One of the highlights of my year is gathering receipts for my small business tax preparation, W-2s, donation slips, and my student loan payment records so I can file my taxes by April 15. “Surely you jest,” you say, as your face squinches into a judgmental expression. Yes, yes I do jest.
While preparing to file taxes is not a source of immense pleasure, it’s nice to tackle a task that will inevitably loom over me for a quarter and a half if I delay the inevitable. And if you’re a small business owner who doesn’t run an accounting firm, your sentiment might echo mine, but peppered with a bit more anxiety.
So I’d like to give you a few nuggets of advice that will help prepare and ease you into the small business tax preparation process. Please feel free to raise your hand in the comments section if you have any questions.
Keep solid financial records
The first thing that any small business owner should do is keep good records, which requires organization and an understanding of business expenses versus personal expenses.
This one shouldn’t require too much of an explanation, but if that new, beautiful computer setup is used more for online shopping and Facebook posts than business purposes, you’re going to want to file that away in your personal expense column, not business.
In the words of my small business-owner CPA father, “The business checkbook is not the owner’s personal checkbook.” Maintain a separate checking account and credit card for your business, but know that a credit card company may not issue a business credit card account immediately until a payment pattern has been established. In this case, the business owner may use a personal credit card solely for business expenses.
Cash flow, good. Outstanding invoices, bad.
Just a quick check in with the realities of business ownership: You must be sure you’re executing prompt customer invoicing. Ask for the money you’re owed so that you can get paid. We may not be talking about making it rain hundos, but when your business is surviving paid invoice to paid invoice, tracking customer payments will help tremendously in keeping your business’ doors open.
It also helps to create an accurate and timely accounts receivable report. Cash flow is the lifeblood of your business and without this type of reporting, the business can’t easily keep track of aging invoices and necessary follow-up with the customer. Also, the older the invoice, the harder it is to collect. Trust me. Stay on these things.
Give the people what they need
Employers are required to prepare and distribute year-end tax forms (W-2s or 1099s) to their employees and contractors by January 31 of each year. Know this and act upon it accordingly—you still have time.
Prep your W-9s
You should have a W-9 on file for every third-party contractor you pay, but collecting W-9s and other forms can be a huge headache for small businesses since most don’t have the same resources and departments to dedicate to the task. But if you’re able to have a process for collecting these documents, it will make the tax season far less of a stressor.
One process you can implement for collecting W-9s (or really, any other tax forms) is printing out a stock of blank forms and mailing it out with the first contract you sign with a new contractor. If you email your contracts or have them online, you can include a link to the form on the IRS website. By adding the extra step to a process that already exists, you can proactively collect the information you need.
If you already have contractors working for you, and you don’t have their W-9 on file, figure out who they are and get their W-9 (or other forms) pronto.
Or, you could automate the whole process. Yes, there's an Infusionsoft Campaign for that. If you're an Infusionsoft user, just download it from the Marketplace, install it, and hit publish.
Know thy financial logistics
If you’re a small business, you may be a party of one or a party of a few, but be sure your employee classification is very clear. Are these full-time employees or independent contractors? If your business is found to have misclassified employees as independent contractors, there are some pretty harsh penalties, like interest and withholding taxes (these can be especially harsh for small businesses who may be operating on a shoestring budget).
According to Dan Parker, CPA, co-founder of TAD Home Health Consultants and my aforementioned father, every small business owner should gain an understanding of the mechanics of payroll, i.e., gross pay, federal, state and local tax withholdings and payroll taxes including social security, Medicare, and federal and state unemployment taxes. This understanding should include the tax deposit requirements of each of the aforementioned taxes, including required electronic payment rules.
Got that? Yeah, I’m a little fuzzy, too. These things can get tricky, especially when knowing these things don’t fall into our wheelhouses, so this is when we should seek outside help.
Call for backup
Any small business owner unsure of how to proceed should solicit the services of a professional tax preparer or accountant—penny wise and pound foolish is often a shortcoming to start up businesses. And those harsh penalties from the government definitely don’t sound appealing to anyone, business owner or not.
With guidance and advice from tax preparation professionals—you know, those who do this for a living—you will not only learn about strict tax compliance requirements but also gain the value of having accurate and complete records. These records will generate reliable financial data off which you’ll be able to forecast things like growth and budgets. And keep you out of the IRS’s not-so-cozy doghouse.
Another business tip from the CPA
According to Parker, the letters after your business’ name can have a significant impact on how your small business gets taxed. A choice of entity is critical and oftentimes overlooked at the outset of business. Should the business operate as a proprietorship, a limited liability company (LLC), or corporation taxed as either a C or S corporation? This decision is totally dependent on a number of factors including the industry, ownership, product or service, and projected capital infusion, but making these decisions will have an impact come tax season.