Don’t believe any business owner who tells you they look forward to tax time. Well, except your accountant, if they happen to run their own practice.
Tax time isn’t fun. But it shouldn’t be a source of stress, either. With advance planning, you can turn the tax filing deadline into just another day on the calendar — not your least favorite day of the year.
Follow these nine steps to make that happen.
1. Use a Payroll Service That Simplifies Payroll Tax Tracking and Reporting
Payroll taxes are really complicated. So make sure you’re not shirking your obligation to collect and pay Social Security, Medicare, and state and federal income taxes.
Whatever you do, don’t try to calculate and collect these taxes yourself. You’ll add hours of work to every pay run and could find yourself on the wrong end of a costly accounting error.
The best payroll services generally automate the payroll calculation, collection, and payment processes. Don’t use one that leaves this all up to you unless you’re angling for a big tax headache.
2. Collect and Organize Your Receipts in a Central, Digital Location
Okay, so you’ve automated payroll tax tracking and reporting. Next up is digitizing the shoebox or folder you’ve kept your receipts in up until now. You can use a dedicated digital receipt management solution or take advantage of organizational tools elsewhere, like a folder marked “Receipts” in your email suite. The most important thing is to create a complete record of your business transactions to show Uncle Sam if and when he comes checking.
3. Use a Mileage Tracking App for Vehicle-Related Expenses
Every mile counts. For tax purposes, at least. Keep precise track of your business miles driven by using a mileage tracking app with enough seats for every driver on your team. And make it a company policy for drivers to have the app activated whenever they’re driving for work-related reasons, even if they’re using a personal vehicle.
4. Use a Digital Invoicing System
A client invoice is just another type of receipt. Unfortunately, most receipt tracking tools don’t offer invoice management capabilities. And while you can use the old email folder trick to collect manually generated invoices in one place, that won’t keep you on top of payments (and non-payments).
The preferred invoice management tool is a cloud accounting platform that can generate, track, and record invoices and payments from one central dashboard. If the bulk of your business revenues come through invoiced sales, this might be your primary solution for tracking inflows — information you’ll most definitely need at tax time.
5. Keep Up-to-Date P&L Statements
Use digital accounting software to produce up-to-date profit and loss statements, or have an outside accountant do this for you. One per year is the bare minimum, but quarterly or even monthly might be better both for tax purposes and for achieving better visibility into your cash flows and expenses over time.
6. Use a Sales Tax Solution That Automatically Collects the Correct State, Local & VAT Taxes
Businesses that sell goods online need to keep track of dozens if not hundreds of local and state sales tax rates. Juggling different sales tax laws is difficult even for big retailers, to say nothing of small-time sellers.
Fortunately, many e-commerce platforms automatically track and collect sales tax. If you sell through channels that don’t have this capability, you may need to use a third-party app that has it. It’s worth the cost.
7. Keep Current Records of Cash and Inventory Donations
Many business owners donate cash and goods for the “right” reasons. They know that the recipients need their money or inventory more than they do.
If you’re one of them, keep doing what you’re doing. But don’t forget to take advantage of Uncle Sam’s generosity toward business owners who do the right thing. Chances are, the cash or goods donations you’ve been making to qualifying nonprofits count as tax-deductible expenses under the law. If you donate lots of unused inventory or equipment, or regularly write business checks to charity, that deduction could really cut your final tax bill.
Just remember to keep accurate, organized records of your donations. Otherwise, you might not be able to back up your claims and could wind up with a higher tax bill — or worse — after an audit.
8. Understand Applicable Deductions and Credits Before the Tax Year Ends
Don’t wait until the tax year has ended to bone up on state and federal tax code changes that could affect your final tax bill or reporting requirements.
Ideally, you’d make time during the first half of the year to go over these changes — or simply to review relevant tax law — with your accountant. But if the first half has come and gone, there’s still time to catch up. As long as you make the effort with enough time left in the tax year to make the right moves, you’ve done your job.
9. Work With a Tax Professional Who Understands Your Industry
Finally, work with a tax professional who actually understands your industry. Confirm that this is the case by requesting — and speaking with — business references willing to attest to their capabilities. The stakes are too high for you to rely on a generic business accountant, both in terms of compliance and your company’s bottom line.
Don’t Let Tax Time Turn Into a Tax Nightmare
You’ve worked too hard this year (and every year) to let tax time become a tax nightmare. And you have the tools to prevent this from happening.
Begin with payroll software that automates and streamlines payroll tax collection. Add centralized tracking and management capabilities for receipts, invoices, mileage, and other tax-relevant expenses. Keep your P&L statements up to date. Make sure you collect the right amount of sales tax on every transaction. Don’t forget about the tax implications of your charitable activities. And, for the love of money, work with a tax professional who knows your industry.
With a little luck and a lot of preparation, you might even look forward to tax time next year.