Tax season can be challenging for small business owners who must find time to gather information for tax returns while managing their companies. It’s important to have good recordkeeping practices throughout the year but even if you do, there still will be tasks to get done. To help you adequately prepare for tax season, take these steps:
Organize Your Paperwork for the Prior Year
Before you can start working on your tax return, you have to finalize your company’s books for the fiscal year. You should also close out any shareholder/owner loans so they can be reported on the tax return. This should be done as soon as possible to give you ample time to confirm that all financial information is accurate and entered properly. If you do this every month, it will be easier to prepare your year-end close.
Issue W-9s and 1099s
W-9s and 1099s are necessary when working with independent contractors. Businesses must be careful about correctly classifying workers as independent contractors. Such workers are not full-time employees of the business but are paid more than $600 for work provided to the business. Employers who hire independent contractors must provide them with an IRS W-9 form before the contractor starts work and retain the completed form for their records. If you are an independent contractor, you must return the W-9 to the employer.
By January 31st, employers must send independent contractors a completed 1099 form showing how much they were paid during the past year. This is also sent to the IRS.
Understand Your Deductions, Credits, and Accruals
In addition, you should keep in mind how you accrue expenses because this impacts your tax return. For instance, certain expenses must be accrued for tax purposes, such as 401(k) profit-sharing contributions, owner-paid business expenses that need to be reimbursed, etc. This is true even for cash-basis taxpayers.
Review the Latest Tax Laws
Tax laws are changing constantly each tax season. To help ensure you are in compliance and that you aren’t missing opportunities to reduce your taxes, you must stay abreast of changes or hire someone to monitor them for you.
Itemize Business Expenses
Excellent record keeping is essential to making sure you detail and deduct all business expenses you are entitled to and that you can justify them in the event of an audit.
Calculate Payroll Taxes
Your payroll taxes should be up to date and calculated throughout the year as part of your process for submitting quarterly estimated tax payments.
Consider an Extension to File Your Tax Return
Businesses can request an extension from the IRS. Extensions are automatically provided the appropriate form is filed on time. The appropriate extension forms are as follows: Form 4868 is for sole proprietors and owners of certain single-member LLCs and Form 7004 is for corporations, LLCs, and partnerships. Importantly, the extension only gives you additional time to file. Typically, you must pay any taxes you owe by the initial deadline to avoid penalties.
Filing deadlines for federal returns are as follows:
- Initial deadline:
- Sole proprietorships: Schedule C and personal tax return (IRS Form 1040) due April 17, 2023.
- Partnerships: IRS Form 1065 due March 15, 2023.
- Multimember LLCs: IRS Form 1065 due March 15, 2023.
- S-corporations: IRS Form 1120S due March 15, 2023.
- C-corporations: IRS Form 1120 due April 17, 2023.
- Extension deadlines:
- Sole proprietorships: October 16, 2023.
- Partnerships: September 15, 2023.
- Multimember LLCs: September 15, 2023.
- S-corporations: September 15, 2023.
- C-corporations: October 16, 2023.
Pay Estimated Taxes
Generally, you must pay estimated taxes after the end of each quarter based on what you made or estimated you would make during that quarter. You can calculate your quarterly estimated tax payments in one of two ways:
- If you receive income evenly throughout the year, calculate your annual income and deductions, determine the taxes you’ll owe, and divide that into four even payments.
- If you do not receive income evenly throughout the year, calculate what you owe each quarter based on your actual earnings and expenses during the quarter.
Importantly, you must pay accurately and on time to avoid an underpayment penalty in addition to the taxes that you owe. The amount of the penalty will depend on how much you owe and how long you have owed it to the IRS.
Think About Succession Planning
While succession planning doesn’t directly relate to tax season, the beginning of the year is a good time to think about what would happen to your business if you died or became incapacitated. It is important to have a plan in place so there are people to step into your shoes. That also includes organizing all of your files and tax records so that someone would be able to manage these issues in your absence.
Having advisors you can trust can make a big difference in the success of your business. We work with clients throughout the year to discuss how they can save money, make improvements in their business, and avoid potential problems. Our attorneys have experience in a wide range of legal, business, and tax matters. Contact us for a consultation to learn how we can assist you.