This article was co-authored by John Gillingham, CPA, MA and by How.com.vn staff writer, Jennifer Mueller, JD. John Gillingham is a Certified Public Accountant, the Owner of Gillingham CPA, PC, and the Founder of Accounting Play, Apps to teach Business & Accounting. John, who is based in San Francisco, California, has over 14 years of accounting experience and specializes in assisting consultants, bootstrapped startups, pre-series A ventures, and stock option compensated employees. He received his MA in Accountancy from the California State University - Sacramento in 2011.
There are 8 references cited in this article, which can be found at the bottom of the page.
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Every year towards the end of March and the beginning of April, millions of Americans are thrown into a panic over doing taxes. However, with the right planning and prep work, you can take a lot of the stress out of doing your taxes. Then, when tax season approaches, all you'll have to do is gather up your records and plug in the data. Keeping your financial documents and receipts organized can ensure a more pain-free tax season.
Steps
Adjusting Advance Tax Payments
Change your allowances if you owed taxes for the previous tax year. If all or most of your income comes from an employer who withholds taxes from your paycheck and you still ended up with a tax bill, it's probably time to adjust your withholding. This is also important anytime you experience a major change in your life, such as getting married or divorced, having a child, retiring, buying a home, or starting college.[1]- Use the tax withholding estimator at https://www.irs.gov/individuals/tax-withholding-estimator to determine if you're putting the right information on your W-4. If the estimator recommends a change, you can submit a new W-4 to your employer.
- You might also want to change your withholding if you got a smaller refund than you anticipated. However, keep in mind that getting a refund essentially means that you provided the IRS with an interest-free loan. You can do more with that money if you keep it in your paycheck.
Calculate estimated taxes if you work as an independent contractor. If you participate in the "gig economy," whether as a delivery driver, ride-share driver, or freelancer, the companies you work for don't withhold taxes from your pay. Rather, you're expected to pay estimated taxes every calendar quarter.[2]- To calculate the amount of estimated taxes you need to pay, use the worksheet on Form 1040-ES. You can download the most current revision of the form at https://www.irs.gov/forms-pubs/about-form-1040-es.
- The easiest way to make estimated tax payments is online through the IRS website. However, you can also mail in payments.
Warning: If you're supposed to pay quarterly estimated taxes and fail to do so, you may end up having to pay a penalty if you file your taxes and owe a substantial amount.
Make additional tax payments if your withholding comes up short. Another way you can cover a shortfall in your withholding is to enter an additional amount to be taken out of your paycheck each period and put towards your taxes. There is a space for you to enter this amount on your W-4.[3]- Setting an additional payment can be helpful if you anticipate a major life change or if you want to cover for other income you might receive, such as interest or dividends from investments.
Tip: If you are employed and also have a side gig as an independent contractor, you can make additional tax payments from your paycheck instead of making separate quarterly tax payments. Just calculate your quarterly estimated taxes, then divide that amount by the number of pay periods to arrive at an amount.
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Organizing Your Records
Use your last tax return to determine what documents you need. Absent any major changes to your employment, you'll likely need many of the same forms and documents in the coming year as you needed last year. Therefore, you can use last year's tax return as a blueprint to gathering the paperwork you'll need.[4]- Go through your last tax return and make a list of the documents you used. If you claimed any deductions, make a note of the receipts or other records you needed to back up those deductions.
- If you anticipate any changes relative to your last tax return, make a note of those as well. For example, if you're planning to get married in the coming year, you would make a note that your filing status is going to change. Knowing that, you would also know that you might need to change your withholding at work.
Make a list of all forms of income you receive. At the end of the tax year, you can use this list to make sure you have all the statements you need to complete your tax return. If you're missing a statement, contact the person or company that was supposed to issue the statement and find out when you can expect to receive it.[5]- If you're self-employed, update your list each time you get a new client.
- If you receive income as an independent contractor, you might not get a 1099-MISC income statement at the end of the year. However, that income is still reported to the IRS.
Tip: These forms must be mailed to you by the end of January. If you have all of your records organized, you could potentially file your taxes the first week in February.
Create a filing system for receipts and statements. If you're planning on claiming deductions, you'll need receipts and statements to back them up. Set up a simple filing system, either digitally or with paper files, to file your receipts and statements by category. Separate personal and business expenses.[6]- If you're using a paper filing system, using separate drawers for personal and business expenses ensures that they don't get mixed up.
- If you're filing digital copies of receipts and statements, make at least one good backup in case something happens to your computer. A cloud backup is a good option. If you make a backup on a thumb drive, update it at least once a week.
Get in the habit of filing receipts and statements every day. At the end of the day, set aside 5 minutes or so to file all of your documents that are related to tax deductions and other financial matters. Some days, you might not have anything at all, but setting aside a time to do it every day will keep your filing from piling up.[7]- If you're keeping digital records, it's a good idea to also record the receipts and documents you've filed on a spreadsheet so you have a single record you can use for your taxes. You can also set up the spreadsheet to keep a running total. For example, if you ride-share, record your fuel expenses each day on the spreadsheet. Then, when you do your taxes, all you have to do is copy the total from the spreadsheet.
