Here are 6 tips to help make things easier so that you know where you stand when it comes to tax and accounting.
1. Track sales and 1099's separately.
The first step to tracking your expenses is to make sure that you have a clear picture of your income. We recommend that you track your sales and 1099’s separately. This will help you easily catch any mistakes that your clients may have made in reporting the amounts that they paid to you on your 1099. Ultimately, the IRS will rely on 1099.
Secondly, you should never rely on 1099's for tracking and reporting your income. Always report your sales and reconcile them with your bank account so that you have an accurate picture of what you actually earned. This will also help you keep up with the health of your business throughout the year and not just at tax time.
2. Setup a separate bank account for your business.
Setting a separate bank account isn’t only recommended because it makes it easier for you to separate business expenses from personal expenses. In fact, the IRS may actually disallow deductions that you want to take by considering them personal expenses. That is because you are generally not permitted to deduct personal, living or family expenses. So make sure that any charges that are related to deductions that you want to claim for your business are always recorded in a separate business bank account.
We also recommend setting up a business entity and getting a separate bank account for your business for legal liability reasons. By choosing to operate your business as an LLC or corporation, you can avoid the risk of losing your retirement or your house to a lawsuit or tax problems.
3. Scan receipts for all purchases over $50.
When it comes to keeping tracking of the receipts and invoices from your business expenses, it’s a good rule of thumb to scan receipts for purchases over $50. While the IRS doesn’t usually require proof of small purchases, in the event of an audit, you’ll need to have receipts for larger purchases that you’ve claimed as a part of a deduction.
4. Issue 1099's to contractors you hire and pay more than $600.
If you hire and pay contractors more than $600 in a single calendar year, you’ll need to issue 1099’s to each one. Make sure that these are issued to each contractor by Jan 31st of the following year. The deadline for filing electronically with the IRS is also January 31st.
5. Review your bookkeeping with your accountant before the end of the year.
To help you get organized for tax time, review your bookkeeping with your accountant before the year ends. Don’t wait until you have to file in order to go over your business records. By discussing your financial records in advance, you can ensure that you’ve tracked everything accurately so that your accountant can easily prepare your taxes when the time comes.
6. Calculate your tax liability before the end of the year.
Finally, it’s also important that you calculate your tax liability before the end of the year. This will help you determine if you should spend more in business expenses in order to increase your deductions for the year. This may help you save more money at tax time in comparison to just paying the tax.