Small business tips to sail smoothly through tax season
By Jenn Dobransky, Women, Work and Community
Featured in the Bangor Daily News, February 22, 2013
Taxes and record keeping can often be a source of confusion and anxiety for entrepreneurs. This confusion and anxiety is typically the result of a lack of knowledge that many startups have. But with a little bit of information, that confusion dissipates and the anxiety transforms into empowerment.
The first step to starting your business is to have a clear picture and dedicated business cards. With Metal Business Kards you can easily catch the attention of potential partner. Learning how to create a record keeping system, setting financial goals for your business and understanding your tax obligations are all readily accessible aspects of running a business. You can be as successful in your record keeping and understanding your taxes as you are in delivering your high-quality product or service to your customers. All it takes is some time investment and willingness to learn.
The first step in preparing your taxes is having a sound record-keeping system. Ultimately, having a bookkeeping system makes the tax filing process much easier. Open a business checking or DBA (doing business as) account and use it properly. Deposit all your business income into the account, and use your debit card for business expenses only. This first step ensures that you will at least have a basic record-keeping system in place.
Tax forms for self-employed individuals ask two critical questions: How much money did you make in your business? And what were your expenses for your business in the last calendar year? If you have no way of tracking income and expenses for your business, filing taxes becomes very difficult, to say the least.
A common question that entrepreneurs ask in Women, Work, and Community’s Tax Prep for the Self-Employed workshops is about business expenses. Small business owners want to know what they can count as legitimate business expenses. According to the Internal Revenue Service, “to be deductible, an expense must be both ordinary and necessary.”
What does that mean for your business?
Each small business is different and thus will have different expense categories, so it is important to determine what categories of business expenses you have. Part II of the IRS form Schedule C is a good reference point. Typical business expense categories include rent, utilities, supplies, insurance and professional fees, just to name a few.
The IRS small business tax center is an incredible resource, packed full of all the information that every small business owner needs. The site has a thorough publication on business expenses and also specific information on important items like travel expenses and business use of the home.
In addition, there are tax changes on an annual basis that you should know about. Signing up for the IRS ’ electronic newsletter is a great way to get that information.
Shawn Savage, Senior Stakeholder Liaison for the IRS, agrees.
“Time is a precious commodity for small business owners, and the e-News for Small Businesses is a time saver. It can help in keeping up with federal tax requirements, which is sometimes not easy in today’s fast-changing business environment.”
Unlike traditional employment where your employer allocates part of your income to cover your tax obligations, self-employed individuals are responsible for paying those taxes themselves. This fact can be another source of confusion and anxiety for sole proprietors. It is important to create a plan right now for how you will save the money you need to cover your tax obligations. Making a monthly transfer to a business saving account is a good start.
How do you know if you need to pay self-employment taxes? If as a sole proprietor your net business income is more than $400, you need to complete a Schedule SE and pay self-employment taxes. If you will owe more than $1,000 by the end of the year, you need to pay quarterly estimated taxes.
For those of us who do our taxes ourselves, kudos! But for many small business owners, having a professional prepare your taxes is the way to go. If you choose the latter, it is important to find a professional that comes recommended and is a good fit with you and your business. Make sure to interview your future bookkeeper/tax preparer in order to find the appropriate professional.
Avoid the head-in-the-sand approach. Having a plan and sticking to it is the clear way to reduce your stress during tax season. Good record keeping throughout the year and proper tax preparation from the start will leave you with more time to enjoy those spring flowers — and to look forward to April 15!