10 Things to Keep in Mind During Tax Preparation Season
The deadline to file taxes is right around the corner! Before you consider your tax prep over, check out this list of ten important things to ensure your small business is ready.
Obtain your 1099-K Form
Whether you are an independent contractor or a small business that accepts card payments, it is possible that you will receive a Form 1099-K. You are required to be issued a Form 1099-K if you have either a) processed more than $20,000 worth of payments, or b) processed more than 200 individual payments with a third-party payment network. Should your business not meet these criteria, some card payment processing entities will still issue this form to be on the safe side. This form will provide you with information such as the number of transactions and gross amount of payment transactions. Once issued, this form will help you obtain an accurate depiction of gross receipts for your income tax return and ensure that your records are up-to-date.
Gather Records of all Cash Receipts or Cash Disbursements
While your Form 1099-K reflects third-party card transactions, it doesn’t tell the whole story. Maintaining a record of all cash receipts and cash disbursements is essential to correctly report business income. Proactively collect these records throughout the year to take the guess work out of tax prep. Remember, business income is a culmination of cash, card transactions and checks!
Reconcile your Accounts
Reconciling your accounts ahead of tax season guarantees that the official record of money leaving/entering your account(s) matches your actual expenditure/deposit history. Should you wait until tax season, there may be outstanding items or receivables giving you a false impression of your financial standing.
Account for Outstanding Checks
What’s worse than a stressful tax season? Finding out that you don’t have as much money in your account(s) as you thought. Accounting for outstanding checks (checks that are still in circulation that have not been deposited/withdrawn) often fly under the radar. To avoid this, ensure that you document each check you write, but take things a step further. With each check, create a procedure with a deadline (for example: 60 days after a check is written) to contact the recipient and/or void the check (and document it of course). In doing so, you can plan for the expense, and will have an accurate view of which checks are to be withdrawn from your account, and which checks have already cleared. Furthermore, check payments must be included in your businesses’ declared income and expenditures, so it is imperative that all checks (issued and received) are accounted for.
Be Aware of Important Dates
Depending on the classification of your business, deadlines for tax submission and distribution of W2s and 1099s can vary each year. Map out the entire fiscal year in advance to be sure you don’t miss any important dates. For information about deadlines this tax season, view the IRS’s online calendar for business and self-employed individuals here.
Set Aside Funds for Estimated Payments
The IRS requires businesses expected to owe $1,000 or more in taxes upon filing to pay estimated taxes. As most businesses naturally fall into this category—including sole proprietors who are paid as 1099 contractors—it is best to be prepared. While paying estimated taxes can appear to have a negative impact on cash flow in the short-term, it will minimize liability in the long run. If you don’t make estimated payments and your business thrives, you could be subject to both an underpayment penalty and a large tax bill from the IRS come tax season.
Evaluate Whether you can Deduct your Home Office
Chances are, you can deduct your home office in this year’s tax filing. However, the deduction can be somewhat complex. First, you will have to calculate the size of your workspace and the amount of time spent in it compared to the living space. Per the IRS guidelines, the rate of $5 per square foot (as of 2019) can be multiplied by the square footage of the workspace to arrive at a dollar amount for the deduction. Just remember, to qualify, your home office must be exclusively used for work. Don’t hesitate to consult a tax professional if you have questions.
Refer to Last Year’s Return
Your return from the last tax year is an invaluable resource as you prepare your current filing—not only can you use this to predict this year’s outcome, but the return serves as a roadmap for complex sections. Additionally, last year’s return helps you keep track of your finances year-over-year to assess business growth!
Make Tax Planning a Habit
Remember that tax preparation is a year-round job. Pay close attention to expenses, outstanding invoices, checks and other payments. The end of the year—the April whirlwind—doesn’t have to be a scary time characterized by searches through a hanging folder filled with receipts. Stay on top of your businesses’ transactions year-round to make life easier for yourself during this, and future, tax season(s).
Consult a Tax Professional
Taxes can certainly be intricate for small businesses, but you don’t have to go it alone. If you have questions or concerns, do not hesitate to reach out to a tax professional to help you find solutions tailored to your business.
Sources consulted:
Slack, Mike. “What Is Form 1099-K and Why Did I Get One?” Tax Information Center, H&R Block, 24 Jan. 2018, www.hrblock.com/tax-center/irs/forms/what-is-form-1099-k/.
“Understanding Your Form 1099-K.” Internal Revenue Service, Irs.gov, 17 Sept. 2019, irs.gov/businesses/understanding-your-form-1099-k
