According to the United States Small Business Administration, there are currently 31.7 million small businesses across the country. A small business is defined by the Office of Advocacy as any independent business that has less than 500 employees.
Whether you just started your business or you’ve been around for years, tax season can be a stressful time. As tax deadlines loom, you might feel nervous and wonder if you’re fully prepared. Preparing your small business for tax season can get complicated, depending on your industry, the expense reports you need to keep, and understanding what you can deduct.
Thankfully, it doesn’t have to be a challenge as long as you know what to expect and prepare beforehand. Keep reading to discover everything you need to prepare for tax season in 2022 and beyond.
Steps to Take Before Tax Season Arrives
Starting to prepare long before tax season arrives can give you enough time to make sure you have everything ready. The earlier you prepare, the more likely you are to stay on top of tax-deductible expenses. As such, your tax planning strategy should begin roughly a year in advance.
Step 1: Add Tax Deadlines to the Calendar
Whether you use a physical planner or an online one, it’s important to keep note of all tax deadlines for small businesses.
Self-employed individuals have to pay estimated quarterly payments. If an individual doesn’t pay these quarterly estimated taxes, they may owe penalties. The IRS issues a penalty for the following reasons:
- You don’t file your taxes on time
- You don’t pay taxes you owe on time/in the right way
- You neglect to provide accurate information
- You prepare an inaccurate return
- You don’t pay in full
The IRS charges some penalties each month if you don’t pay the amount you owe in full. There are a variety of different penalties, such as Failure to File, Accuracy-Related, Tax Preparer Penalties, and more. You can learn more about the different types of penalties on the IRS website.
What if you don’t know how much you owe on quarterly payments?
Self-employed individuals and small businesses just getting off the ground may struggle to calculate how much they owe. However, this shouldn’t keep you from paying your quarterly taxes.
An easy way to determine how much you owe each quarter is to use a tax calculator. This tool takes all the mystery out of wondering how much you’ll owe come tax time. It can also tell if you’re eligible for a refund.
Once you know how much you owe, make a note of each deadline on your calendar. You can also sign up for calendar reminders. The IRS sends calendar reminders to your email between 1-2 weeks in advance.
Step 2: Selecting the Right Tax Form
Form 1040? Schedule C? If the various types of tax forms seem overwhelming, you’re not alone.
However, it’s important you select the right business tax forms to avoid errors when you file. The forms you need depend on your business structure.
If you’re feeling overwhelmed, start here:
- S-Corp or LLC taxed as a partnership: Form 1065
- Single-member LLC or sole proprietorship: Form 1040 Schedule C
- C-Corp or LLC taxed as a corporation: Form 1120
A tax preparation service can help you fill out all these forms as long as you have all the required information.
Step 3: Collect Income-Related Business Records and Expense Documentation
One of the most important steps in preparing for tax season is to collect all income-related reports. The IRS needs to know how much income your small business made.
At this step, it’s critical that you provide accurate information. You also need the right documentation to back up these numbers.
You’ll want to collect all gross receipts from your sales. Keep careful records of any refunds you made, so you don’t count that money as taxable income. Keep track of your refund reports and documentation.
Additionally, you’ll need to factor in investment income and interest from business financial accounts.
Aside from income documentation, you also need to keep track of your expenses. After all, there are a lot of tax breaks for small businesses.
The Most Common Small Business Tax Deductions
Many small business owners aren’t aware of all the tax deductions out there. Once you’re aware of what you can deduct, make sure to keep detailed reports of these expenses as proof.
Here are some of the most common deductions:
- Factory overhead
- Business insurance
- Lease or rental payments for business
- Car expenses (mileage)
- Equipment depreciation
- Office supplies
- Software subscriptions
- Office furniture
- Advertising and marketing expenses
- Business meals and events
- Travel expenses
- Employee salaries
- Certain employee benefits
- Freelancers or contracted labor
- Legal fees
Again, it’s crucial you know what you can and cannot deduct and that you have the right documentation to prove it. For instance, meals with clients are only tax-deductible if it’s necessary to your business. A meal at an office party, however, is deductible.
Depending on your industry, you might be able to claim other deductions.
Restaurant owners can deduct commissions paid to vendors like Uber Eats and Door Dash, for example.
Make sure to read through the rules put forth by the IRS. For sole proprietorships, you’ll fill this information in on your Schedule C and your 1040 forms.
The right tax preparation service can help you claim these expenses, as long as you have accurate documentation. Keep receipts and invoices stored somewhere that you can easily find as tax deadlines approach.
Steps to Take as Tax Season Arrives
If you’ve been planning and keeping track of your expenses, the approach of tax season won’t feel as daunting. However, you’re not done preparing quite yet.
Step 1: Select How to File Your Taxes
You have a few different options for filing your taxes. Consider the pros and cons of each as tax season approaches so you know what to do when it’s time to file.
You can file your taxes yourself by hand and mail them in, though this isn’t recommended. There’s always a chance you can make errors this way, especially if you’re not familiar with the different forms you need. This is also a time-consuming process.