- Make notes on each receipt. If there was a business purpose, write down what it was. Then round the total to the nearest whole dollar and write that amount on the receipt. This will make it easier for you to total up your receipts come tax time.
Tip: Even if you're keeping paper records, it's still a good idea to scan your receipts. Sales receipts are typically printed on thermal paper, which fades over time.
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Using Accounting Software
Choose a quality accounting software product. Accounting software can get expensive, but the most expensive product may not necessarily be the best product for you. Compare features to find the product that provides all of the things that you need.[8]- Before you start looking at software, make a list of the features you need. That will make it easier for you to pick the best one, because if you see one that doesn't have something you need, you can automatically mark it off your list and move on.
- Tech and finance websites regularly do round-ups of the best accounting software on the market. These articles also provide insight on which products are best for different types of people and businesses. For example, if you have a shop on Etsy, you might look for a product that would connect with Etsy to automatically update your sales.
- Some accounting software, such as QuickBooks, will automatically import your information into your tax return if you use the same company's tax preparation software. However, these packages are typically more expensive than others. If you keep good records throughout the year, you might find that you don't really need that extra convenience.
Tip: If you're self-employed or have a side gig, the cost of your accounting software is also a tax-deductible business expense.
Complete the initial set-up of your account. Setting up your accounting software is usually relatively simple. Provide some basic information about yourself and enter your bank account information to connect your accounts. Then, your accounting software will automatically update your transactions.[9]- Most accounting software can also be used to create invoices and other forms you might need for your business. Take the time when you first set up your software to customize any forms you might need so you have them when you need them.
Download the mobile app to help track deductible expenses. Most accounting software also has a mobile app that offers additional tools to help you track your finances when you're on the go. Using the mobile app regularly means you'll have less work to do on a daily basis and at tax time.[10]- Most mobile apps allow you to take a picture of receipts with your smartphone. Some will even read data from the receipt and import it into your account. If the mobile app you use does this, double-check to make sure the figures are correct before you import them.
Update and reconcile your records at least once a month. Accounting software typically has a feature that does this automatically by comparing your accounting records to your bank records. Look for a "reconcile" tab on your account dashboard or in the menu.[11]- If you have frequent transactions, you might want to run a reconciliation every week instead of every month.
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Expert Q&A
- QuestionWhen should I start to prepare my taxes?
John Gillingham, CPA, MAJohn Gillingham is a Certified Public Accountant, the Owner of Gillingham CPA, PC, and the Founder of Accounting Play, Apps to teach Business & Accounting. John, who is based in San Francisco, California, has over 14 years of accounting experience and specializes in assisting consultants, bootstrapped startups, pre-series A ventures, and stock option compensated employees. He received his MA in Accountancy from the California State University - Sacramento in 2011.
Certified Public Accountant & Founder of Accounting Play
- QuestionCan you start a tax return early?John Gillingham, CPA, MAJohn Gillingham is a Certified Public Accountant, the Owner of Gillingham CPA, PC, and the Founder of Accounting Play, Apps to teach Business & Accounting. John, who is based in San Francisco, California, has over 14 years of accounting experience and specializes in assisting consultants, bootstrapped startups, pre-series A ventures, and stock option compensated employees. He received his MA in Accountancy from the California State University - Sacramento in 2011.
Certified Public Accountant & Founder of Accounting PlaySort of. You can definitely start calculating your taxes early so you can streamline your filing. If you want to get a head start on your taxes, look at your last pay stub in November and estimate what your income will be for the rest of the year. Then, put those on your tax return as projection figures to see if you'll need to pay in taxes for that year.
Tips
- If you use the same tax preparer or tax software every year, you can carry over a lot of your information from one year to the next so you don't have toThanks
Warnings
- This article is based on US tax law. These steps might also help you get a head start on your taxes in other countries, although many of the details will be different. Talk to a local tax professional for advice tailored to your situation.Thanks
References
- ↑ https://www.irs.gov/pub/irs-pdf/p5348.pdf
- ↑ https://www.irs.gov/pub/irs-pdf/p505.pdf
- ↑ https://www.irs.gov/pub/irs-pdf/p5348.pdf
- ↑ https://www.forbes.com/sites/robertfarrington/2019/12/23/filing-your-taxes-early-what-you-need-to-know/#366b5550338c
- ↑ https://www.forbes.com/sites/robertfarrington/2019/12/23/filing-your-taxes-early-what-you-need-to-know/#366b5550338c
- ↑ https://www.moneycrashers.com/home-filing-system/
- ↑ https://www.moneycrashers.com/home-filing-system/
- ↑ https://www.nerdwallet.com/blog/small-business/best-accounting-software-small-business/
- ↑ https://www.pcmag.com/picks/the-best-small-business-accounting-software
About this article
The best way to get a head start on your taxes this year is to get together all of the documents you'll need in order to file. Use last year's tax return to figure out which documents and forms you'll need, since they should be largely the same unless there were any major changes to your employment. If you know that anything is going to change this year, like that you're going to be getting married before you file, make a note of that so you know what things need to be updated on this year's return. It also helps to make a list of all of your income for the year so you can make sure you have all of the statements you'll need. For more expert tax filing tips, check out the full article below!
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