Tax season is here and if you own a business this time of year can be especially stressful. Since being a small business owner can be expensive in and of itself, you definitely don't want to be over spending when it comes to filing your taxes.
It’s easy to over pay when you’re doing your own taxes. Services like TurboTax are great for keeping up with your personal taxes, since they tend to be pretty straight forward. But, when it comes to your businesses taxes something that seasoned business owners unanimously agree on would be to hire a trusted CPA.
Now let's not get ahead of ourselves! Here are 5 smart ways for small business owners to make tax season a breeze and reduce your liability this tax season and every year thereafter.
Work with a Well Qualified CPA
A certified public accountant (CPA) is just another name of a tax advisor. They make sure that your taxes are up to snuff and they help you to receive any tax credits and deductions you may be eligible for. A CPA can also help you keep track and manage your tax documents throughout the year which can really reduce stress when taxes are due.
Investing in quality help will always work out in your favor, even if it is an added expense. With solid bookkeeping and professional help you could set yourself up to offset the cost of their services.
Separate Personal and Business Accounts
When you start a business typically one of the first things you do when you start turning a profit is opening a business account. While some think this step is optional, there are so many reasons why you should do everything in your power to keep them separate.
One reason why you would want to keep your personal and business accounts separate is because if the IRS chooses to audit your business they may also choose to audit your personal assets as well. Even if you correctly report all of your business expenses the IRS may do this because your money would be commingling in one account.
While an audit of your personal accounts may be inconvenient, there’s another reason why you want to keep your personal and business account separate.
Keeping separate accounts helps you keep adequate records as well. It’s easy to go through your accounts and see what money is coming in and out and when. If you were to mix your personal and business accounts you would lack that clarity, which could really eat up your time and stress you out.
Bottom line is that it's always a good idea to get a separate bank account and credit card for your business. Not only for the reasons listed above, but as a means of building your business credit which can open doors for you and your business down the road.
Keep Up with Your Records
We briefly touched on one of the reasons why it’s important for small business owners to keep adequate records, but let's really get into it.
The last thing you want to do is put yourself or your business at risk for getting audited. What a nightmare! Besides helping you mitigate the possibility of being audited, keeping accurate business records is also an important tool for monitoring the progress of your business, which helps increase the likelihood of your business succeeding.
An equally important reason why you need to keep good business records is that it will ensure that your tax return is correct. By keeping loose records you could be leaving a lot of money on the table in the form of write-offs.
If you choose to not work with a CPA then it’s smart to invest in some sort of accounting software. This is a good option because all you really need is the basic version, which is user friendly, inexpensive and will help you keep track of your income and expenses. There’s a lot of options on the market so take some time to weigh the pro’s and con’s of each to see which option is best for you.
Correctly Classify Your Business
One of the most common ways that small business owners end up overpaying when it comes to their taxes is that they make the mistake of incorrectly classifying their business.
Most small businesses are federally classified as pass through businesses. This means that all of the money made flows through the owners and is taxed as personal income. LLCs (Limited Liability Companies), partnerships, sole-proprietorships and S-corporations are all considered to be pass through businesses.
In 2017 a reduction in income tax rates was signed into law for C-corporations, So, it may be worth it for you to switch from a pass through business to a C-corporation. It could help to reduce your tax liability and help to save you money in the long run, but it is important to note that C-corporations are liable to corporate income tax which is typically less than personal income tax.
Claim all income that is Reported to the IRS
We’ve all heard of a famous person who’s done hard time for tax evasion. It seems like something that really only affects a small subset of our society but in reality it’s something that could happen to any of us, especially business owners.
Now going to jail is not the first action that the IRS takes if you don’t report all of your taxable income to them. Typically, it leads to a pretty sizable penalty that you have to pay on top of the taxes you already owe. Ouch.
Now everybody makes mistakes, but if the government deems you to be purposefully avoiding paying your taxes then you can go to jail. Seriously.
The IRS receives copies of all the 1099 forms you receive, so they’re able to match the income they know you’ve received against what you report you receive. When things don’t match up that’s an automatic red flag for them. So make sure the amount you’re reporting matches the amount of income stated in the 1099s you receive.
Even if a client doesn’t give you a copy of their 1099 form, you’re still legally obligated to report your earnings. This goes for state taxes as well.
Taxes can leave you feeling wild, but they don’t have to. Take time to ensure that your business is taken care of and that you’re keeping yourself as organized as possible throughout the year. This will help to reduce any unnecessary complications and keep you on track to receive your maximum refund and minimize your overall stress.