The Secret To An Easy And Stress-Free Tax Season For Your Business
Updated on March 18, 2020 to include new tax payment delay changes and deadline information.
Spring is in the air and with it comes warm sunshine, colorful flowers … and taxes. Counting the days until April 15 can be stressful for anyone, especially small business owners. Just like the oh-so-dreaded seasonal allergies of spring, tax time can sneak up on you, cause a massive headache, and leave you feeling dazed. But let me let you in on a little secret: tax season doesn’t have to be difficult or stressful.
In this post, we’re going to look at the top tax tip that can help ease the burden of tax time. It’s easier than you think (and yes, it’s 100 percent legal!) We’ve also included a few bonus tips that will simplify preparing and filing your taxes. If the mention of taxes makes your pulse speed up and sends your anxiety into overdrive, these tips are for you. So, sit back, take a deep breath, and read on to find out how to make this tax season the easiest and most stress-free one yet.
#1 Tax Tip: Use Accounting Software
If you want to transform tax season from a complete nightmare to just another normal part of owning your business, there’s one tip to keep in mind: use accounting software. Other than having an accountant in your office or a tax pro on speed dial, you won’t find a more useful resource for doing your taxes than accounting software.
If you don’t already use accounting software, now’s the time to start. Even when it isn’t tax season, accounting software helps you keep your finances in order. Many programs also have additional features such as project management, time tracking, employee management, invoicing, and more.
Some business owners shy away from accounting software because of their lack of accounting experience. Fortunately, there is software available for all skill levels from beginner to pro. If the expense of accounting software has been holding you back, you’ll be surprised to learn that there are plenty of affordable options … and some programs are completely free!
In other words, there’s no reason for you to avoid integrating accounting software into your business. After all, who doesn’t want to simplify their business processes, especially preparing and filing tax returns?
8 Ways Accounting Software Can Help You File Taxes
Looking for a good reason to use accounting software to help you file taxes? How about eight? Accounting software doesn’t just help you keep track of your finances from day to day — it also helps when it comes time to do your taxes. It’s even useful post-filing … like if you get hit with an IRS audit. Keep reading to see why you’ll be glad to have good accounting software when tax deadlines are on the horizon.
Keep Detailed Expense Records
One of the most important things you can do for your taxes (and for your business in general) is to keep detailed records. Especially when it comes to expense tracking, make sure your data is up-to-date and categorized. That will make it easier to quickly determine your profits and losses.
Almost all accounting software programs have expense tracking features, and many even allow you to attach pictures of receipts for your own personal records. Being able to set custom categories for transactions is also a nice plus, especially if you design them to correspond with IRS categories. This will save you time, money, and stress come tax season.
Track Your Income
It’s vital to make sure your income/sales information is up to date. You want your cash flow, both negative and positive, to be accurately represented. It’s also important to know whether you run your company using accrual or cash-basis accounting.
- Cash-Basis Accounting: Records income when products/services are paid for (i.e. when you receive payment from a customer on an invoice)
- Accrual Accounting: Records income when products/services are incurred (i.e. when you send the invoice to a customer, even if they haven’t paid yet)
The type of accounting you use will determine which recent transactions count as income for the current year, and which are saved for next year’s taxes.
Separate Personal & Business Expenses
Several software options, like Quicken Home & Business, allow you to separate and categorize expenses as personal or business. Ideally, you’d want to have a separate business account, but if you don’t, this feature is incredibly important.
According to personal finance expert, Eric Tyson:
One of the IRS’s biggest concerns is that as a small business owner you’ll try to minimize your company’s profits (and therefore tax) by hiding business income and inflating expenses.
The IRS may also suspect that your reported deductions are personal expenses rather than legitimate business expenses.
The ability to separate personal and business transactions could save you a lot of headaches, and clear records will take the IRS’s radar off your back (or at least provide protection if you are audited).
Save Money With Deductions
Most accounting software programs allow you to track mileage deductions. Some even support travel and home office deductions. But while these features can be incredibly helpful, your accounting software probably only scratches the surface of all the deductions you could claim on your taxes.
