Please consult with a licensed tax preparer to confirm what’s best for your business. This is not tax advice.
Isn’t it funny that tax season, the most universally dreaded time of year, immediately follows our gleeful, gift-filled holidays?
Taxes are all about cold, hard facts. This can be intimidating for some of us creatives. But if you can peel away that first layer of terror and look at tax filing as an opportunity to dive into the financial health of your business you might be rewarded. Maybe you’ll uncover a new way to lower expenses or take advantage of a large deduction for next year. Let’s end the cycle of dread this year and take charge of our tax preparation with confidence.
Use these 5 tips to change your tax season mindset from fearful to empowered.
#1. Know the Basics
The point of having a licensed professional prepare your taxes is so that you don’t have to know the regulations, right? Yes and no. It’s true that if you’re working with a tax professional you don’t need to know every detail. But having a basic understanding of tax rates, how they apply to your business, what forms are required for your type of business, whether you need to pay quarterly estimated taxes and the deductions you need to track throughout the year will help you succeed financially in the long run. It’s also a way for the business owner to take control back into their own hands. Knowledge is power after all and with it we can make informed decisions. It may come as a surprise, but the IRS actually has some great basic information. And why not go straight to the source? Start with this page for small businesses and the self-employed.
The size of your business and the type of business entity makes a significant impact on what system you’ll use to stay organized and what forms you’ll need to file. Get acquainted with the Schedule C form (typically applicable to sole proprietors) with this article from Craft Industry Alliance. Don’t forget to look at your state’s tax information for businesses. Another way to learn the basic information I listed above is to simply talk to your tax preparer. While they, presumably will answer most of these questions within a normal tax preparation meeting, if you have additional questions about optimizing deductions ask if you can arrange for a special consultation. At the very least, you want to be clear on what information and reports your tax preparer will need from you each year. This will help you create a system that makes all your future tax seasons so much more smooth.
#2. Get Organized
Whether you’re coming into this tax season with an organizational system or not, you’ll need to collect all your information and prepare it for filing. If you don’t have a system, use this opportunity to create one as you’re collecting your documents.
Here’s a short list of information/documents you may need:
- Revenue
- Expenses (make sure this matches the receipts you have filed at home)
- Mileage (make sure you have miles logged on an app or book)
- Payroll information
- Asset purchasing/depreciation schedules
- Issue or request 1099’s
- Issue or request W2s
Your organizational system should make it simple for you to collect all the information you need each tax season. When we’re talking about a system for tax record keeping, we’re really talking about overall financial recordkeeping with a few extra considerations. How you make this happen looks different for everyone. It’s ok to start wherever you are and move forward from there. A system that serves you is one that is repeatable year after year and even helps you stay organized when it isn’t tax season. There is no one-size-fits-all here, so you’ll have to do some tinkering to find what suits you.
Plan for your system to record income and expenses, store actual receipts, track mileage, generate tax forms for employees/contractors and possibly record more complexities such as depreciation. Remember, you must have an actual receipt (paper or digital) to claim a deduction. Your system could include any combination of accounting software, a CPA/bookkeeper, tracking apps, receipt scanners, spreadsheets, and digital or physical file folders.
Freelancers or sole proprietors who have a small number of simple transactions per month can sometimes get by with a system that includes a spreadsheet for recording income and expenses, file folders for receipts (digital or hardcopy), and a mileage logbook or app. If you’re a micro business with a lot of monthly transactions, or a business with employees you’ll need accounting software such as Craftybase and/or a CPA to help you stay on track and be prepared for tax filing. Start with this software comparison from Craft Industry Alliance. If you already have a system in place, tax season is a time for assessment. Is your system really working for you or are you still finding yourself frustrated? Maybe you’ve outgrown your current system and it’s time to upgrade.
#3. Stay Current
Some tax preparers send out a cheat sheet each year that lists the current year’s changes in deductions and other updates to regulations. This is a huge help in planning what documents I need to gather and adjusting my expectations for a refund/payment. The IRS version of this lives here. Stay up to date with changes so you can plan ahead and not be caught off guard by lower deductions or changes in regulation.
For example, for the 2022 filing year, there was a last-minute delay in the requirement for third-party payment platforms (PayPal, Venmo, Square) to report all 1099’s. What this means is that if you’re doing freelance work for under $20,000 you will not receive a 1099 from the payment platform. Read up on the details here. The point is, things change quickly and you’ll want to keep track of how this impacts your business. Plan ahead by adding calendar events to check on any tax changes during the year. Set yourself up for success by planting this reminder in a season that is typically slow for your business. For retail businesses, you might consider October. Try to plug in 1 day right before or after Christmas to check in on any last-minute tax changes and assess where your finances will land in January. This could be a great time to purchase a piece of equipment you’ve been considering and benefit from the tax deduction it will bring in the spring.
#4. Dig Deeper into Deductions
Make sure you aren’t missing out on any deductions for your business. One of the more complex but valuable deductions for businesses purchasing large equipment or vehicles is the depreciation deduction. Learn more about it here, and ask your tax preparer how your business can benefit from this deduction. Another deduction that is often overlooked by business owners is what is called family wages. This deduction allows small business owners to hire their children or other family members in their business and lower their taxable income by paying them up to $12,000 for their work each year. There are several rules for this deduction so make sure to read up and ask your tax preparer for help. Get started on your checklist of deductions with this article from Craft Industry Alliance.
#5. Work with a Professional
While the allure of saving money on the actual preparation of taxes is nice, remember that a certified tax professional or a CPA is there to help you receive the most deductions and make sure you’re carefully following tax regulations. Instead of going to a generic tax preparation company, ask friends and family for a local recommendation. It’s important to work with someone you trust who listens and can offer advice on planning for next year. A significant part of the value of a licensed tax preparer is that they can advise you on how to handle confusing tax situations and if you end up with a letter from the IRS, your tax preparer may be able to assist you in sorting out issues.
Check out these resources for more information:
Bookkeeping Software Comparison
