How to Get the Tax Season Under Your Belt As a Small Business

About 20% of small business owners don’t know their tax rate.

That could leave 20% of all small businesses scrambling to pay their entire tax bill. That’s a way to get behind on taxes and be indebted to the IRS. That can result in penalties, interest, and a host of other problems for your business.

Do you want to be ready for this tax season and every tax season? Keep reading to find out exactly what you need to do to prepare your tax documents and file your taxes.

Prepare for Tax Changes

This year has been the most unusual that we’ve seen in our lifetimes. The COVID-19 pandemic has wreaked havoc on the economy, leaving

The first change is that tax day was extended to July 15, 2020. This means your 2020 taxes and the first and second quarters’ estimated tax payments for 2020 are all due on the same day. That was meant to give you some temporary breathing room and deal with the pandemic, but it may not have been enough.

Other changes that are happening are part of the CARES Act that was passed by Congress at the end of March 2020. This enables businesses and self-employed people to take rebates or defer payroll and self-employment taxes.

You can get a rebate if you provided leave to an employee that needed to take off due to COVID-19. You may also have the option to defer up to 50% of self-employment taxes into 2021 and 2022.

If you received a PPP loan, you should know that you are unable to deduct the expenses that the loan funds covered. The IRS issued a notice saying that you would benefit twice from the deduction and loan forgiveness which isn’t taxable.

You should tax laws to be very fluid right now and subject to change as Congress and state legislatures try to adapt and meet the needs of small businesses. You should consult with a tax professional that has been staying up to date with all of the tax changes.

Should You File an Extension?

Small business owners tend to avoid taxes because they know they’re going to owe the IRS money. What they’ll do is they’ll file an extension and file their taxes in October.

You might be wondering if you should do the same thing. Tax extensions shouldn’t be used to avoid paying taxes. You should only file for an extension if you had changes in your business and you need time to prepare your taxes.

If you owe money, the funds are still owed to the IRS by the Tax Day deadline, even when you file an extension. Paying after the deadline will result in penalties and interest.

Get Your Documents Together

Once you know what you need to pay and when, you need to get ready to pay your taxes. You have to start by getting your business documents together.

This would include all business income documents, expense reports and receipts, and payroll documents. If you’re self-employed, you may have 1099- Forms to file with your tax returns.

For businesses that hired contractors and employees, you have more responsibilities to deal with. You have to distribute 1099-MISC forms to independent contractors. You also have to create W2 forms for all of your employees. These forms also get sent to the IRS.

The IRS will compare your documentation to the contractors’ and employees’ tax filings. If there are discrepancies, it could trigger an audit.

Calculate Income and Deductions

Once you have your documents ready to go, you have to use them to calculate your net earnings and adjusted gross income. You’ll add up all of your income, which should be easy to do.

You should take your invoices and add them up. You can then reconcile them with your bank statements to make sure that your figures are correct.

Your deductions will be any business-related expenses. This can include advertising costs, office equipment and supplies, payroll costs, meals and entertainment, dues, and licenses.

Filing Out the Right Forms

You have to make sure that you file the correct forms when you do your taxes. A self-employed person would report these on Form Schedule C and file it along with Form 1040.

If you take a salary as a business owner, then your business income would be separate from your personal income. You’d file your personal income taxes using Form 1040. You’d then file your business taxes using the form that’s appropriate for your business structure, whether that’s an LLC, S-Corp, or C-Corp.

Make Tax Planning a Priority During the Year

You may have to learn a hard lesson when it comes to filing taxes. If you don’t plan for it properly, you’re going to owe a lot more than you should.

Tax planning is something that you need to be aware of all year long. You can make strategic purchases and hires during the year to minimize your tax burden. You could make a decision to defer purchases to the following year if you know that your profit will be higher.

You also want to make sure that you set aside funds to cover your estimated taxes and final tax bill for the year. Not taking this simple step could leave you in a position where you owe a lot of money to the IRS instead of investing in your business.

Getting Through Tax Season

Tax season tends to be tough on small business owners because they don’t know how to prepare for it. You can put your business in a great position to be successful by knowing the basics of tax law and keeping your records organized.

You should also work with a tax professional so you’re up to date on the latest tax law changes and to maximize your deductions.

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