Prepare Your Online Business for Tax Time
Every year, tax season rolls around whether you’re prepared for it or not. It’s one of the most stressful times of the year, but one of the only times of the year we all come together and witness the same pain.
If you’re looking to finally have a stress-free, organized, and well-prepared tax season, we have the step-by-step guide for you! Follow along as we help you take control of your taxes this year.
1. Don’t Forget These Dates
The most important thing you need to know when tax season rolls around are the specific dates that act as deadlines for turning things into the IRS. While they can sneak up on you, adding them to your calendar and setting up multiple reminders will help you stay on top of everything.
Here are the most important dates to keep in mind:
- February 1 - make sure you’ve sent your 1099-MISC to any contractor and W2 to any employee if you paid them more than $600 for the year. This also needs to be reported to the IRS.
- March 15 - make sure you’ve filed your individual and partnership tax returns by this date, that way you can receive the Schedule K-1 in time to do your personal tax return.
- April 15 - make sure you’ve filed your personal tax returns by this date, otherwise you’ll be subject to a penalty or fee.
There are plenty more dates that you’ll need to know, but they’ll differ depending on the type of business you own and how big it is. Always make sure you consult with an accountant so you can feel confident when tax season rolls around.
2. Do You Have Your Receipts?
One of the most time-consuming tasks when tax season comes knocking is finding all the receipts you’ve accumulated throughout the year. These are going to prove to the IRS that you did, in fact, pay for all those expenses you mentioned in the tax return.
While most people still maintain paper receipts year after year, it’s not a sustainable or efficient way of getting things done during tax season. Instead, use one these platforms to simplify this process:
- Evernote - a free platform that allows you to access scanned receipts or photographs taken of receipts. They also have a personal scanner that does everything for you.
- ShoeBoxed - a service that costs up to $100 per month and allows you to ship an envelope full of receipts to the company and they’ll enter all the data for you.
- Expensify - as low as $5 per month and allows you to link a bank account to track expenses and transactions in real-time. There’s also an app that allows you to scan or take photos of receipts.
Getting your receipts organized before tax season rolls around is one of the most beneficial things you can do. It saves you a lot of time and allows you to focus on what’s really important.
3. Where Are Your Bookkeeping Records?
Before you enter tax season, it’s important you have a clear idea of what your books look like, where all your records are kept, and make sure they’re up-to-date. Doing so will protect you against an audit and better prepare you for what lies ahead.
There are two major ways of bookkeeping for business owners -- doing it yourself or having a professional do it for you. With the amount of accounting software available today, it’s extremely easy for owners to do it themselves.
At the end of the day, it comes down to preference. You should pick method and right software that works best for you, your business, and your day-to-day operations. As long as they’re accurate, up-to-date, and accessible, then you’ll be fine when/if the IRS shows up at your door.
4. Taking Care of Independent Contractors
Independent contractors make it easy when paying them throughout the year because they don’t require you to pay taxes. They do, however, need you to send them their 1099-MISC by February 1 and the same needs to be sent to the IRS by March 31.
There is a $600 minimum, however, meaning you don’t have to do this for any independent contractor you paid less than $600 the previous year.
5. Do You Understand Sales Taxes?
While sales tax can be a tricky and complicated subject, we’re going to touch base on the basics so you have a better idea of what to expect. Since these laws and guidelines generally vary by state, it’s important to do your own research. Of course, speaking with a professional makes this easy for you.
In order to have the right to charge sales tax in a certain state, you need to have a physical connection to that state -- which is called having ‘nexus.’ Once nexus is achieved, you can charge whatever that state allows.
You might be asking yourself, “What’s considered having a physical connection to a state?”
Living in that state is certainly the most popular way to gain nexus, but you can also achieve it by owning an office in that state, having employees that live there, a warehouse, hosting a pop-up shop in that state, or simply storing inventory in that state.
Since it’s a requirement that this sales tax is collected from the consumer and paid to the IRS every year is essential to limiting penalties and fees when tax season rolls around.
6. Do You Need a Tax Extension?
Many business owners get confused every year by the meaning of a tax extension. On the surface, you would think it means business owners get an extension to pay their taxes. In reality, you still have to pay the IRS by the original date.
So, what is a tax extension, then?
A tax extension gives you more time to do all the hard things -- the number-crunching, receipt-finding, and filing -- that some business owners save until the last-minute. In order to file a tax extension, you just need to fill out a form that requests it, along with the estimated tax payment and payment.
If there are any issues with the extension, the IRS will reach out to you. If not, then nothing happens and you’re expected to then file your taxes before the new date. The date will depend on the type of business you own, which breaks down as follows:
- Partnerships - file before March 15th for a 7-month extension by the IRS.
- Corporations - file before April 17th for a 6-month extension by the IRS.
- Sole Proprietors - file before April 17th for a 6-month extension by the IRS.
If you don’t have the money to pay for the taxes, you don’t have to send the payment right away. Instead, you’ll receive a fine for each month they don’t receive a payment. While you don’t have to send the payment, it’s best if you want to avoid a fee.
7. Deductions Save You a Lot of Money
One of the bright spots of tax season is the ability to list tax deductions, which are expenses that fall under the ‘business’ category. Since these expenses are meant to start-up, maintain, and grow your company, they effectively lower your expected taxable income.
Knowing what these deductions are is crucial to ensuring you receive the most benefits come tax season. If you’re an online seller, here are some of the most important deductions to consider:
- Home Office - in order to use your home office as a deduction, it needs to be used regularly and exclusively for work purposes. If so, you can deduct $5 per square foot of office space, but no larger than 300 square feet.
- Education - classes and courses that contribute to your business can also be deducted on your tax return.
- Utilities - if you pay monthly internet and phone bills for your business, those can be deducted on your tax return. You’ll need to account for personal use, so be careful if you use the phone or internet for other reasons other than just work purposes.
- Website - the cost of maintaining your company website is also viewed as a deduction. This can include the cost of themes, hosting, domain registrations, and any work you have done on it.
- Contractor - if the process of hiring an independent contractor costs your company money, you can deduct that cost on your tax return.
- Shipping - you can also deduct the cost of shipping goods to your customers, which includes both postage costs and packaging costs.
- Vehicles - by using a mileage tracker, you can track how many miles you travel for business or work. At the end of the year, the amount of money you spent on gas for those trips can be deducted from your return.
- Services - if you pay for any online services that contribute to your business, such as Spotify for store music, Amazon Prime for deliveries, or Microsoft Office, then those expenses can be deducted.
- Equipment - any equipment you purchase that contributes to you or your employee’s ability to do their jobs can be deducted. The process for this is a bit complicated and should be done by a professional.
In addition to those, your business could be eligible to list some expenses as ‘start-up costs’ if you’re new to the game. This is crucial, since there are often a lot of expenses that could count as a deduction when first opening your business that wouldn’t normally be counted for other businesses.
8. Do You Need Help?
Navigating through the many demands of tax season can be difficult for a business owner that already has a growing to-do list each and every day. That’s why most business owners elect to have a professional manage their taxes and financials throughout the year.
There are also a wide range of software programs, applications, and services designed to make it easier for business owners to manage themselves. You just have to find the one that works best for you and your business.
If you need help at all during this process, feel free to contact Consultants In-A-Box. We can help you find the right solutions that are catered to meet your needs year-in and year-out. We can’t wait to help you and your business continue to grow!