In almost any blog, book, or article about small business taxes, the biggest mistake small business owners make is not recording enough deductions. Yes, you heard that right. If you are self-employed or own a business, you could seriously be missing out on some savings.
According to the IRS, you can deduct any business expense that is “both ordinary and necessary.” Here are some of the most common, and least known, deductions available for small business owners:
- Home office
- Car and truck expenses
- Office supplies
- Office furniture
- Rent on machinery or equipment
- Rent on business property
- Computer software and subscriptions
- Insurance premiums
- Start-up costs
Your accounting software can definitely get you started down the right track, but most software is limited to just the basics. Be sure to consult a licensed CPA, read our complete business deductions guide for more details and to see if you qualify for these tax breaks.
Track Business Inventory
If your accounting software has an inventory feature, use it! Companies manufacturing products or reselling items will have to value inventory at the beginning and end of each tax year. These records will give you your COGS for the year, a calculation that is needed to complete several tax forms.
Run Necessary Financial Reports
A valuable feature of any accounting software system, reports give you a solid way to monitor the financial health of your business. They can also be extremely useful when filing your taxes. So long as your books are up to date, you can pull key information from reports to fill out your taxes easily and efficiently.
Make life simpler for yourself (or your accountant) and have the following reports accessible and ready to go when you fill out your taxes:
- Profit & Loss Statement: This is arguably the most important report come tax time. Profit and loss statements (or income statements) help calculate your net profit for the year (or your net losses, though hopefully, that isn’t the case). You will have to use your net profit on multiple tax forms.
- Expense Report: It is important to generate an expense report in addition to a profit and loss statement so that you or your accountant can see each transaction in detail.
- Income Report: The same is true of an income report.
- Balance Statement: A balance statement (or balance sheet) is used to see the assets and liabilities of your company. Assets are often used to determine equipment deductions or depreciation.
- Payroll Summary: If you run payroll, be sure to have a payroll summary report that shows the year’s payroll records.
- Sales Tax Summary: A sales tax summary will come in handy when calculating your sales tax returns.
- Mileage Log: If your software doesn’t have this feature, it isn’t a deal-breaker. But if you are able to track deductions, make sure you have this report ready to go.
All decent accounting solutions should provide the above reports (the names of these reports may vary slightly, depending on the software). If yours doesn’t, it might be time to upgrade your accounting software.
Be Prepared For An Audit
If you are ever audited by the IRS, you will need clear records of all your business transactions.
Most accounting programs will let you export reports (usually via .csv or.pdf). It is important to determine which export capabilities your software offers ahead of time. You should also save your business records in a safe location (or multiple locations), as many accounting programs only let you run reports on the current year. Believe me, you don’t want to be trapped in an audit and unable to find a past year’s report. Read this post for more audit prevention tips.
Get Tax Support To Simplify Filing
The tax forms you must file will depend entirely on the type of small business you own. Some of the most common taxes business owners face are income tax, estimated quarterly taxes, and self-employment taxes. Basic tax forms include 1099-MISCs, Schedule Cs, W-4s, W-2s, and 1040s. (To see which forms are required for your business, check out the IRS’s Small Business Tax site.)
Your accounting software should make it easier for you to file these forms. Many companies offer at least some form of tax support. For your convenience, here is a list of support services offered by the most common software providers:
- Xero: Sales Tax Returns and Schedule C
- QuickBooks Online: 1099-MISCs and W-2s
- QuickBooks Pro: 1099-MISCs, 1096s, 940s, 941s, 944s, W-2s, and W-3s
- QuickBooks Self-Employed: Estimated Quarterly Taxes, Deductions, and Schedule C
- FreshBooks: 1099-MISCs
- Sage One: 1099-MISCs and W-9s
- Sage 50c: 1099-MISCs, W-2s, and W-3s
- Zoho Books: 1099-MISCs
- Wave: 940s, 941s, W-2s, and W-3s
Be sure to check with your software company about how their tax support works. Do they do e-filing? Do they automatically fill out the forms electronically? Do you have to pay for the forms? These are all good questions to consider, and answers vary by company.
