For many small business owners and entrepreneurs, the most stressful season of the year falls between the months of January and April — the tax filing season. With confusion surrounding tax obligations and fears of being audited, tax filing stress is real among small business owners in all industries and sectors.
The good news is you can start preparing for next year’s tax season today. And whether you work with a professional or choose to DIY your taxes, you’ll want to check out the following filing tips from Watchman Advisors to help you get through the process (almost) hassle-free come tax season next year.
1. Organize Financial Documents
To manage this year’s tax filing process, it’s important to organize your financial records early on so you’re not scrambling to gather the information you need as the deadline approaches. And if you’re unsure of the current year’s tax dates, you can easily find this information online. For 2021, the federal tax deadline is May 17th.
To ensure you have everything you need in time for Tax Day, you’ll need to gather records of the following:
- Business receipts
- Office supplies
- Sales records
- Bank statements
- Office rental fees
- Advertising expenses
- Employee wages
- Contractor payments (you’ll learn more about this in the next section)
After gathering these important tax documents, be sure to organize them in a way that works best for you and your small business — whether you’d prefer a paper or electronic recordkeeping system. If you choose to scan documents and save them to your computer, however, it’s necessary to back them up using a service such as Google Cloud, Dropbox, or OneDrive. Then, plan to retain these documents for at least seven years — if not forever.
If you do happen to get audited, there’s no reason to fear jail time or an in-person visit to your local IRS office. The three types of audits include mail, field, and office audits — mail audits being most common. Plus, you can use your well-organized financial records to support the information provided on your tax return.
2. Report and Pay Contractor Taxes
If your small business works with one or more independent contractors (including freelancers), you’ll need to report your contractor payments once a year using the 1099-NEC tax forms. You must send these 1099 forms to your contractors by January 31st, or the following business day, if January 31st lands on a Sunday. Your 1099-NEC forms must be filed with the IRS by February 1st and all 1099-MISC tax forms must be filed by March 31st.
Online 1099 efile services can make the tax filing process simpler and a whole lot faster. Plus, a service can help you to differentiate between the 1099-MISC and 1099-NEC tax forms. Here are a few things to keep in mind:
- Starting with the 2020 tax year, the 1099-NEC form is used to report the annual income of non-employees (e.g., freelancers, contractors, and nonemployee salespersons).
- Beginning with the 2020 tax season, the 1099-MISC form should be used for reporting more than $600 in attorney fees, healthcare payments, prizes, and rent.
If you’re new to working with independent contractors, you’ll also need to learn how to pay them for the products and services they provide. You can use payroll services to not only automate your payroll and track your timesheets but also offer same-day direct deposits to your contractors. In other words, you can manage everything involved in paying your contractors in one app — even when you’re away from the office.
3. Enlist a Financial Expert
Innocent tax mistakes do happen, but your chances of ending up in jail or being audited because of them are slim. Still, you’ll reduce tax season stress and protect your business finances if you work with a financial expert. By doing so, you can expect assistance in a number of services, including tax, investment, and insurance plans for your small business.
Tax season is already stressful, so don’t make it worse by preparing and filing your own business tax returns. Strictly adhering to these tips, employing online software, and hiring a professional to help guide you through the process will leave you feeling more relief than stress knowing you’re covering your tax filing bases.