How to Prepare for Small Business Tax

Tax preparation needs to start immediately for small business owners. An organized bookkeeping system must be set in place in order to ensure you have accurate records and receipts for all deductions. If done properly, you will have all the information to ensure you get the best tax breaks. To get prepared, you can learn how to get organized, keep track of the right information, and avoid costly mistakes.

Part 1

Part 1 of 3:

Getting Organized

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Consider consulting an accountant to help you get organized. A certified public accountant (CPA) can help you to set up a paper or software accounting system as soon as you start your business, to help you keep your records up to date. The CPA can also tell you about changes in the tax law, and let you know if you are required to file quarterly, semi-annual or yearly tax returns.
- If you want to eventually do the taxes for your business yourself, it's still a good idea to talk to an accountant when you're first getting started, to help you get organized and save in the long run. Ask for referrals from other small business owners, to see what accountants in the area charge fair prices, are trustworthy and do a good job.
2
File IRS form SS-4. If your business is just starting out, one of the first things you need to do to keep detailed tax records is to request an Employer Identification Number, which is done by filling out form SS-4 and filing it with the IRS.^{[1]XTrustworthy SourceInternal Revenue ServiceU.S. government agency in charge of managing the Federal Tax CodeGo to source}
- This is like the W-2 that you give your employees, but for the business itself.
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3
File an Expected Taxable Income form. To get your taxes processed in a timely manner, most businesses file their projected income figures from year to year, and then make adjustments in the next fiscal year, depending on how things actually ended up. To do this, you'll need to fill out the correct form, depending on how you've structured your business:
- If your business is structured as a sole proprietorship, you need to fill out form 1040-ES.
- If your business is structured as a corporation, you need to fill out form 1120-W.
Depending on the nature of your business, and how it's structured, you'll need to use different forms to prepare for your taxes properly. This is one of the reasons it's a good idea to consult a CPA, especially when you're getting started. To learn more about the different forms needed for Partnerships, Corporations, Sole Proprietorships, and LLCs, navigate to the IRS web page for small businesses, or click here.
5
Start a tax diary. On a weekly or monthly basis, make sure you, or your bookkeeper, add sales and receipts to a tax diary. It's important to keep track of receipt dates, amounts, payees, check numbers and employee accounts.
- It's fine to use an old ledger, like Ebenezer Scrooge did, but most small businesses use a software record-keeping system, such as Quickbooks, Run a Small Business|Quicken or PeachTree because it automates many of the functions, and it can be updated with the tax laws from year to year.
- In basic terms, you need to track what's coming in and what's going out, and cross reference that information day-to-day. For more information about keeping track of the finances for your small business, read this article.
6
Collect a W-4 from each employee. You will likely need to apply for an Employment Identification Number (EIN), or tax number, and report all employees that are hired. The W-4 should be filled out by every employee upon hiring.
- If you hire out any work to independent contractors or freelancers, you'll need to have them complete a W-9, and request a 1099-MISC form when tax time rolls around.
- As soon as these items are filed, you must begin to withhold wages for tax purposes. Never, under any circumstances, should you borrow money from employee tax withholding, which makes you liable for huge penalties.^{[2]XResearch source}
7
Create a separate worksheet for each type of information. You need to be able to quickly reference sales against expenses, so that you can calculate the deduction according to the tax laws for each. If you want to compare one employee's travel expenses in June of last year against the office supplies gathered in March of this year, it shouldn't take more than a few scrolls of the mouse.
- For a more detailed description of what and how to track, read the next section.
If you have to file throughout the year, or if you must give all your records to your CPA by a certain date, these are essential deadlines to meet. Set reminders on your computer and/or cell phone to ensure you don't incur costs for tardiness.
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Part 2

Part 2 of 3:

