Our bookkeeping partners at Bench share their top tips for making tax season a lit bit easier and a lot less stressful.
Bookkeepers have the privilege of making tax season easier for their clients. But they also see how much stress this time of year can cause.
And this past year is a special case. Shutdowns due to the COVID-19 epidemic, and the accompanying recession, have put extra pressure on business owners.
If the pandemic has you experiencing extra downtime, take advantage of it. The IRS has extended the tax filing deadline—use this time to get your books in tip-top shape for filing on May 17.
And you’re in good hands. The bookkeepers at Bench have helped small business owners across the USA file their taxes. Here are seven strategies they recommend to make the job easier.
1. Keep Business Income in One Account, Personal in Another
If you let your personal and business finances intermingle, you’re creating a lot of extra work for yourself. That’s because:
- You’ll have to invest extra time to separate the two before you can file your taxes
- You could easily overlook professional deductions in the mix
- You may accidentally commit tax fraud—by claiming a personal expense as a business expense, or vice versa
- You can’t create accurate monthly financial statements, which are your most powerful tools to make tax filing easy
Even if your business is a small side hustle, it’s important to keep your finances separate. Opening a separate checking account or signing up for a business credit card will help you stay on track for tax season.
2. Sort Out Your Sales Tax Nexus
Your sales tax nexus is the territory where you’re responsible for collecting sales tax. For instance, even though you live in one state, if you sell products in another state, you may be responsible for collecting sales tax there.
If you don’t know what your sales tax nexus is, and how much you’re expected to collect, you could end up in trouble at the end of the year—saddled with a bunch of tax you didn’t know you had to collect in the first place.
Take time now to read up on sales tax nexus and sort out which states expect you to collect tax. Then start collecting it, and make sure the funds are earmarked for tax season. It’ll save you a headache down the road.
3. Shred All Your Papers and Go Digital
WAIT. Read this whole section before you fire up the shredder!
If you’re still relying on paper records, you’re making your business more complicated than it needs to be. Handwritten ledgers, printed receipts, and photocopied invoices are easy to lose and hard to share with the people who need to see them—like your accountant.
Online tools like FreshBooks let you manage all your receipts, reports, purchase orders, invoices, financial statements, and other essential documents from one location.
So the documents that make up the lifeblood of your business are:
- Easier to organize—you can tag documents, and find them using the search tool
- Much harder to lose or destroy, since it’s stored in the cloud
- Shareable right away—no office visits necessary
Make this the year you go fully digital. Still have one or two clients clinging to paper invoices? Give them the nudge—being able to pay by credit card online can help make the transition more appealing.
4. Create Monthly Financial Reports
Financial reports keep you tuned into your company’s performance and financial health.
The three essential financial reports are:
- Income statements, which tell you how much you earn and spend
- Balance sheets, which tell you your assets and liabilities—what you own and what you owe, respectively
- Cash flow statements, which tell you how much cash you have on hand to work with
By the end of the year, you can compile all your financial reports into annual reports. You’ll have all the info you need to fill out your Form 1040 and get your taxes accurately filed.
On top of that, when it comes to getting financial relief for your business, year-to-date financial reports are essential. Keep on top of it, and you’ll have the resources you need to apply.
Software like FreshBooks can generate financial reports for you based on the information you input. Or, if you work with Bench, your bookkeeping team will import information for you to create your financial reports. Both options give you more control over your business and help set you up for an easier tax season.
5. Avoid This Common 1099-MISC Mistake
If you’re adding up all your 1099-MISCs at the end of the year to figure out your revenue, you could be missing payments.
Remember, only clients who paid you $600 or more during the year are required to give you a Form 1099-MISC. But you also need to report income from clients who paid you $600 or less—it’s still taxable income after all.
When you’ve got annual financial reports, you can easily see your whole revenue, without tracking down forms or old emails from clients. If you don’t have financial statements, your next best option is to add up all your invoices for the year. Luckily, FreshBooks does this for you.
6. Spend an Afternoon Investigating Tax Deductions
Planning to save money by filing itemized deductions this year? Don’t wait until the last minute to Google “tax deductions [my industry].”
Instead, set aside an afternoon with a pot of coffee and a notebook. Sort out which deductions you qualify for, so you know which expenses you need to track and save receipts for.
Whether your freelance writer deductions amount to the cost of 1 month’s rent or an ergonomic keyboard, you can benefit from claiming them. And there are plenty of commonly missed tax deductions lurking around, waiting to reduce your tax bill.
7. Hire a Bookkeeper
It is a truth universally acknowledged, that a small business in possession of steady revenue, must be in want of a bookkeeper.
– Jane Austen (with some minor edits)
As your business grows and becomes better established, it gets more complex. At that point, a bookkeeper is essential for helping you navigate the day-to-day.
A bookkeeper takes a big slice off your to-do list. They track your daily expenses, categorize them and create financial reports for you. So you’ve got everything you need to file taxes at the end of the year.
You don’t have to worry about making mistakes doing your own bookkeeping, or missing out on deductions that could save you money. With a professional on your side, you’re guaranteed accurate books and an easier tax season.
This may be the most overwhelming tax season your business ever faces. But don’t let it get you down. These simple strategies will keep your books in order, and preparing regular financial statements will give you the resources you need to get emergency loans.
Don’t have the time or energy to tackle it yourself? For U.S.-based businesses, Bench gives you a remote team of North American bookkeepers who do your bookkeeping for you. Sign up for one month of free bookkeeping, and see how Bench makes tax season easier.
about the author
Bench Accounting, the online bookkeeping service that pairs you with a team of professional bookkeepers who do your bookkeeping, so you don’t have to.Bryce Warnes is a writer for