Many people choose to file their taxes online through tax software. Popular examples of tax software include TurboTax, TaxAct, and H&R Block.
The IRS also has a Free File program. If you qualify, you could prepare and file your tax return online through one of the IRS’ partner websites for free.
Each company can state different requirements for qualification. For instance, you might qualify for the Free File program if you have an Adjusted Gross Income (AGI) of $39,000 or less.
You might get free federal filing as well as free state filing if you qualify. Not all companies offer free state filing, so go over your options first. Some companies offer a free version for simple returns.
You can also hire and work with a professional tax preparer. If you’re worried about missing anything, such as a deduction, this is often the best solution.
Tax preparers have the experience and tools necessary to help small businesses file their taxes. Many also offer a guarantee so that if there are any errors, they’ll take the next steps and communicate with the IRS for you.
Step 2: Brush Up on New Tax Laws for Small Businesses
Business owners need to understand all tax laws, including federal, state, and local requirements. Failure to learn all the tax laws for your business can result in reporting inaccurate information, failure to make all necessary payments, and penalties.
As such, you might want to brush up on all the terminology you’ll face when you prepare your taxes, as well as all the laws.
Find out if you qualify for certain tax credits and what information you’ll need to prove this when you file your taxes.
Step 3: Prepare All Paperwork Necessary
Once you set a tax appointment or decide on a day that you’ll sit down to prepare your taxes, it’s time to gather all the necessary paperwork. Here’s a checklist of all the forms, papers, and documentation you’ll need:
- Social security numbers
- W-2 form(s)
- Retirement account contributions
- 1099 forms
- Property taxes
- Charitable donations receipts
- State and local tax information
- Records of loans and educational expenses
- Last year’s tax returns
This information will help expedite the process. You’ll have all the numbers and papers you need to file your taxes, whether you’re doing it yourself or using a tax preparation service.
Filing Your Taxes
It’s the big day, and you’re ready to file your taxes. If you plan on doing it yourself, make sure you set aside plenty of time and have all the necessary paperwork ready. You should also double-check your work before sending your tax return in.
If you’re using online tax software, the program does most of the work for you. You can speed up the process by having all the necessary documents on hand and ready, so you can enter the information as you’re prompted to do so.
If you’re filing your taxes with an in-person tax preparer, make sure you have all the documents you need for the appointment. Bring all the necessary forms, expense reports, receipts, and so on. They’ll walk you through the process, ask you questions, and fill in the necessary information.
Once you have all the information entered for your federal and state taxes, go ahead and submit it. If you’re expecting a refund, you can expect it within a few weeks. It takes the IRS roughly six to eight weeks to process paper returns and around three weeks or less to process electronic returns.
What if You Owe Money?
If you owe the IRS money, you have a few options. You can send money through electronic payments, debit or credit cards, check, or cash.
IRS Direct Pay is free to use and lets you authorize and schedule payments. You can pay for everything online, including estimated taxes, payments for amended returns, and installment agreement payments.
If you can’t pay what you owe by the filing due date, you may face late payment penalties and interest. However, this isn’t always possible for people. If you can’t pay everything that you owe right now, you can set up an installment agreement.
A payment plan is essentially an agreement with the IRS that you’ll pay the taxes you owe within a certain timeframe. There are both short-term payment plans and long-term payment plans.
The IRS has to approve your payment plan. You’ll also incur additional fees.
For a business, any balance over $10,000 has to be paid through Direct Debit.
You can apply online using the IRS online payment agreement tool, by phone, or by mail. You’ll have to submit Form 9465 (Installment Agreement Request).
Avoiding Penalties in the Future
As a small business, you have to watch your expenses. Paying extra fees and interest eats into your profits, which can affect your bottom line.
You can avoid paying late payment penalties in the future by planning accordingly and setting up quarterly payments. Work with a tax professional to find ways to reduce or eliminate what you owe and maximize your deductions.
Planning early and keeping on top of your expenses long before tax season approaches is one of the best ways to make filing business taxes easy.
Getting Your Tax Refund Earlier
Getting a tax refund is exciting, and there are a few ways you can ensure that money reaches your bank account as quickly as possible.
Filing your taxes on paper means it takes the IRS longer to process. As we mentioned, this can take between six to eight weeks.
If you really want to speed up the time it takes to receive your refund, you should file online. Taxes filed digitally typically only take about three weeks to process, meaning you’ll see the money in your account sooner.
Set everything up, so you get your refund as a direct deposit instead of receiving a paper check. You’ll see the money sooner this way, as you won’t have to wait around for it to arrive in the mail. It’s also safer to receive a direct deposit since you don’t have to worry about your check getting lost.
Prepare for Tax Deadlines
If you use these tips, filing taxes for your small business should be a breeze. Make sure to start preparing early and gather all the necessary forms and documentation you’ll need before tax deadlines approach.
Are you looking for more tips and strategies to make filing your taxes less stressful? Do you want to learn to maximize your refund? Take a look at our article on tax strategies for beginners.