It’s here again, W2s and 1099 are being issued, last year’s books have been reconciled and it’s time to start thinking about tax season again. While most of us can’t wait to get this chore over with and hopefully pocket a decent refund, it may benefit your business to step back in time and revisit last year’s return.
Why? Dusting off your most recent return can reveal some important things about the financial state of your business and ways you can improve.
Let’s take a look.
Was preparing your taxes a huge pain?
If this sounds like you then, more than likely, you aren’t the world’s best record keeper. For example, if you put in a lot of miles to conduct business, can you be sure you tracked and logged every mile, toll, and parking fee?
It happens, even to the best of us. I’ve known highly successful business leaders who delay logging a year’s worth of business mileage until April. You can only imagine the deductions they are missing out on, as well as incurring the potential wrath of the IRS who have strict rules about maintaining records and receipts.
If this sounds like you, then take the time now to organize your books. Gather your receipts. Track and categorize your expenses in a spreadsheet or accounting software. Then look at ways to improve your bookkeeping practices this year.
If tracking mileage is your problem, try Milog ($3.99) which lowers the burden of calculating distances and tracking deductions. Mileage Log ($9.99) is another option. For more useful financial apps read: 7 Apps and Tools to Manage your Cash Flow on the Road.
Options for self-employment tax woes
Self-employment tax has risen steadily in the past few years from 13.3% in 2011 to 15.3% in 2014 and it’s a tough pill for most small businesses and freelancers to swallow.
Taxes can’t be avoided. However, there are workarounds that may lower your tax obligation. If you’re a sole proprietor and operate within a certain income bracket, you might benefit from forming an S-Corporation. The structure isn’t for everyone but it could help alleviate the steep income and self-employment taxes that sole proprietors pay. As a guideline, if you make between $80,000 – $100,000 in bottom line profit then structuring your freelance business as an S-Corporation might be worth considering.
Don’t forget to factor the costs of self-employment tax into your cost of doing business and reflect it in your pricing.
Expense, expense, expense
Fortunately for small businesses, the IRS is particularly friendly in terms of expense deductions. Are you maximizing yours? What does your last return tell you?
IRS laws around expenses change annually – from changes in mileage rates to new ways to claim your home business/office deduction. In addition to mileage, you can also deduct other travel related expenses, the cost of client gifts and entertainment, and charitable donations and activities.
This is all great, but many small businesses, especially home-based freelancers or consultants, don’t incur significant expenses. Talk to your accountant and see if there are ways you can boost your deductible expenses, without compromising cash flow. This might involve more on-site client meetings or entertainment opportunities, or you could look at ways to upgrade your business’ technology assets.
Estimated taxes that come back to bite you
Estimated taxes are a tough nut to crack. If your income varies from year-to-year, or quarter to quarter, gauging what to set aside for these payments can be tricky and may come back to bite you at tax time in the form of an underpayment or overpayment. Likewise if you hold off quarterly payments and write one big check with your return, the burden is immense.
A better way of handling your estimated taxes is to pay them quarterly, based on revenues less expenses made during that period. Put a portion of every payment you receive from a client aside, preferably in a separate bank account and pay on time, each quarter.