Ah, tax season – the annual adventure that makes you question your life choices whilst simultaneously reminding you that running a business isn't for the faint of heart.
It's that time of year when you face off against the ultimate financial nemesis: the IRS. But fear not, intrepid entrepreneurs! TFA is here to provide 3 steps to get ready for taxes.
1 - Get your bookkeeping up to date.
This isn't going to surprise anyone but you need to have completed numbers.
Your tax preparer is going to ask for two reports:
- Profit and loss
- Balance Sheet
You will find these reports in your accounting system, and to ensure the data is accurate, you want to make sure your bookkeeping is caught up. Your tax preparer is going to calculate how much tax you need to pay based on these reports so having accurate data will ensure you are paying the right amount of tax; not too much or not too little.
2 - Track your mileage.
To reduce your taxes with your mile or car expenses, you will need to give your tax preparer two numbers;
total miles driven for the year
total miles driven for business purposes
You can track your miles in a document or spreadsheet, or we recommend using MileIQ (no affiliation). It makes it easy to track your miles and identify which miles are related to personal or business.
If you are tracking your miles manually you want to make sure you include:
date of travel
from and to destinations
number of miles (don't forget to add if it's a round trip)
Note, miles relating to commute (to and from your home) are not considered business miles.
3 - Save for taxes
In the wise words of Kevin O'Leary, taxes are the biggest expense in your business, and unfortunately there is no way to avoid them.
Technically, it's money that you've already received, so the key to successful tax saving is to put aside money on a monthly basis, and make payments towards your quarterly estimated taxes. This is so you are paying as you go and you won't get lumbered with a huge tax bill (and penalities if you're required to pay estimated taxes) come tax time.
We recommend speaking with your accountant or tax preparer on how much you should be putting away but as a general target, we advise 30% of your profit.
One very important thing to note is that unless you are a C Corp, your business does not pay taxes. The income generated in your business gets reported on your personal tax return. Therefore, your tax liability is also determined by your personal circumstance. If you have other forms of income or dependents that reduce your taxes, then your liability will be impacted, and how much cash you need will change. If you have other forms of income you want to make sure you are saving for taxes in those other forms as well.
Getting ready for taxes as a business owner might seem like a big task, but it's all about staying organized, using helpful tools, and knowing when to ask for help.
Remember, it's not just about surviving tax season; it's about setting your business up for success all year round. By following these steps, you can make tax time a little less stressful and maybe even find some opportunities to save money.
While taxes might never be the most exciting part of running a business, they're a crucial part of keeping things running smoothly. So, take a deep breath, stay prepared, and always reach out if you have any questions. We do not recommend 'Googling' your way through taxes.
You've got this!
DISCLAIMER
The Finance Agency are accounting professionals however, any information contained or given is for educational purposes only and does not a substitute for financial advice from a professional who is aware of the facts and circumstances of your situation. Please consult with a CPA, tax preparer, or accountant that is working with your specific business situation and State regulations.
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