The tax filing deadline has come and gone. With yet another U.S. tax season in the books, now is a perfect time to reflect and position yourself better for a successful season next year.
Small business owners aren’t expected to be tax experts, but they are expected to file a federal income tax return. Your focus, though, is on your business and doing the work you love.
But if you avoid dealing with taxes until tax time, those months before you file a tax return can be unbearable—a time of panic and stress while you scramble to gather receipts and records. Even if you hand off your annual income tax return duties to an accountant, there’s still work to be done. That said, you should treat your taxes like any other business practice: an ongoing process that needs your attention throughout the tax year.
Here are a few tips to get you started on the filing process early and keep you on track to meet the tax deadline.
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Toss the Shoebox, Find a Better Way to Log Expenses
Does your team affectionately refer to you as the shoebox receipt collector? Or does your accountant cringe when you drop the box off at their office? The shoebox method is a highly inefficient way to manage your expenses, making tax time even more stressful. Don’t wait until the last minute to add up expenses for your tax return. Keep close track of them throughout the tax year. Logging them as you go is more accurate and saves you time in the long run.
Chances are, it will be easier for you to find 10 or 15 minutes a week to deal with taxes instead of spending hours or even days dealing with them in March or April.
Separate Your Business and Personal Finances
Do you have a separate checking account and credit card for your business? You should, no matter the size of your company. Maintaining separate accounts makes tracking business income and expenses for your tax return much more straightforward. It’s also an excellent preventive tool for protecting your business from being reclassified as a hobby by the Internal Revenue Service (IRS).
Since we’re discussing it, it’s important never to muddy the waters between your personal income tax and your business income tax. Keeping them separate protects you and your business in many different ways.
Automate Your Accounting Process
If you haven’t already, it’s time to bring your business into the 21st century. Accounting and invoicing software, like FreshBooks, can be instrumental in driving efficiency and accuracy all year round—not just for your federal income tax returns. Modern accounting software can connect to your bank account, automatically sync transactions, and even categorize expenses for you. This saves you time every month and ensures you won’t miss any deductions when you file your income tax returns at tax time.
Save up to 40 hours of tax filing time every year with FreshBooks
Pro tip: To continue to encourage a more streamlined process for your entire business, consider downloading an app to track your business miles, like FreshBooks Mileage Tracker. To take a deduction for business use of a vehicle, the IRS requires a contemporaneous mileage log. Estimates just won’t hold up in an audit, so save yourself the trouble of trying to recreate a year’s worth of driving using a calendar and Google Maps the next time you file your income tax return.
Back Up Your Electronic Records
Today, many options exist that allow you to quickly and inexpensively store your data in the cloud. If you’re still storing electronic documents on your hard drive or a local server, what would happen in the event of a disaster? Get in the habit of backing up your files to a cloud or a remote location. It’s essential to maintain backups of the crucial information you need to prepare and file a tax return. The IRS won’t go easy on you just because your records are missing. Have a contingency plan in place for all your important tax return documents, just in case.
Accounting and invoicing software, like FreshBooks, can be instrumental in driving efficiency and accuracy all year round.
Work With an Accountant
Many small business owners try to muddle through tax preparation and tax returns on their own. Some people actually enjoy it! Going the DIY route is fine if you take pleasure in the income tax process.
But keep this in mind: As your business grows, calculating how much you owe on your federal tax return will get more and more complicated. And that’s not even taking into account local and state taxes too!
If you dislike bookkeeping and federal income taxes and thus put them off like your most dreaded chore, you could be doing yourself, your business, and potentially your tax refund a huge disservice. An accountant with industry expertise can provide sound advice and help you plan your federal tax return appropriately.
Should you itemize or claim the standard deduction? Are you taking advantage of all the tax credits you qualify? Should you make any changes to your local tax returns? Your accountant can answer these questions and more. They’ll also stay on top of any tax changes the government makes so you’re not blindsided by them.
Pro tip: Give your accountant access to your cloud-based accounting software to help file tax returns. This access to real-time data can help them give you even better advice throughout the tax year.
Make the Most of Your Deductions
Did you know that tax laws aren’t just rules to be followed? Most taxpayers don’t. In many cases, the tax code is actually designed to incentivize certain behaviors. You can use tax laws to your advantage if you know what they are.
For instance, did you know that you can deduct up to $5,000 of startup expenses in your first year of operations? Are you aware of the tax credit for research and development activities? Are you taking advantage of the tax benefits for contributing to a retirement plan? Are you deducting home office expenses? You might even be able to purchase new equipment and write off the entire cost in the year you buy it. Every business is eligible for different tax breaks on their tax returns, yet many are still overlooked. So ask your accountant about potential tax breaks that apply to your business. You may even see an increase in your tax refunds as a result.
Get over 25% of your tax season time and effort back with FreshBooks accounting and tax features.
There are many tax credits available, like the earned income tax credit and the child tax credit, but it’s important to know which to use when filing income tax for your business and which to use for your personal income tax.
Make Accurate Estimated Payments
If you work with an accountant, they can help you estimate your tax liability and make estimated quarterly payments for your business. Whether you get professional help or handle it yourself, making estimated tax payments is crucial. For instance, it can help you avoid a big tax bill in April and ease your cash flow throughout the fiscal year. Plus, making estimated tax payments is required. The U.S. tax system is a “pay as you go” system, meaning individuals and businesses must pay estimated taxes as income is earned. If you fail to pay enough, you could get hit with underpayment penalties at year’s end.
Consider setting up a separate savings account specifically for your business taxes if you’re unsure where to start. Each month, transfer 25% of your net profits from the business to that account, then cut a check to the IRS quarterly (on April 15, June 15, October 15, and January 15) or make a payment online using the Direct Pay service available on the IRS official website.
Your actual tax liability will depend on many factors, including your business structure and eligibility for other deductions and credits. Talk to your tax professional to get a more accurate estimate, but 25% is a good rule of thumb for many businesses just starting out.
And don’t worry, even if you overpay on your estimated payments, you’ll get that money back in your tax refund for the year.
Why Filing Your Tax Return Early Makes a Difference
Typically, the IRS starts processing tax returns in late January or early February. There’s no legal need to file before the due date, but even if you don’t, there are many reasons to start preparing your taxes as quickly as possible. Starting early makes it easier to collect any necessary documentation needed for tax compliance. Collecting all this info early gives you a more flexible schedule in terms of managing your constant workload and the added work of preparing and filing taxes. And if you’re expecting a tax refund at the end of the year, filing early can help you get that money sooner rather than later.
Essentially, though, you want to avoid the midnight last-minute pressure of incoming debts and tax bills.
Tax Filing Deadline: File Your Tax Return on Time!
No matter your business, you probably manage deadlines, appointments, due dates, targets, and everything in between. If you can’t seem to file your return on time, start thinking about the tax filing deadline like you would any other deadline in your business: non-negotiable.
When you fail to file your return on time, in addition to paying any taxes you owe and paying interest on the past-due balance, you’ll be penalized for failing to file and pay on time. Those penalties can add up fast, making paying Uncle Sam even more of a burden than it already is.
As we coast into summer, your next tax return deadline may seem far away, but it will be here before you know it. Take the necessary steps now to organize your records correctly. Spending some time now will make the next tax season a breeze and help you better understand taxes. That’s just good business sense for any small business owner.
This post was updated in January 2024.