Tax time is here again…that means a lot of stress for many business owners, but you don’t have to be one of them!
Here are four steps you’ll want to take when preparing your business for tax time:
1. Collect your business financials
Before you begin to fill out the required IRS paperwork, you’ll want to get organized. If you use a bookkeeping or accounting firm, this is an easy step–just put in a call or email and request your financials.
On the other hand, if you keep your own books, get organized by creating a copy of your annual P&L (Profit and Loss). This will show you all the revenue you earned and the costs you incurred over the year, which is critical information for the IRS.
Keeping track of receipts should always be a priority as you’ll need to produce them in the case of an audit. Make sure you aren’t inflating your numbers to produce a favorable outcome.
You’ll most likely want to take care of your personal taxes as well, so be sure to gather the information you need for that. At a high level, this includes all income that you received, adjustments to your income, and itemized tax deductions.
In addition to financial data, you’ll also want to rustle up your social security number (in case you don’t have it memorized) as well as the social for any dependents who rely on you.
2. Select the right form
Now you’re ready to find the right form for filing. The right form for you will depend on the legal entity of your business.
If your legal entity is a sole proprietorship, you can report your business income on a Schedule C attachment to your personal income tax return. This means that you’re attaching any profits from the business to your personal income. You can also use this form if your legal entity is an LLC and you are the sole owner.
If your legal entity is a corporation, or if you have an LLC with multiple owners, then you must prepare a separate corporate tax return on Form 1120. This is more work and doesn’t attach to your personal taxes like a Schedule C. However, the benefit of filing Form 1120 is that you don’t pay self-employment tax as you do when you file the Schedule C.
A third option applies if your legal entity is a specific type of corporation known as an S-Corp. S-Corps require a form known as Form 1120S. You can think of this like a hybrid between the first two forms.
Is this confusing yet? This is one area where finding a good tax professional is worth its weight in…well…tax forms. I’ve known businesses to save tens of thousands with good tax advice.
3. Know your deadlines
Most of us think of April 15th as tax day, but it’s not the case for every form. Actually, this year you have until April 17th for most forms, since the 15th falls on a weekend. However, there are a few other dates business owners should be aware of.
- If you employ others, your due date for W-2s is January 31st.
- If you are filling out Form 1065 or Form 1120S, the deadline is March 15th.
4. Fill it out!
Once you’ve collected your records and selected the appropriate forms, it’s time to fill out your paperwork. Make sure that you read through all of the forms carefully and don’t skip any steps. A Schedule C is typically less involved than Form 1120, but both will require that you dive into your financials with some granularity.
While it’s always best to get your taxes filed in a timely manner, sometimes it’s just not possible, so allow me to leave you with a bonus. You can request that the IRS grant you an extension when filing your taxes. Although they are not required to oblige, my experience has been that they are quite lenient in this area. So, if you are running behind and can’t seem to get your ducks in a row in a timely manner, remember that the worst thing you can do for your business is to just pretend that you forgot about the filing date. Instead, request an extension, and if it’s granted, you’ll buy yourself an additional six months to get prepared.
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