Tax Season Checklist for Small Business Owners

If there’s one thing we love in the US, it’s paying taxes.

We love it so much that over 160 million of us paid extra last year and had to get refunds.

All jokes aside, in the world of small business ownership, refunds are few and far between, which is a serious learning curve for new business owners to overcome. Luckily, small business taxes don’t have to be too complicated if we prepare in advance.

Let’s talk about how to prepare for tax season as a small business owner.

How Small Business Taxes Work

If you’re new to paying small business taxes, it’s a lot different from employee taxes. The more employees, expenses, and streams of revenue you have, the more complicated it becomes.

Small business taxes are also incredibly different based on their company structure. Corporations and LLCs will have completely different tax setups than sole proprietorships or partnerships, which we will primarily focus on, as over 73% of businesses are considered sole proprietorships.

Essentially, you will only have to pay a certain percentage of your profits, which is income after expenses. If you spend more money than you make on your business, then you won’t owe anything.

However, the amount you have to spend varies widely. Some businesses may only need to save 5% to 10% of their revenue to pay for taxes, while others with high profit margins will have to save 30%.

If this is your first time filing as a small business owner, then it’s best to talk to a professional and get an estimate ahead of time to prepare for your tax bill, especially if you haven’t been saving at least 20% or more of your income. You may owe more than you think.

Understanding Important Tax Laws

One mistake in your tax filing could be costly. In the event of an audit, you need to be prepared.

Also, tax laws change every year in the United States, which has some of the most complex tax systems in the world, leading to a 27% error rate throughout the country. Of course, nobody expects you to know everything in the tax code, but there are some important laws to understand as a small business owner.

Most importantly, the tax deadline is April 18th this year, meaning you will either have to pay or file an extension by that time. You will have to report all of your business revenue and expenses to the IRS, regardless of how it was earned, and pay a designated amount based on that.

One important factor to keep in mind is any Covid-19 impact payments or special tax credits from the last year. This may be completely new, even to experienced business owners, so if you received or had to make any payments to employees last year, remember to report these payments in your filing.

There are also many tax laws that are specific to certain industries, so consulting with an accountant with experience in your industry or consulting with a tax lawyer may be helpful.

Documents You Need for Tax Season

If you received any 1099 forms from various companies for your services, then you will need to hold onto these. These may say 1099-K, 1099-NEC, or 1099-Misc. Depending on your line of work, companies and individuals may have to provide you with one of these forms if they paid you more than $600 within the last fiscal year.

Many businesses will never receive a 1099 form, but if you sell certain services to other businesses, then you will likely receive one or more of these forms. Hold onto these, as they are statements of income. If you find any errors regarding monetary amounts, discuss this with the company before filing.

Then, you will need any statements of expenses and revenue. This could be a pile of receipts, a bookkeeping app, or business account statements. Regardless of your system, make sure you have your business and personal expenses separated.

If you’re missing documentation from one of your expenses, it’s not the end of the world. It’s still okay to report it as long as you’re telling the truth. In the event of an audit, a lack of receipts will be okay as long as you can piece together your purchase history and show some type of evidence to support it.

Other than that, you will need personal identification for a sole proprietorship or partnership. This may include your social security number or card and a government-issued photo ID like a driver’s license or passport.

How to Prepare for Tax Season

Preparing for tax filing can be challenging if you haven’t done it before, but it all comes down to prep work. If you’re diligent throughout the year, then you’ll save yourself a lot of hassle when tax time comes.

However, if you wait until the last minute, then you’ll need to get a lot prepared before you’re ready to file. Either way, here’s what you’ll need.

Learn About Potential Deductions

Whether you were diligent or not with your expense tracking, learning about potential deductions before tax season could save you a lot of money.

Whether you’re an Uber Driver or the owner of an international eCommerce giant, there are dozens of potential deductions to get familiar with. Each of them could save you a lot of money on your tax bill, but only if you know about them. Some commonly overlooked deductions can include:

• Meals
• Employee benefits
• Business mileage
• Insurance
• Reinvested dividends
• Student loan debt interest
• State sales taxes
• Moving expenses (for business)
• Green energy tax rebates (solar panels, heat pumps, etc.)

