Tax season is here, and it is one the busiest times for small business owners and tax preparers to get these important financial responsibilities done. Keeping good financial records is a recipe for success for every small business. But small business owners have many other priorities, and a good financial regimen will ensure tax season is not as hectic.
From hiring the right employees to overseeing the daily operations of your company, it can be challenging to find the time to manage your books. This can present a challenge when tax season comes around. To help with that, a simple checklist can help you streamline your small business tax preparation, while making the lift for your bookkeeping lighter over time. Here are seven tips to prepare your small business for tax season without missing any rules or regulations from the IRS or state and local tax authorities.
- Know your tax schedule. For the individual taxpayer, taxes are due on April 15 each year. But for small businesses, tax deadlines can depend on how you structure your business entity. Most small businesses, like single-member LLC’s or sole proprietors, will file on the same deadlines as individual taxpayers. For S-corporations, a tax return is generally due on March 15.
- Know what tax forms you need. As with tax deadlines, your business entity structure will determine what forms you will need. Returns generally include a summary page that provides a high-level overview of your tax obligations, along with supporting schedules and attachments that provide more detailed information. Sole proprietorships use Form 1040, especially Schedule C, to report business income and expenses, while C corporations file their taxes on Form 1120 and S-corporations use a special Form 1120-S from the IRS. Partnerships must complete Form 1065 and then provide individual partner information on Schedule K-1.
- Gather your income-related documents. Keeping track of what your business generated in revenue for the fiscal year can be verified in different ways. You want to have records of your gross receipts from sales of goods or services, revenue from contracts, investment income, and any other money that counts as taxable income. If you are an independent contractor with multiple projects, make sure to collect a 1099-Nec Form from each client that generates more than $600 in revenue for your business. Keeping good records of your income will save you headaches should the IRS want to conduct a tax audit.
- Gather your expense-related documents. There are many tax benefits for small business owners and the only way to take advantage of them is to be able to prove your deductions. You will need to keep records of your business-related expenses, such as insurance, overhead costs, supplies, utilities and professional fees. Furthermore, there are many other tax breaks available if you have payroll, cover health benefits for workers, and have investments.
- Make sure to send the proper tax forms for your workers. As with keeping track of your income and expenses, your workers must do the same for their tax filing each year. For example, W2 forms are sent to each employee and a 1099-NEC Form for independent contractors by the end of January. Copies will go to the IRS, as well as to state and local tax agencies.
- Get an extension if you need one. Sometimes we need a little time to get everything ready, and an extension will allow you a little breathing room. You will need to file for an extension before the original due date of your tax return, and you also must make sure to pay your taxes on time — even if you have received an extension. The extension is only for filing the return. Extensions for small businesses set up as sole proprietors, single-member LLCs, and C-corporations are for six months through October 15.
- Keep track of your tax records and adjust as needed. Your financial situation is always evolving and how you filed one year may change in the following. The way to know when you need to change your business entity is to keep track of your revenue and expenses. As your business becomes more sophisticated, there will be other tax breaks you can explore that will ensure you are meeting your obligation with the IRS as you scale. Always talk to a tax professional for advice.
Keeping good tax records will keep you and your business in good standing with the IRS. Your good standing can also play an important role when it is time to seek capital, as banks usually require tax records to verify a business operation to fund. If you need help preparing your small business for tax season, there are Taxpayer Assistance Centers opening on Saturday, April 9, 2022 to offer free face-to-face help from 9:00 a.m. to 4:00 p.m. No appointment is needed. For details, visit the Taxpayer Assistance Center website.
EDGAR RAFAEL OLIVO is a bilingual business educator, economic advisor, and contributor for several media outlets. He’s a nonprofit executive who is passionate about education. He is certified in finance and data analytics and holds a business degree from Arizona State University.
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