As a business owner or self-employed entrepreneur, there’s a good chance you’ve messed up on your taxes.
I know I have.
There have been years I haven’t set aside enough money to pay my taxes. Additionally, there were years I didn’t even bother to pay quarterly taxes. These are huge mistakes — mistakes that can lead to a massive tax bill.
If you experienced an unpleasant tax surprise this year, here’s what you need to know to prepare your business for taxes next year. And avoid the surprise.
Know the Tax Law
First of all, many taxpayers were tripped up by the new tax law. Find out how it impacts your business. For some entrepreneurs, the cap on taxes for pass-through business income was a real help.
However, for some business owners, the loss of personal exemptions weighed heavily. Consider talking to a knowledgeable accountant about your situation. You might pay some money up front, but it can be worth it to know the tax law.
Congress is always tinkering with the tax code. There are always new deductions and credits, sunsetting tax breaks, and all sorts of changes to your tax bracket. Keeping up with it can be tough, but it’s important.
When you know the tax law (or get help from someone who does), it’s easier to make decisions to prepare your business for taxes in the coming year.
Engage in Year-Round Tax Planning
Many of us are terrible about planning for taxes year-round — and that’s a huge mistake. While there are things you can do if you can’t pay your taxes, it’s best not to be in that position to begin with.
When you’re involved in year-round tax planning, you’re better able to prepare your business for taxes, no matter what.
Figure out how you can deduct items like business travel, hiring help, and establishing tax-advantaged retirement accounts. You can also make a difference by being strategic about HSA contributions, how much you pay yourself as a salary, and what you do with bonuses.
Even your organizational structure (S-Corp vs. single-member LLC) can make a difference. Work on these issues year-round with the help of a professional, and you might be surprised at how well things turn out for you.
Make Those Quarterly Estimated Tax Payments
You might not be used to making quarterly estimated tax payments, especially if you recently started your own business. However, this can be a mistake. The IRS wants to be paid, and it expects you to be on top of the situation.
When you don’t pay the IRS as you go, you run the risk of owing a great deal at once, as well as being charged a penalty. Depending on the situation, the IRS can charge you a penalty if you get to the end of the year and owe more than $1,000 in taxes.
Paying estimated quarterly taxes can help you better plan throughout the year and it breaks your taxes into chunks. I like to set aside money each month for quarterly taxes. I keep it in a high-yield account. Then, when it’s time to make that quarterly payment, it’s easy to just make the payment.
Don’t Forget About State Taxes
Many entrepreneurs forget about state taxes — even if they have their federal taxes on lockdown. Some states require that you pay quarterly, while others just collect the tax at the end of the year. Find out which method your own state uses so you can plan accordingly.
If you want to prepare your business for taxes on the state level, take similar steps to how you do it federally. When I set aside money each month designed for taxes, I include an estimate for the state. My state doesn’t require quarterly payments, so I just keep building the account year-round. It’s a great way to let some of the money in my account grow. It’s not a ton — thanks to low yields on savings — but it’s better than nothing.
Keep Good Records
Good records are vital if you want to prepare your business for taxes and are worried about a potential audit. I’ve been audited before — once at the state level and once at the federal level.
At the state level, a mistake on my return meant that I owed. However, at the federal level, I didn’t owe more money. Luckily, I had the records to back up my claims. All my accountant had to do was send the IRS the requested documentation and things were cleared up.
Keeping good records is essential if you want to make it easier for you (or an accountant) to prepare your tax return. Plus, you can back up your entitlement to breaks.
While it’s never fun to pay money to the government, if you take steps to prepare your business for taxes, you can only pay what you’re required to, and it doesn’t even have to be an overwhelming experience.