Taxes can be tricky, making the thought of tax season extremely stressful. Taking time to prepare your business for the end of the year is very important. End-of-year preparations make tax time easier, ensure all your financial info for the current year is accurate and up to date, and let you start the next year out on the right foot.
Here are five steps you can take now to prepare your business for the end of the year.
Getting your bookkeeping organized will help you rest easy at night. You’ll know that all your numbers for the year add up and that the information on your year-end financial statements is correct. That makes for a less stressful tax season!
One of the easiest ways to take care of your bookkeeping is to sign up for a remote bookkeeping solution. If you’re looking for a service provider to take care of your bookkeeping year-round and help you skip the tax season crunch, you can check out Bench. We’ve been using it for years, it’s a lifesaver!
Go back and make sure that every transaction you’ve recorded for the year is correctly categorized. If you made a categorization error in February and then kept repeating that error, it could have a major impact by the end of the year.
For instance—let’s say you’ve been incorrectly categorizing credit card processing fees for your store as part of your overhead. That could give you a fluctuating monthly overhead expense; use it to make financial projections for the new year, and your numbers will be off. Fixing the problem now will save you trouble once the books are closed.
If you use the double-entry method of bookkeeping, it’s essential that all your credits and debits match up. Otherwise, some accounts may actually hold less value than your books say. You can do this at the same time you’re double-checking your transaction categories. Make sure that each time an account is credited, another account is debited the same amount—and vice versa.
This is to make sure your bank statements match up with your books. It ensures your books reflect reality—the real, tangible cash you have to work with. Reconciling bank accounts isn’t complicated, but there are steps you need to follow to do it accurately. Bench has a helpful guide to bank reconciliation for your business.
When tax season rolls around, you may need some help navigating through it. Especially if this is your first time filing taxes for your business, it’s wise to enlist the help of a CPA. They can double check your books and make sure everything adds up, so your tax filing is accurate. They may also be able to identify tax deductions you’ve overlooked. That means your business will save more money in the new year!
On the last day of the year, close the books. That means adding up all your numbers for the year, making sure everything is balanced, and preparing year-end financial statements. You’ll use those statements to file your tax return. If you have a bookkeeper, they’ll close the books for you. They’ll also complete other preparation steps, like checking transaction categories and balancing the books.
If you’re claiming itemized deductions on your tax return, you need to make sure that each tax deduction is backed up by documentation. In the event that you’re audited, you’ll need those receipts to support your claims. If you can’t prove that your deductions were valid, the IRS can penalize you.
Make sure you hold on to the following:
Receipts for business purchases are one of the most common types of business records. You should hold on to every receipt for at least three years. That’s the length of the statute of limitations—the amount of time the IRS has to audit you. On every receipt you keep, be sure to list the date, what you paid for, and what the purchase was. If you’re writing off a business meal, be sure to list on the receipt who attended the meal, and the business-related topics you discussed.
Going paperless cuts down on clutter and helps make sure nothing slips through the cracks. Apps like Expensify allow you to photograph and categorize your receipts, then upload them to the cloud—where they’ll be organized by type, and protected from hazards like sudden gusts of wind.
When you’re self-employed, it’s up to you to figure out how much you owe in taxes, and pay it to the IRS. That may sound like a big responsibility, but don’t worry, these few shortcuts can help.
Generally speaking, be prepared to pay about 30% of your gross income to the IRS as taxes. If you’re going back retroactively to put together money for tax payments, get together 30% of your income for the year. (This is when it’s handy to have year-end financial statements—so you can easily see how much you earned for the year.) Next year, save yourself the hassle of sorting out taxes retroactively: Set them aside as you earn.
There are three methods for setting aside taxes as you earn income: Per-payment, monthly, and yearly.
Dipping into your tax savings is a major no-no. You don’t want to come up short at the end of the year, unable to pay your taxes. The best way to keep your tax withholdings separate from the rest of your income is to create a separate savings account. That way, you’ll know exactly how much you have—and you’ll be less tempted to spend it.
Every year, the IRS makes changes to tax laws. That could mean you’re no longer eligible for certain tax deductions, or the deadlines for filing certain forms have changed. These changes are important to stay on top of. Each year, the IRS puts out Publication 5318. It tells businesses what kinds of changes to tax law they can expect in the coming year. Make sure you read it when it’s published!
You may want to hire a CPA to file your taxes. It’s their job to stay on top of the latest changes in tax law, and make sure you’re in compliance.
If you use Bench to do your bookkeeping, you can opt for BenchTax. Your bookkeepers will work one-on-one with tax professionals to get your taxes filed and 100% compliant with the current year’s tax laws. With BenchTax, you don’t need to bring your books to a CPA, and explain how your business works. Since your Bench team produces all your financial statements throughout the year, and has hands-on knowledge about your expenses, they can work with professional tax filers to make sure your return is prepared accurately, and taking advantage of write-offs.
This New Year’s Eve, make a resolution to run your business more smoothly and effectively than you did the year before. Here are a few simple steps you can take to make it happen:
By taking five straightforward steps at the end of the year, you can make sure your next tax season goes smoothly! Need more advice on how to run your business smoothly? Check out our blog for more free resources!