Tax season begins as soon as the new year starts and here’s how it should look: the financial year ends at midnight, December 31. Whoever does your bookkeeping hands your financial records for the year to your accountant. Your accountant uses them to file your taxes. Later, you receive a tax refund.
As tempting as it might be to ignore, how you handle your bookkeeping now could make or break your tax season. But, by following just a few simple steps you can save both time and money in the long run, which will almost certainly lead to a less stressful tax season and a more successful year.
Review your profit and loss statements
Your business’ profit and loss statements provide you with a snapshot of its financial performance. If you’re not a numbers person, consider looking into services that break them down for you and offers the support you need to make financial decisions with confidence. You should start the year with a firm understanding of your profits and losses, as well as your top 10 expenses, for starters. Solutions like Bench give you a visual representation of your monthly profit & loss, and make it easy to reconcile and categorize your expenses with the help of a real, live bookkeeper.
Collect W-9s, 1099s, and W-2s
If you paid independent contractors and/or employees during the tax year, there’s a good chance you’ll need to file some forms, including Form W-9, Form 1099-MISC, and Form W-2.
A W-9 is a form that requests a contractor’s taxpayer information. You’ll need that information to issue a 1099-MISC to the IRS. Commonly referred to as “a 1099,” the form is used by the IRS to track miscellaneous income. In a small business context, 1099s are commonly used to track and report payments made in the course of your trade or business to a person who is not an employee, or to an unincorporated business. So, if you paid an independent contractor $600 or more during the tax year, you’ll need to arrange a 1099, through the mail or online, to tell the IRS how much you paid them. Keep in mind, there are a couple exceptions to this rule, namely that you don’t need to submit 1099 forms to corporations or employees. There are significant penalties for misclassifying employees as independent contractors, so make sure you learn to tell the difference before submitting a 1099.
You’re required to file Form W-2 to report wages, tips, and any other compensation you paid to an employee during the tax year.
Gather and Organize your Receipts
One of the simplest ways to reduce your tax bill is to ensure you’re claiming all of the tax deductions available to your small business. That means collecting and organising your receipts for everything, from customer invoices to charitable contributions, and mileage. You’ll need to properly identify the charge on the receipt and be able to prove that it was a true business-related expense.
Make a point to review your personal credit card statements as well, especially if you haven’t separated your finances. If you operate a corporation or LLC and you fail to separate your expenses, you can lose the liability protection afforded by your company’s structure, and could become personally liable for business losses.
Reconcile Your Bank Accounts
It’s important to reconcile your bank accounts so that you can identify any errors in your company or bank records. Compare each transaction from your bank statement with the same transaction in your company’s accounting records to ensure the balance is consistent across all accounts. If they aren’t, identify and fix the discrepancies. Since handing over accounts that aren’t reconciled to your bookkeeper or accountant can be costly, you will be saving your accountant and yourself time and money by taking care of this step beforehand.
Catch up on your Bookkeeping
When you fall behind on bookkeeping, your books stop reflecting the actual state of your finances. That makes it harder (and sometimes impossible) to understand cash flow and accurately gauge the health of your business. Having tax-ready books will also help you comply with IRS recordkeeping requirements and file an effective tax return well before the deadline in April.
While you might be inclined to file for a tax extension, tax season doesn’t have to be one that you dread. By taking the appropriate steps to ensure that your bookkeeping is in order, you can live tax day just like you would any other.
Author, Emily Key, Vice President of Operations
Emily Key is the VP of Operations at Bench, the largest bookkeeping service in North America for small businesses. There she leads a growing team of world class, professional bookkeepers who specialize in preparing standardized historical and monthly financial statements for entrepreneurs and small business owners, as well as audit-ready year-end tax packages. Bench exists to help small businesses survive and thrive by providing them with the accurate financials they need to make informed business decisions. A former small business owner herself, Emily is passionate about empowering 21st century entrepreneurs with a new back-office stack, getting them out from behind a desk and back to growing their business.