If you are looking for accounting software that has good tax support, check out our article, The 3 Best Accounting Software Programs For 2020 Tax Support.
5 Bonus Tips To Make Small Business Taxes Easier
Finding the right accounting software and integrating it into your business plays a big part in simplifying taxes, but there are other steps you can take throughout the year to make the process less burdensome. Integrate these five bonus tips into your routine to ease tax-related stress.
Track Deductions Throughout The Year
Tax deductions decrease your taxable income, which in turn reduces what you owe in taxes. Any smart business owner knows the importance of cutting costs, and claiming deductions is a simple way to keep more money in your pocket. Instead of waiting until the 11th hour to compile your deductions, track them throughout the year. Not only does this make tax time less stressful, but it also ensures that you don’t overlook any important money-saving deductions.
Learn more about the deductions that you should be tracking for your business.
Stay On Top Of Your Finances
Staying on top of your finances isn’t just necessary for taxes — it’s also a good business practice for assessing the health of your business. Record your income and expenses on a regular basis, and reconcile your bank accounts at least monthly. Send out invoices regularly, which also ensures you get paid and maintain your cash flow. Adding these tasks into your regular routine means less work (and stress!) come tax time. The good news is that you can easily record transactions, create and send invoices, and track finances using accounting software.
Learn Which Tax Forms You Need To File
As a business owner, you should know which tax forms you need to file. Familiarize yourself with these forms to make tax time less confusing. While the specific forms businesses file vary based on their legal structures, there are a number of common forms that most business owners should know. This includes:
- Form 1040: Used to submit individual income tax returns.
- Schedule C: Used to report profit or loss from your business.
- Schedule SE: Used to calculate Social Security and Medicaid taxes due on self-employment income.
- W-2: Given to employees to report wages and taxes.
- W-3: Sent to the Social Security Administration along with copies of W-2s to report wages and taxes.
- 1040-ES: Used to calculate and pay quarterly estimated taxes.
- 1099-MISC: Sent to the IRS and independent contractors that were paid at least $600 by your business.
Of course, there may be additional forms that you have to file or some on this list that aren’t applicable to your business. If you’re unsure of what forms you need to file, consult with an accountant or tax professional.
Know When Your Taxes Are Due
Submitting a form late or filing your taxes after the deadline may result in hefty penalties from the IRS. Avoid these costly mistakes by knowing the due dates of important tax forms. Payment deadlines for estimated quarterly taxes vary from year to year. Also, if the day for filing an annual return falls on a Saturday, Sunday, or holiday, the deadline is moved to the next business day.
Because of the coronavirus, the IRS has changed the tax deadline from April 15th to July 15th. Individuals and business owners can now pay and file taxes by July 15th. Individuals can delay payments on up to $1 million dollars, and corporations can delay payments on up to $10 million.
For self-employed individuals, estimated quarterly taxes resume to their normal schedule on September 15, 2020. Visit the IRS for more information.
|File Annual Tax Return||April 15|
|File Annual Tax Return w/ 6-Month Extension||October 15|
|Pay Quarterly Estimated Taxes (for 2020)||July 15, 2020|
|September 15, 2020|
|January 15, 2021|
|File W-2s with SSA||January 31|
|Form 1099-MISC to Contractors||January 31|
Be Prepared Before Meeting Your Accountant
Let’s just cut to the chase here: accountants aren’t cheap. Most accountants charge by the hour, which can add up quickly if you’re not careful.
To prevent unnecessary expenses, be prepared before meeting your accountant. By taking some time to prepare, you can significantly cut down on the time it takes an accountant to prepare your taxes. Make sure that you have all financial statements and important documentation ready, and ensure that all information is accurate. Unsure of what you need? Learn more about what your accountant needs to file your taxes.
Sure, filing taxes is never fun, but you can alleviate some of the pain by following the simple tips mentioned in this article. By implementing accounting software into your business and preparing throughout the year, the stress that comes with tax season will soon be a thing of the past. Good luck!