One negative side effect of entrepreneurship is dealing with taxes. But you can use these seven tips starting today to make your life easier next tax season.
1. First, understand how businesses are taxed
There are essentially two ways the IRS taxes businesses and entrepreneurs. One is “pass-through” in which the business’ owners pay taxes on the business’ profits rather than the business itself. The other is “double-taxation” which normally only applies to corporations. You can read more about this in this post: How the IRS Taxes Businesses and Entrepreneurs
2. Use a good accounting platform
This is one of the most important things you can do to make your taxes easier. If you track and organize your income and expenses (see below) then you can usually just run an export at the end of the year to manage most of your tax filings. Two cloud-based platforms that are highly recommended are xero.com and freshbooks.com. Both have reasonable monthly fees, receipt tracking, the ability to sync with banks and other parties, quick and painless reconciliation processes, and invoicing and billing functionality.
3. Create a good chart of accounts
A chart of accounts is just an organizational structure that allows you to allocate your income and expenses into different categories. For example, you may allocate some expenses to marketing and others to office supplies. The key is to create a chart of accounts that matches the way you do business. For example, we separate marketing into subscription marketing expenses and non-subscription marketing expenses so we can better track our expenses.
4. Use a good payroll provider
If you are paying any employees (or a lot of independent contractors) it is best to use a payroll processor. The reason is that (at least with employees) you will be required to withhold and remit portions of their payments to the government for tax purposes. This is a nightmare to do on your own. For a low monthly fee you can use a cloud-based payroll processor like gusto.com (FYI – that’s our referral link). They can help you to manage withholdings, payments to the government, and also employment-related government filings. At the end of the year, the documents they can give you will make your taxes significantly easier.
5. Collect W9s from your contractors
If you pay an independent contractor more than $600 this year, you’ll have to file a 1099 for that contractor. To do that, you should collect W9s from your contractors so you have the information you need. You can read more about this in this post: W9s & 1099s – What Freelancers & Entrepreneurs Should Know
6. Make and track estimated payments
Most entrepreneurs and freelancers are required to make estimated payments to the IRS and your state’s DOR throughout the year. If you don’t do this, you’ll end up owing everything in a lump sum come tax season and you’ll also owe penalties for failing to pay earlier. To learn more and figure out how much you should pay, we highly recommend you talk with an accountant (see below).
7. Meet with an accountant now
Don’t wait until the end of the year to meet with an accountant. Talk to one now so they can help you get set up and ready for success. Plus, if you plan to have them run your taxes, they can make sure you are set up in a way that makes it easy for you to work with them when tax season arrives. You might also want to check out this post: Finding an Accountant – What Entrepreneurs Should Consider
*This article is very general in nature and does not constitute legal advice.