Keeping the Right Records

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Keep a detailed record of all income. To calculate your expected income taxes, it's important to itemize all the money coming in over time.^{[3]XTrustworthy SourceU.S. Small Business AdministrationU.S. government agency focused on supporting small businessesGo to source} In your ledger, you need to track:
- Gross receipts for sales and sales records
- Inventory
- Items removed for personal use
- Returns and allowances
- Bank and savings account balance
- Investment interest
2
Keep track of all expenses. Expenses are especially important for you to track in as much detail as possible, to give yourself the most chance for optimal deductions come tax time. It's important to keep track of everything that you purchase through the business, as well as everything you purchase personally, for the business.
- Keep track of transportation and travel expenses, such as mileage, toll or parking receipts, airfare, hotels, meals, tips, taxes and Internet expenses.
- Keep track of office expenses, such as rent, business vehicles, office supplies, home office square footage, home office rent or mortgage, repairs or maintenance and depreciation of assets.
3
Keep track of employee payroll and contributions. Applicable expenses could include W-2 and W-3 payroll returns, Health Savings Account (HSA) contributions, health insurance premiums and payments to contractors.
- Also, keep track of legal fees and business insurance, such as Worker's Compensation or liability insurance premiums. Business-related legal fees are often deductible.
There should be documentation as to how your salary is decided. It is usually not lawful just to pay yourself with all the profits from the company, depending upon what you end up with from year to year.
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Part 3

Part 3 of 3:

Doing Your Taxes

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Send your employees' tax information a few months ahead of time. Gather your tax records at least a few months before taxes are due. You will need to send W-2s or 1099s to your employees and contractors, respectively. If you are doing the taxes yourself or if you are hiring a CPA, make sure you do your taxes well in advance, in case there are any problems.
- After filing these, you and your employees will both receive your forms when tax time rolls around. Generally, these are filed in early January, to allow for ample time to refile by April.
2
Decide how you'll do your taxes. The easiest way to do all your taxes is to hire them out. For example, you can use a software/e-file service, a CPA, a tax preparer or you can file them on your own. Request all the proper tax forms, or talk to your CPA about what they need.
- Most e-file services, especially the ones associated with accounting software, tend to have automated tax preparation services that fill in the required forms as you answer questions about your business.
3
Deduct all necessary expenses. The IRS defines all deductible expenses as being anything that's "necessary and ordinary," meaning that you've got a huge window of opportunity for making deductions.
- Make sure all expenses pass what is called the "laugh test." If something doesn't seem reasonable, it's likely to get flagged, should you face an audit.^{[4]XResearch source}
- Be especially careful in family business situations, if you're making payments to family members. Family businesses need to keep very close records to avoid suspicions.
- There are some key deductions that often go unnoticed if the business owner is unaware and doesn't keep receipts, or if you do not use a CPA. For example, in 2010, the US government passed the Small Business Jobs Act, which made it legal for cell phone costs to be deducted like other property.^{[5]XResearch source}
This is the time in which you can be audited by the federal government, so it's important to retain all of your well-kept records for at least that amount of time, to give yourself a big safety net. Another good reason to use a software-based system of record-keeping.
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Expert Q&A

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Can a business operate without doing accounting?
John Gillingham, CPA, MA
Certified Public Accountant & Founder of Accounting Play
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.
John Gillingham, CPA, MA
Certified Public Accountant & Founder of Accounting Play
Expert Answer
Yes! As a business owner, you should really have strong accounting in place so you can pay your taxes and run your business more efficiently. For instance, you might use Excel or accounting software to categorize your expenses and track how you're paying yourself.
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Tips

Make sure you decide if you are running a business, or if you have a hobby. People who gain income by selling occasional goods or services are not allowed to make the same business deductions as people who run a small business. Keep excellent records of work time, income and expenses, so that you can prove that you are running a business.
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Warnings

Don't assume that you can do your small business taxes. One of the biggest mistakes that small business owners make is doing their own taxes when they are not aware of all the small business deductions and tax laws. Consider at least consulting with a CPA, before you take on the task and invest valuable time doing taxes yourself or with an online tax program.
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