Small Business Taxes
Everything a Small Business Needs to Know to Prepare for Tax Time
If you’re a small business owner looking to make tax time as smooth as possible, then this is for you.
While 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 find yourself behind and it’s mid-January, fortunately, 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 you must deal with to get through a successful tax experience: human resources compliant activities, bookkeeping and clean-up, and tax planning.
This section is largely about processing tax documents on time, which are related to your W-2 employees and 1099 contractors. Both documents are due on January 31st each year, so you need to process them by the 25th 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 to help you stay on top of this all year so that at tax time, you’re able to file these documents on time without a problem. Using the size of your business as a metric will help you determine the right payroll service for you. There are companies like: Sure Payroll, Gusto, Paychex to Oasis, ADP, and more.
Gather W-9s for all vendors who you pay more than $600 and aren’t a corporation
For all vendors whom you pay more than $600 during the year, such as a landlord or lawyer, you’re required to send them a 1099, if they’re not incorporated. Your accounting system will enable you to track vendor’s Business ID 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. That way, at tax time it will only take 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 per 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, request a W-9, if you don’t already have one. You can send them this link ,for convenience, for them to fill out.
- Enter the W-9 information 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. 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 their help files or call them.
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’ 1099s, it’s a good idea to compare this information in your accounting system to ensure that all payments made through the 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 don’t 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!
Once you’re done, you’ll receive a 1096. A 1096 is a summary of your 1099s, which you may need for your tax return and you should provide to your CPA, if you have one. You’ll receive a W-3 in the package of W-2s your payroll company will provide. Provide copies of everything to your CPA, if you’re working with one.
Bookkeeping and Clean up
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’ll also make any audits super easy to comply.
Here are a few tips on how to clean up your books in one day:
- Make sure any expenses 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 and utility bills, if you work from home. It’s tricker if you own your own home to claim rent expense, but you can still take some of the electricity 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 there 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 your next year’s planning.
- Review your balance sheet. Make sure all of your loans and interest paid over the year are in alignment with the bank’s documents they send 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.
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, but 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 harder 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’s 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.
- Has other clients in my industry.
- Comes recommended!
- 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 both 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 59 ½. You can contribute a small amount in an IRA all the way up the max in a SEP at $57,000 (2020 limit) depending on your sales, income, and cash flow. When 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 give 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.
Do you qualify for any tax credits?
Ask your CPA about tax credits for environmentally friendly subsidies available such as in New York where 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, your state, and local tax authorities.
While 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 new year and achieve your new goals.
Belinda DiGiambattista is a serial entrepreneur, business coach, and outsourced financial controller.
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