Preparing for tax time as a small business can seem daunting, but it doesn’t have to be! Here are some tips to make tax time as smooth as possible for your small business.
Tax season for small businesses
Keeping track of your business expenses throughout the year will make filing easier when the time comes. Preparing taxes can be a daunting task, but with the right attitude and resources, small businesses can ensure that their taxes are filed accurately and on time.
It is critically important to understand what kind of filing requirements you have based on your type of business. For example, those of us who are self-employed will generally need to file an individual income tax return in addition to having paid estimated quarterly taxes throughout the year. Knowing which forms you need is key to getting started with your tax prep process.
Gather required documents to file self employment taxes
The most important document needed for filing self-employment taxes is an IRS 1040 Schedule C form. This form must be filled out accurately in order to report any business profits or losses during the year. If you are self-employed and want to write off home office expenses, you must also file Form 8829 which covers expenses like utilities and rent. Other documents that may be needed include invoices detailing income earned from customers, records of expenses related to the business such as supplies or equipment purchases, and proof of payment for any subcontractors used during the year.
Having an organized filing system for income, expenses and other financial statements is key to navigating the tax season with ease. Using the right accounting software, like Freshbooks or Quickbooks, can make bookkeeping easier for entrepreneurs, freelancers and small businesses.
Quickbooks allows users to track income and expenses in real-time from multiple accounts. This makes it easy to view essential financial information at any given time. Quickbooks has built-in features invoicing tools that enable users to bill customers quickly while keeping financial records up-to-date.
How do self employed taxes differ for sole-proprietors and LLCs?
Self-employed taxes can be confusing for even the most seasoned business owners. For those who are just starting out, understanding the differences between how taxes are calculated for sole proprietors and LLCs can seem daunting.
Sole proprietors report their income and expenses on a Schedule C form when filing their personal tax returns. They also must pay self-employment taxes including Social Security and Medicare.
LLCs have a few more options available, like electing to be taxed as a corporation or partnership by filing Form 8832. This gives them the opportunity to minimize their tax burden by taking advantage of deductions that may not be available to sole proprietorships, or they can choose taxation similar to a sole proprietorship with certain additional benefits like pass-through taxation. These decisions should generally be made before tax time and will determine how you file.
Know Your Deductions
Many of the available deductions for self-employed entrepreneurs are similar to those that traditional employees can claim on their tax returns. Home office expenses, business travel costs, start-up fees, professional membership fees, and other related costs could be deductible. Expenses related to materials used in your business such as supplies or advertising may also qualify as a deduction.
It’s important to keep thorough records of all expenses related to running your business so you have evidence if needed at tax time.
Use the right software to file self-employment taxes
If you want to file your own taxes, using the right software can help you save time and money while ensuring that all of your tax documentation is filed correctly.
There are many different programs available to help the self-employed with their taxes. The most popular options include TurboTax, H&R Block, TaxAct, ezTaxReturn. Each program offers differnet features and pricing depending on the level of complexity in your filing, but all support Schedule C forms for the self-employed. For basic tax filing needs, TurboTax or H&R Block may be best suited; however if you need more detailed guidance, then TaxAct or ezTaxReturn might be better options.
File on time
When it comes to filing and paying self-employment taxes, the old adage “time is money” rings especially true. You should already be in the habit of making your estimated quarterly tax payments on time. Estimated taxes are payments made throughout the year that are required by the IRS for most self-employed situations. Typically, these payments are due every quarter by April 15th, June 15th, September 15th and January 15th of the following year.
The most important step in filing annual self-employment taxes on time is to complete your Schedule C form as soon as possible after your business year ends. This form requires detailed information about your profits or losses, expenses, deductions and other relevant information for self-employment tax purposes. Make sure to keep accurate records of all your business transactions throughout the year; this will make completing your Schedule C easier by providing an accurate summary of your finances for the entire year.
Stay prepared throughout the year
Tax season is one of the most dreaded times of year for many people, but it can be especially daunting for the self-employed. The added responsibilities mean more effort and time must be dedicated to preparing taxes and ensuring everything is accurate.
Our best advice is to stay up to date on your record keeping throughout the year. With proper bookkeeping and organized receipts, self-employed taxes don’t have to be a nightmare.
I am the founder of VIRTUALCOPIA Business Collective and a self-employment enthusiast. I hope to inspire others to take a leap into their own entrepreneurial journeys while providing resources and support, and facilitating a community.