If you’re a small business owner looking to make tax time as smooth as possible, this is the article for you.
Though it helps if you’ve been preparing all year long by keeping squeaky, clean books and reviewing your revenue every three to six months, if you do find yourself behind and it’s mid-January, it’s still not too late to get it together. Commit to peeling away for a day, even if you have to take a Saturday to do it, and follow this guide.
There are three main areas that you must deal with to get through a successful tax experience:
- Human Resources compliant activities
- Bookkeeping and Cleanup
- Tax Planning
This section is largely about processing tax documents related to your W-2 employees and 1099 contractors. These documents are due to recipients by January 31, so you need to process them by January 25 at the latest to ensure they’re on time.
Use a Payroll Service to Manage Employee and Contractor Payments
There are numerous payroll companies for small businesses that can help you stay on top of this all year so that at tax time; you’re able to file these documents on time with no problem. Your business’ size will depend on the right one for you; options include Sure Payroll, Gusto, Paychex, Oasis, ADP, and more.
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Gather W-9s for all Vendors Who Earned More than $600 Last Year and Aren’t a Corporation
For all vendors that you paid more than $600 during the year, such as a landlord or lawyer; you’re required to send a 1099 if they are not incorporated. Your accounting system will enable you to track vendor’s Business IDs or an individual’s Social Security number if they’re not a corporation.
Ask your vendors to provide their W-9 so you can complete this information in your accounting system at the time you pay their invoices. This way, at tax time, it only takes pushing a few buttons to prepare and deliver the 1099s.
Process Your 1099s with Accurate Information
To ensure you don’t miss anyone, follow these steps at tax time:
- Run a Summary Report of All Expenses by Vendor for the whole year.
- Review any payments made that did not capture a Payee and make sure nothing is missing for someone who requires a 1099.
- For anyone on your list for whom you don’t have a W-9, request one. You can send them this link if they don’t have one ready.
- Enter the W-9 info into your accounting system and indicate you’re tracking for 1099s. QuickBooks Online (QBO) makes this very easy.
- When all the information is entered, you can use a system like QBO to prepare, file and distribute your 1099s for a very low price and you’re done! This functionality can be found in the Payroll > Contractors section of the application. The wizard is fairly simple to use, and if you need help you can check QBO’s Help files or even call them.
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Audit the Information by Comparing Your Payroll System Records to Your Accounting System
If you use a payroll system like Gusto to send your contractors their 1099s; it’s a good idea to compare this information in your accounting system to ensure that all payments made through that system match the ones you posted. Compare them and fix any errors.
If any outside payments have been made that aren’t in the payroll system, make sure that money is included when they process the 1099s.
If you pay these vendors with a credit card or any merchant organization like PayPal, you do not need to send a 1099 because those companies already send them one — another good reason to pay by credit card in addition to getting points and cash back!
Get Your Own Tax Documents in Order
Once you’re done, you’ll receive a 1096: a summary of your 1099s, which you may need for your tax return. You’ll also receive a W-3 in the package of W-2s that your payroll company will provide. Provide copies of all these forms to your certified public accountant (CPA) if you’re working with one.
Bookkeeping and Cleanup
It’s important to have clean books before filing your taxes. This will ensure you optimize your tax planning strategies and keep them in alignment with your goals and cash flow. It will also make any audits super easy to comply with.
Here are a few tips on how to clean up your books in one day:
- Make sure any expenses that you’ve paid out of pocket are adequately accounted for in your expenses. For example, if you use your personal cell phone for work, you can buy the phone through the company and expense part of the service.
- You can take a portion of your rent if you work from home or utilities bills. It’s tricker if you own your own home to claim rent expense, but you can still take some of the light bill.
- Reconcile your bank and credit card statements including statements from banks like PayPal. Avoid numerous journal entries to make the statements reconcile; find and fix the errors. If you have unreconciled old transactions, check to see if they are duplicates that need to be deleted.
- Review your P&L by clicking through each account and make sure everything is in the right category. This is time-consuming, but really worth it when you start next year’s planning.
- Review your balance sheet. Make sure all your loans and interest paid over the year are in alignment with the documents the bank sent to you. Check any accounts receivable to make sure they are right as well as your owner’s draw account.
- Check to see if your grants or forgiven loans are to be treated as taxable income and make necessary adjustments. For 2020 anyone who received a PPP loan that was forgiven must treat that forgiven amount as taxable income.
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Tax Planning and Working With a CPA
This can start with wondering if you need a CPA.
You need a CPA when you make enough money to require tax planning and if you simply don’t have time for the Turbo Tax wizard. You know you need tax planning when you start paying a lot of taxes!
Finding a great CPA can be a challenge and in my experience is more difficult than one might think. Not all CPAs are equal. I’ve had the best experiences when my CPA:
- Speaks slowly and clearly and I can fully understand what they’re explaining to me. If you don’t understand their explanations, that is a red flag and you should find someone else.
- Cares about accuracy and makes sure my balance sheet from one year’s return matches my accounting system and the next year’s return.
- Is honest about how long something takes.
- Has other clients my size.
- Other clients in my industry.
- Has been recommended to me!
- Is in it for the relationship and not just a transaction.
Plan Your Retirement Savings as a Part of Tax Planning
A big part of tax planning is understanding your financial goals: short, medium, and long term. This will help you determine how much money to put in retirement accounts that you can’t touch until you’re 59½.
You can contribute a small amount in an IRA all the way up the max in a simplified employee pension at $57,000 (2020 limit) depending on your sales, income, and cash flow.
Working with a tax accountant, you can run various scenarios and figure out what makes the most sense for you.
Retirement contributions can be made up until Tax Day, and you’ll still get credit for the tax year.
Plan Your Charitable Giving to Maximize Tax Savings
If your normal tax-deductible expenses such as mortgage interest and state income taxes aren’t larger than the standard deduction, you can plan to batch your charitable giving for multiple years at one time to maximize your expenses and get the itemized deduction in one year that you expect to have the highest income.
Another way to save is to gift securities that have appreciated in value instead of cash. When you do this, you get credit for the value of the securities at the time of the gift as if you had given cash; and you do not have to pay the capital gains.
See if You Qualify for Any Tax Credits
Ask your CPA about available tax credits for environmentally friendly subsidies. For example, in New York we get a credit for buying an electric car.
Once this is all done and your taxes are filed, your CPA will let you know if you need to pay estimated taxes throughout the year to the IRS and your state and local tax authorities.
Though this seems like a lot, you still have time to get this all done on time — if you set aside the time. Filing your taxes on time frees up mental space to focus on the year ahead and achieve your new goals.
Belinda DiGiambattista is a serial entrepreneur, business coach, and outsourced financial controller, and can be found at www.belindadi.com.
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