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Updated: February 27, 2023
As a small business owner, you have to think about getting finances, payroll, and taxes right — all while running things day-to-day.
While most taxpayers don’t need to spend too much time worrying about the IRS, some small business owners are also high wage earners. This means you’re much more likely to hear from the taxman. And the IRS says that in 2019, they sent more than four million notices just for math errors on forms.
There are steps you can take to make sure you’re getting taxes right and reducing the possibility that the IRS will come knocking on your door. These 10 simple things small business owners can do to make tax time easier can be started today — and are well worth the time.
It’s much easier to sort through everything now than when 2022 is a distant memory. In fact, reviewing and organizing your records monthly helps spread the workload throughout the year instead of cramming it all into a year-end rush.
Take time to go through any forms you’ve already filed (like Form 941) to check for accuracy. Make sure to confirm EIN numbers, social security numbers, and anything else the IRS might use to identify you or your employees. And when you’re done, move all your forms, invoices, and receipts into the same place — whether it’s online or a physical folder — so you’ll be ready for tax time.
Tax codes change all the time, and it’s your accountant’s job to keep up with them. Some of those changes will impact you as a high-wage earner, others as a small business owner, and some taxes will affect your business. Ideally, your accountant should be knowledgeable about all of these and keep you informed if there are new or different deductions that might change the way you run your business.
Gain a deeper understanding of the differences between invoices and receipts, the information they should include, and the reasons why they are important to a business.
Carving out a few minutes in January to make sure you’re making things easy for your accountant can help reduce the risk of a mistake come April — or an audit later. But we recommend talking more often than twice a year.
In fact, we recommend chatting regularly — even monthly. You’ll have a better handle on your business and can plan for any tax law changes. Recording income and expenses in real-time allows you and your accountant to catch any mistakes early. And your accountant will know your business better and be more empowered to offer proactive, consultative advice: Small business owners who have a strong relationship with their accountant are 32% more likely to expect a significant increase in revenue over the next year.
Just as it’s crucial to bring in some expert help with taxes, you should consider getting some assistance with payroll. A payroll service provider will be able to calculate and remit those taxes accurately and on time alleviating a headache for you. You may also want to check to see if any of your other service providers offer to help with tax issues. For example, OnPay offers an error-free guarantee, which means we’ll help deal with IRS notices if there are problems with your payroll taxes.
When you offer a 401(k) or other qualified retirement plan, employer contributions and some administrative fees are tax-deductible if they fit certain criteria. And qualified employers can get a $500 per year tax credit for the first three years of the plan. Plus, as an employee of your business, you will be able to take advantage of tax-deferred savings with your company 401(k) as well. To make sure the plan seamlessly integrates with your current back-office systems and payroll deductions, contact your payroll services provider to see what retirement savings plans they offer.
The line between business and personal expenses can get a little blurry, but you should take care to make the distinction as sharp as possible. Not separating expenses once or twice might not be a big deal, but if you get into a habit of doing so, your business expenses may end up being completely inaccurate.
Plus, the Tax Cuts and Jobs Act of 2017 not only eliminated many the ability to write off entertainment expenses but also reduced the deduction for most business meals to 50%. Be prepared for the IRS to heavily scrutinize write-offs for these items related to your business — if they haven’t already.
Charitable donations are a wonderful way to help your community, and they can result in significant tax deductions. However, if your donations seem too big for your income bracket, the IRS is likely to want a closer look at your books. Make sure you maintain good records of your charitable donations, and if you’re going to claim non-cash deductions over $500, be sure to file a Form 8283. Also, be careful about whether you classify charitable donations as personal or business write-offs. There are a number of limitations and special requirements for different types of business entities.
Get up-to-speed on how long you need to retain payroll records in our in-depth guide for employers, which includes details on federal requirements and tips to help you stay on top of everything.
If your business uses the cash method of accounting instead of the accrual method, this tip is for you. The cash method requires that you calculate your income and expenses based on when the cash goes in and out of your bank account. By paying bills in December, even if they are not due until January, you can decrease your taxable income in the current year, which in turn reduces your tax liability.
If you expect to need to make large purchases of equipment or other business items early in the new year, it might be a good idea to buy them a little ahead of schedule to take the deduction for your current tax year. Just remember that a deduction isn’t exactly an equal return for the money spent. Check with your tax adviser to be sure that spending now will reduce your overall tax burden, not just push it out until later.
All year long you’ve been withholding payroll taxes and sending them along to the IRS (and your state agency, if required). In January, you’ll need to provide your employees with W-2s and contractors with 1099s so they can complete their taxes. Don’t wait until the last minute — a time when you’re also probably finalizing an entire year’s worth of your business income and expenses. Set aside some time in early January to get this done well before crunch time. Or, if you partner with a payroll service provider, all of this can be taken care of for you.
After you’ve finished reading this article, be sure to check out our additional resources on how to complete Form W-2 and Form 1099 NEC instructions, which include step-by-step instructions and screenshots to make completing these documents stress-free.
Taking a few proactive steps throughout the year to get your business’s tax prep in shape can make April one of your favorite times of the year. You’ll be free to do more of what you enjoy (and spend less time going back and forth with your accountant).
And if you are subject to an audit, know that you’re one of the 2 million Americans each year in the same boat. Things will work out. Start by reviewing this guidance from the IRS to get a handle on common questions. Then consult with your accountant to get organized so you’ll be calm and collected.
If you’re eager to plan your tax year, we’ve got a printable 2023 tax deadline calendar that will let you know all the important tax dates for the year. You can also subscribe to the IRS’s calendar to get reminders.