Tax Season is Over, Now What?
Want to avoid the high fees and high stress that occurred last quarter with your business's CPA or Tax Accountant?
A lot of new (and seasoned) business owners have so much to keep track of daily, multiple hats to wear to keep their business going, and daily fires to put out that bookkeeping and taxes typically lies way at the bottom of the checklist.
This is completely understandable, but can also be a great hindrance to your business in the long run...and when I mean long-run, I mean...around February and March. Of Every Year.
Did you know it's possible to cut your $3,000+ bill you pay to the CPA down to $600 or $800? Depending on where you live. The high fees creep up with every back-and-forth email, every bank account left unreconciled, and every transaction in the wrong account. Imagine the work you could get done and the stress that could be avoided if you could just hand over a few documents to your CPA and within a few days and 1 small bill later, your taxes are complete with no interference in your daily life..daily fire to put out and daily client to tend to and win over.
I want to make sure you can be prepared for next year. Just a few small actions each month throughout the year can really pay off come tax time next year. These steps will help save you a lot of money, time and frustration.
Keep Separate Bank Accounts
First things first, if you are still mixing business with pleasure. I politely urge you to stop. There's so many reasons keeping separate bank accounts is a good idea, but to keep it light, I'll just name a couple.
This is a time-waster, a money-flusher and complete stress for you and your CPA. If they are going through your transactions trying to determine which transactions are personal and which are business, I can guarantee you are going to have a high bill from them.
Attaching your business to your personal account makes it hard to look at your account throughout the year and really see how your business is doing, how much you have for monthly operating expenses and advertising and how much you have leftover to save.
It doesn't matter if you just started your business yesterday, are a part-time freelancer or if this business is your only source of income...a separate business bank account AND savings account is a must-do. This should be one of the first things you do when you decide to start working for yourself.
Tip: Opening a business bank account at your current bank makes it a breeze to transfer money quickly. If you need to draw from your business account to pay for personal items, simply do a transfer and the money will be in your account right away!
Create a Separate Business Folder
Keep a separate, dedicated folder on your computer or laptop with all your important business documents such as your business registration and licence, Sales Tax registration, signed W9 form, all your important receipts, employee contracts and any important documents you will need on hand.
I like to scan all my business-related documents to the computer so they're easy to get to, can be emailed easily when needed and I don't need to bother searching through my files. Of course, always keep the original of your business formation documents in a well-kept folder, but for ease of access, scanning them to your computer is the way to go!
Tip: To find your important permanent files quickly and easily and to be sure no one else has access to them, keep a separate folder called "Black Box." In the Black Box is your business registration and licenses/renewals, a current and signed W9, contracts, last year's tax return and anything else that you never want to lose!
Keep Up With Bookkeeping
This one can be a separate topic all on it's own. But I will stick to the important hilights.
You don't want to pay a CPA for bookkeeping. Let me repeat that again....you don't want to pay a CPA for bookkeeping. They charge on average $200/hour for their services and bookkeeping is a tedious task. Even CPAs don't want to do your bookkeeping. It's not worth their time and frustration, especially all at once at the end of the year and during the tax time rush.
Doing your own bookkeeping or hiring a professional to take care of it throughout the year, will definitely lower your tax return bill, guaranteed. Not only will it lower your bill, but bookkeeping is one of those necessities in business. It needs to be done. Monthly. Every Month.
So much magic happens when a business has clean books, ready to be analyzed. Keeping up with your business' books means they are getting recorded into an accounting software (not on an Excel Spreadsheet); each transaction is being put into their own account depending on the type of business activity it is; bills and payments are being tracked; income and invoices are being recorded. Do this daily or weekly and at the end of the month, the accounting software will spit out this magical report that shows you exactly what you spent on advertising (I spent what on Facebook and Google Ads??!), exactly what you spent on office supplies (how much paper could we have possibly purchased this month?), how much cash you brought in and how many sales were made.
Reviewing and analyzing your financial reports is such an essential monthly task when you have a business, when you're just starting out, and especially when you're trying to grow. As the months go by, you will be able to clearly see the patterns of your spending and know how to cut it down for the following months.
I understand it can be a daunting task to begin. It will take time that you may not want to spend, but it is a defining moment in your business when you start. As much as you may think you can track it all in your head or an excel spreadsheet...analyzing your business just from reviewing your bank account balance just won't cut it in the long run. It won't cut it if you want to grow or even survive. And I assume you started your business to survive and grow!
Tip: Ready to start your own bookkeeping, but a little overwhelmed about where to start? I have created an online course to help new and small business owners you want to do their own bookkeeping, but not sure how or where to start. It will go through piece by piece of how to set up your accounting software, how to record your transactions the right way, walks through reconciling at the end of the month and which reports are important and how to analyze them. This is a video course, so you will see the steps right on the computer as you follow along. It's easy peasy and takes the guess work away from getting started and keeping up with it on your own until you can afford someone to take it over for you! Check it out here:
Categorize Employees and Independent Contractors Appropriately
It's common to want to hire that first Independent Contractor instead of an Employee, skipping the whole payroll tax thing. But make sure they're actually a contractor! Your CPA will ask about it next year and if they realize you actually should have hired them as an Employee...there could be a LOT of Employee/Employer tax you will have to fork up. Better to just start out safe rather than forget about it and be sorry later.
One of my colleagues ran into this situation. They hired part time help where they really thought they should have been labeled as Independent Contractor. However, when they're CPA looked further into, they really should have been an Employee. So rather than asking those professionals to pay up their portion of Employee Tax for the entire previous year, my colleague had to pay both Employee and Employer Tax for the entire year for multiple contractors. Needless to say, they will be very careful when hiring in the future.
When it comes to the IRS, it's never a good idea to run the risk of "maybe they won't find out." They always find out...it may be 5 or 10 years down the road, but eventually an audit will happen and a huge fee will have to be paid. One that could be devastating to the life of your business.
Tip: Independent Contractors aren't just professionals who work on their own time. They provide and pay for their own tools, they don't need training or direction from you, they can work for others while working for you, they work in their own space.
Save Up for Your Tax Liability
If you're a new business or if last year was your first year running, you may not have had the profit to be worried about a huge tax bill. But as you grow this year and the years to come, it will become essential to save up each month. This way a $10k tax liability won't come as a shock. You can simply grab from savings and pay it without disrupting any cashflow or investment plans.
So how much should you put away each month to save for this? Typically, 25% of your revenue is an extremely safe way to go. However, let's be realistic...you just started a business, or you're still a small business, you need every penny of income you can get. That's why my realistic number is 15%. Chances are, as you get started you will have a small net profit margin and therefore have less tax to pay. 15% is reasonable and doable each month.
Tip: Estimate your monthly revenue and setup auto transfers from your checking to saving each month for 15% of that number. Pick the week where you have the least amount of expenses coming out so that transfer doesn't get in the way of paying any bills.