end of the year to come up with the money.
Incorporate (or Don’t)
Depending on your state, business type, and income level it may make sense for you to incorporate as an S-Corp or LLC. Doing so may offer tax advantages by reducing the self-employment tax you pay on the distribution portion of your income vs. the salary portion.
If you choose to incorporate, try to do it on a date such as the first day of a new quarter or the first of the year to make accounting, and therefore taxes, as easy as possible.
If you’re only incorporating for a tax advantage, keeping mind that those advantages may go away in the near future, that there is paperwork to be filed regularly, and that there are annual fees associated with incorporation that may not make it worthwhile for your situation. Speak with a business lawyer and your CPA to determine the business structure for your situation.
As a business owner you’ve got enough stress. If you implement a bookkeeping process, maximize your deductions, and pre-pay your income taxes, tax time shouldn’t involve more than a bit of paperwork and will definitely be less stressful.
The post How to Make Tax Time Less Stressful by @Pamela_Lund appeared first on She Owns It.