The list goes on. Look into common tax deductions within your industry, as there may be plenty you’re missing! Talking to a professional may help you find some.

Get Your Papers in Order

All of your tax forms, income and expense statements, and identification should be in order. Put everything in one place, preferably in a sealed envelope or binder. Not only will this help you file your taxes, but it will help you keep diligent records for the future if you need to look back at your tax records.

If you discover you’re missing some expenses or revenue, ask your bank or credit card company for statements from the previous year. If you use Venmo or PayPal at all, these will be saved in your account, and you can access them at any time.

Look through these diligently and if you notice something you missed, add it in. Nobody is perfect, so don’t worry if you weren’t 100% accurate with your tracking system. You can always work to improve that system this year.

Double-Check Everything

Before getting ready to file, it’s important to look over everything once more and ensure you aren’t missing anything, especially if you’re filing last minute. You don’t want to show up at your accountant’s office only to have to schedule another appointment because you forgot something important.

Check the dates on your expenses to ensure there are no gaps, check the email from your tax preparer to ensure you have what they asked for, and check that you have your bank account information, personal identification, business records, and everything else you need. It’s better to be overprepared than underprepared.

Choose a Tax Preparer

You have the choice between using software or a tax firm to help you with your small business taxes, and depending on your circumstances, one may make more sense than the other. For a first-time business owner or for larger businesses with complex revenue and expenses, hiring a tax professional will likely make more sense.

If you’re new to small business taxes, there’s no substitute for having an expert to help you along the way. This could prevent you from making a critical or costly tax mistake. Also, if you have too much data to keep track of, then you may want the help of an expert accountant to ensure you aren’t missing anything.

However, if you’ve done this before and you have all of your paperwork prepared, then you may consider using software to help guide you through the process yourself. If you know what you’re doing, this could save you some money on filing.

Either way, before you get started, learn how to choose the right tax preparer so you know you’re getting the right services for your needs. 

Bonus Tax Tips for Small Businesses

Now that you have a good idea of how to prepare for small business taxes this year, you can prepare for tax season with confidence. However, let’s go over some bonus tips to help you get the most out of your filing!

Paying Quarterly Can Save Headaches

If you don’t like saving up and spending all of your money on large tax bills, it’s never too late to start paying quarterly estimates. Even if you’ve already missed the first quarter of this year, many businesses find it easier to pay their taxes quarterly than to save one lump sum each year.

This way, every three months, you can pay your estimated tax bill for the quarter, and when it’s time for the final bill, you’ll owe significantly less or even receive a refund. It is a little extra work to file, but there’s no extra headache of preparing for large tax bills or keeping extra records.

Consider Making a Charitable Donation

Want to improve public relations and save on last year’s tax bill? Well, all the way up until the due date, you can still make a charitable donation to the nonprofit of your choice and write it off on your taxes.

You Can Even Pay Taxes Throughout the Year

Want to fill out a W2 and get a tax refund at the end of the year? It’s possible as a business owner.

If you already use a payroll system for your employees, then it won’t be any different to add yourself onto that payroll and pay yourself a salary out of the company funds. If you use that salary to cover all of your living expenses, then you won’t mix business and personal taxes at all.

You will still have to file self-employed taxes on your small business profits outside of your salary, but you won’t owe money on what you spent in your personal life. This may be easier if you don’t want to save for a large tax bill, as you’ll be able to make weekly payments.

Tax Extensions Are Free & Easy

If you need to file an extension, it’s entirely free to do so and you can do it on the IRS website. After that, you’ll have six months to pay your tax bill, and you may even be able to work out an installment plan with the IRS.

Develop a System

What works for other businesses may not work for you. You may not want to pay for a bookkeeper, pay quarterly, track everything through an app, or file your receipts. If not, that’s fine.

However, every business needs to develop a system that works for them, regardless of what that system is. If you’re worried about tax season and you still have time to prepare, then get started right away. The sooner, the better.

File Safely Today

Now that you know how to prepare for tax season, get your documents in order and prepare for your tax bill. The sooner you do, the sooner you can take that load off of your mind.

If your bill was higher than you expected, consult with a professional, choose a tax prep service that meets your needs, and stay diligent to prepare for next year’s tax bill. From there, keep reading our blog for our latest financial tips and keep building your business!