Pamela Capalad is a Certified Financial Planner™ and founder of Brunch & Budget, a financial planning service that makes talking about your money less scary and more delicious. She loves helping entrepreneurs and freelancers streamline their financial lives so they can focus on growing their businesses.
What if you could just push a button and taxes would be 99% done?
We are in the heart of tax season right now, and you might be scrambling to get all the information to your accountant before the April deadline (or maybe you did this a few weeks ago if you were filing corporate returns – yay, so fun!).
You’re highlighting bank statements, you’re going through invoices and 1099’s, you’re rummaging through drawers to find receipts, and by the time you’re done, you don’t want to think about tax season again until next tax season.
Sound familiar?
As anyone who has income from a business (also looking at all my freelancers and side hustlers out there!), tax season can feel like the seventh level of hell.
It might be a little too late to ease tax season for you this year, but once you’ve recovered from it, here are 4 things you can do now to make sure next year’s taxes are way easier than this year’s:
1. Have a separate account for all your business income/expenses:
Even if you do nothing else until next year, separating your business banking from your personal banking will make your life 1,000% easier for taxes.
Open a new checking account (doesn’t have to be a business account if you’re not ready for that yet!), and deposit all your business income into it.
Use the associated debit card to pay for all your business expenses. Transfer money from this “business” account to your personal account each month to pay for your personal expenses.
Is it ever too early to start? Not opening a separate account sooner was honestly my biggest regret going into tax season this year. I just started doing Brunch & Budget full-time last January and wasn’t making very much money at all (which meant I wasn’t spending very much), so I kept telling myself that I would separate my accounts when it seemed like it would be worth it.
Then it happened all of a sudden. There wasn’t a steady “ramping up” period that I was anticipating on the income side. A switch just flipped and before I knew it, my business finances were a mess.
I’m still sorting through my expenses for the first half of 2015 while the second half’s information is ready and waiting.
If you don’t already have this setup, you will be so happy you did come this time next year.
2. Start tracking your business finances now:
You don’t need a bookkeeper and it doesn’t need to be fancy. You just need to be consistent. My monthly clients have access to a financial portal where we can track their business expenses together all year long.
If you’re up for DIY’ing your expenses, there are two free options I recommend. If you’re new to the whole tracking thing, mint.com is incredibly user-friendly. It’s designed for personal finances, but if you only link your aforementioned “business” account, only business income and expenses pull through.
Once every two weeks or every month, go in and categorize your expenses. This is where the magic happens. If you do this on the regular throughout the year, then you can literally just hit export next year and send the spreadsheet to your accountant. Boom.
The other option is WaveApps.com. They have more traditional accounting features, which can be overwhelming for someone who is new to bookkeeping, but can be a dream for someone who wants to be able to analyze the data throughout the year the way an accountant would.
3. Have a way to keep track of all your receipts and separate your cash spending:
I’m sure one of the pieces of advice you got from someone when you told them you were starting your business was, “Make sure you keep your receipts.” You think you’ll be really diligent about it and then one day, you’re not.
The main purpose of keeping receipts is in the case of an audit. If an auditor wants to see exactly what you bought at Staples or Costco to make sure it was all business expenses, he will need to see the receipt (also why showing an audit your credit card statements won’t cut it).
BUT, if you are tracking your expenses and keeping everything separate, your accountant never needs to see one receipt since you can just download all the data and hit send.
The best way to keep receipts is to either have an envelope or a box labeled by year and toss them all in there, or download an app like Expensify and snap a picture of the receipt. Bonus: once you take a pic, you can throw the receipt away!
EXCEPT for cash.
Cash transactions tend to get lost in the shuffle because they aren’t being tracked by your bank statements or online accounting app, but you can’t avoid them and these deductions can add up. Every time you have to pay a toll or go into a cash only spot, it doesn’t get captured.
What can you do? Make sure you grab a receipt (toll booths give receipts!), then download the Expensify app and snap a pic of the receipt.
You can even go so far as to create a separate report just for cash receipts so you can easily get the information for your accountant. That way, Expensify can create and export reports for you based on the receipts you snapped in the app and you can just send the number to your accountant. Hooray!
4. Pay your taxes along the way:
To pay or not to pay estimated taxes? If it’s your first year, how do you even know what to estimate? Here’s the deal – the penalties for not paying estimated taxes are relatively small if your income isn’t in the 6 figures.
The reality is though, unless you’re super diligent about putting away money for taxes every month, doing quarterly payments can keep you out of a lot of trouble once next year’s March/April deadlines roll around.
Once this year’s tax season is over, talk to an accountant and ask them to help you calculate quarterly tax payments. Tax payments are based on either 90% of this year’s income, which can be hard to predict, or 100% last year’s income, which is a more concrete number. Then start to pay them every 3 months. You can even pay them online at EFTPS.gov.
Even if you make more money this year, as long as you pay at least 100% of what you owed last year, you won’t be charged a penalty for not paying enough. Do keep in mind that if you do blow it out of the water this year income-wise (which you will), you will probably owe more taxes come next year, so you’ll still want to set aside additional funds to pay any potential taxes.
So there you have it.
Push through your taxes this year, set up these 4 things ASAP, and next year, you can have your taxes done by February with the push of a button and spend time on more important things 🙂
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