Tax season is fast approaching, and although many entrepreneurs and small business owners pay quarterly taxes, this is the time of year to crunch numbers to see if you have been effectively following the necessary guidelines. How you structure your business, the amount of estimated taxes you pay and other business decisions all affect how much you’ll end up paying in April. If you are a small business owner, keep these tips in mind to make tax season less of a headache.
Keep it simple, especially in the beginning
How your business is set up can affect what you ultimately pay in taxes. Your business designation as a limited liability company, a sole proprietorship or an incorporated company will determine which regulations it must follow. In an Entrepreneur.com article titled, “The Glaring 2 Mistakes Entrepreneurs Make When it Comes to Taxes,” David McKeegan, co-founder of Greenback Expat Tax Services states, “Use an LLC to limit your personal liability, keep your set up costs low and use a jurisdiction you either know a lot about [e.g. your home county] or where you can easily figure out the rules and find help when you need it.” McKeegan advises that you can always change the structure of your business later if it makes more sense to do so. In the beginning, sticking with an LLC structure and forming under your home jurisdiction is an excellent way to decrease the likelihood of making a mistake in your taxes.
Organize records for easy access
It seems simple enough, but many entrepreneurs co-mingle business and personal finances by managing business funds in their own personal bank account. This makes it difficult to differentiate taxable expenses and income that is tied directly to your business. Keeping bank accounts separate is the first step to accurate tax information, but you also need to know what records to keep. According to IRS.gov, “The responsibility to substantiate entries, deductions and statements made on your tax returns is known as the burden of proof. You must be able to prove certain elements of expenses to deduct them.” For this reason, you need to keep receipts, contracts, invoices, payroll records, etc. Good recordkeeping practices will help your CPA identify everything that you can deduct, along with income that needs to be reported, reducing the chances of a tax error.
Paying taxes is a necessary part of business ownership that can be stressful, but making sure that all of your business’s financial records are in order can eliminate some of the stress. Make sure your records are thorough and easy to interpret so your tax season will go smoothly and you can focus on your business.
This article was written by Mario McKellop for Small Business Pulse