Tax Time Is Over—Here Are 3 Ways To Make It Better Starting Now
Tax time is frustrating and scary for lots of people, especially if you're self-employed or have a side-hustle—but it doesn’t have to be. Here's how to prepare for tax season throughout the year to avoid surprises and for it to go smoothly.
Here are three common pain points and how to avoid them next year: owing money at tax time, you didn't file on time and had to extend your return, and feeling confused and stressed.
Problem #1: You Owed at Tax Time.
Solution: Pay Quarterly Estimates.
If you owed money, that may be okay. Theoretically, you got a low-interest loan from the government. The problem is if you didn’t set aside enough cash to make the payment when you filed your return or extension.
Here’s how to avoid owing, or at least avoid being surprised: pay your quarterly estimates. These are due April, June, September, and January for each quarter for both federal and state income tax purposes. If your income and tax situation is similar to your prior year, you can use the vouchers provided with your prior year tax package. Be sure to pay both the state and federal income tax. You may also be subject to city income tax if you live in NYC, for example.
If your income is drastically higher or lower than the prior year, you may want to engage with a tax accountant to help calculate your minimum required payment for each quarter. Use your Profit & Loss Reports or Income Statement to find out how much you've earned year-to-date (Are you doing your books? If not, you should be!). Compare this to the prior quarter or the same quarter in the prior year. If it’s significantly different, you may want to run it by your CPA and discuss cash flow to figure out what the best option is for you.
The other issue with owing money at tax time is interest and penalties. It’s important to remember that the income tax system in the US is a pay-as-you-go system. This means you should pay in as you earn each quarter. In addition to not paying on time, there are penalties for late filing (if no extension was filed). Make sure to file on time or extend by the original due date of your return to avoid late filing penalties.
Problem #2: You Didn’t File on Time.
Solution: Get Organized.
Did you file for an extension? If you have multiple K-1s or have a complicated tax return, it’s nice to get additional time to file the return. That said, if you extended because you waited until the last minute or didn’t have your files organized, then today is when you should start getting things organized for next year's tax filing.
Where to start? Are you staying up on your bookkeeping? Do you have a bookkeeping system? Google docs can easily get out of hand and disorganized. Consider software tools like Freshbooks or Xero. Keeping track of income and expenses not only helps you keep on top of bookkeeping, but also helps you know the financial health of your business at any time, enabling you to make informed financial business decisions.
Deciding whether to hire a bookkeeper as well is another decision. Either way, it is important, if not essential to have your bookkeeping in order to stay on top of your revenues and expenses. There are uncertainties in life and this will prepare you for loan applications, renting an office (or apartment if it’s your only source of income), or filing your taxes.
Make sure you save all your bank and credit card statements too. Setting up Filethis or Hubdoc are good options. Otherwise, diligently downloading and saving them in Google Drive or Dropbox are ideal solutions.
Problem #3: You’re Confused and Stressed.
Solution: Consult a Professional.
Being self-employed, you’re probably the type of person who is quite self-reliant. When does it make sense to hire outside help? It depends on your level of comfort, but generally, you should find a CPA or tax professional when you feel frustrated or overwhelmed.
A good pro will be able to talk you through your situation and empower you to make decisions. It’s not always necessary to engage someone to file your taxes or do your books, but if you’re consistently behind or feel like you’re paying too much, it might be time to find someone you feel comfortable working with.
Just like a doctor, finding an accountant with good bedside manner is important. You should feel comfortable discussing your situation to enable you and your tax adviser to make intelligent financial plans and achieve your goals.
When to consult a professional? Many individuals only hire a CPA to prepare and file their taxes. If you're looking for a CPA after the tax year is over, it is generally too late to discuss ways to plan for tax saving opportunities. As a small business owner, it is especially important to work with a CPA to utilize and optimize all eligible tax deductions or credits you may be unaware of. Start the conversations early. Ideally you should be discussing with your CPA: revenue when its earned and expenses when they are incurred, and learning about about their tax implications and any tax compliance requirements.
To review, if you owed money, filed late, or felt overwhelmed at tax time, you now have 3 ways to combat those issues. Make sure you’re paying your quarterly estimates to the IRS and your state(s) if they have an income tax. Set up and stay on track with a system to keep your books and records organized. Find a trusted adviser, preferably a referral, who can talk you through your situation. It’s best to work with someone who has experience in your industry.
Timber Tax is a web-based tax service for freelancers, consultants, and small business owners. Timber knows the ins and outs of federal and state income tax, allowing you to focus your time on your business. Book a call today for a free consultation with a CPA.