Three Tips for Small Business Tax Preparation
Tax season is upon us. Is your small business ready? Tax season can be stressful, and it often seems as though it adds a lot of work for small business owners who are already balancing many different priorities. From dealing with human resources (HR) to marketing and operations initiatives, it seems easy to let tax preparation fall by the wayside. Luckily you are not alone. One of the biggest pieces of advice that Focused Energy can offer for small business tax preparation is simple: have processes in place year-round.
Managing the right accounting tasks on an ongoing basis helps to always be prepared to pay taxes rather than trying to scramble to accomplish them at the last minute. By preparing to pay taxes early and on an ongoing basis, it serves businesses two-fold. It helps to maintain a well-organized business and deal with less crunch time in April.
These three business activities can help make tax season less of a headache.
1. Maintain accounting diligence
Throughout every month of the year, remain diligent with accounting processes and financial management. Make sure to:
Track business expenses
Make sure to enter expenses and reconcile receipts at least monthly. Include all those small things that add up, such as monthly subscriptions, team lunches, educational classes, and any ongoing expenses that can often fall off the radar. "Small" expenses can add up quickly.
Use the right tools to organize business expenses
Using a spreadsheet to track business expenses is cumbersome and time-consuming. We recommend using tools to either digitize receipts or pull expenses directly into accounting software. This simple step is extremely valuable for a business. It saves time and cuts down on the manual process of tracking expenses.
Proper documentation can help reduce taxable income—a huge issue when tax time arrives. If those expenses have already been tracked, it’s not a struggle to find or organize them when tax time arrives.
2. Utilize accounting systems
Companies can save significant time, effort, and money by linking financial accounts to an online accounting system. Simply linking the two helps automate tedious data entry as well as improves efficiency related to tracking revenue and expenses.
Use the right accounting software
Accounting software like QuickBooks or Xero can provide more organization and insight for financial documents. Companies can, for example, get financial statements and balance sheets at the press of a button. This makes it easier for companies to manage many of their financial needs.
Free E-Book: Finding the Best Cloud-Based Accounting Software
Take full advantage of accounting software capabilities
Make sure to check into the features of the current business accounting software. It’s not necessary to utilize every option in the system but use features that can ultimately save your company time and money.
As a business owner or leader, having accurate statements at your fingertips is an incredible help come tax season and for business decision-making at any point in the year. The last thing you want is to spend another tax season struggling to crunch the numbers you need. Utilizing effective accounting software helps to better prepare key information and have the right data at hand when you need it most.
3. Correctly classify people and expenses
Correct classification of employees, as well as expenses both, make a big difference in preparing for tax season. Doing this last minute in order to file taxes is not only incredibly frustrating but also introduces the potential for errors. Make sure to take these critical steps:
Clarify new hires' employment classification when they come on board, and make sure to fill out the correct tax forms for that status. Instilling processes during hiring and onboarding avoids headaches later on. Employees and independent contractors are different classifications of workers from an employment and tax perspective. Misclassifying independent contractors as employees--or vice versa--can lead to paying higher taxes. It can also cause significant legal issues down the road. Work with your HR team periodically to ensure that all team members’ paperwork is up to date and review employee classifications during this time.
Think through the categories and purposes of business expenses. Some expenses are tax deductible, and others are not. Some business expenses can be claimed completely, and others can only be claimed partially or as a percentage of the total cost. If you are a small business owner, you also need different classifications for personal expenses and business expenses. Keeping them separate and classifying them appropriately will make life much easier when tax time arrives.
Contact us now to learn more about our accounting services and how we can help keep your business books in great shape all year long.