Tax season is often one of the most disruptive times of the year for any business, no matter the size. For solopreneurs, you’re already a one-person show with a lot on your plate.
The silver lining about Tax Day is that you know when it’s coming every year, which means now’s the time to get ahead of it for next year. As an accountant and business owner myself, the greatest wisdom I can impart to solopreneurs is to adopt a year-round approach to your taxes.
This accounting practice can do more than save you penalties; it will also help you avoid the tax season crunch – and we know that time saved is money earned. Here’s how to get started:
Keep your bookkeeping up to date
In my seasoned career as an accountant, I’ve witnessed a lot of clients experience a need for cash during tax season that they weren’t expecting. That’s largely due to one mistake: they were underprepared. The fact is, tax season is less stressful when you’re organized.
As a solopreneur, you’re running the whole show, and it can be easy to push updating your numbers to the side to focus on other business operations. However, having a constant pulse on your finances will go beyond helping you during tax time. Keeping your books updated also provides greater insight into any financial trends in your business, including areas where you may need to trim or bolster your budget.
The best way to stay organized is to use a digital storage system, such as Google Drive or Dropbox, to hold all necessary receipts, business, and tax documents in one accessible and safe place. That means opening every business financial document you receive and scanning it into your online system right away so you don’t forget. In addition, check your books on a consistent weekly cadence to ensure everything is up to date. It’s always helpful to plan backward from the tax deadline to stay ahead and carve out time in January or February to triple-check that you’ve accounted for all your documents. This will give you the breathing room to file for a tax extension well in advance if it turns out you’ll need more time to prepare.
Separate your business from personal funds
Remember to fund your business by regularly placing money into a business account and using it solely for business expenses. As a business of one, you may think, “Why do I need a business account if all my money is ultimately going to the same place?”
It may seem like an extra step in your to-do list, but opening and using an account for business-specific purposes will make tracking much easier come tax time. For example, if you make a supplies purchase at a retail store with a personal credit card and you’re audited during tax season, remembering what expense was made for business purposes may be a hassle. If you’re a part of the 81% of solopreneurs currently using personal credit cards to make purchases for their business, do you feel confident that you can prove an expense was for your business if the IRS asks?
Making sure that all business income and expenses pass through the appropriate account ensures that you have an accurate accounting of all deductible transactions. Plus, a business account can be connected to your bookkeeping system, which helps to automate and categorize transactions for you. That’s something you can’t do with just a personal bank account and a spreadsheet.
Set aside funds for taxes
It is common in my practice to hear from clients who are unsure what their tax burden will be when they file. Often, this creates fear they won’t have enough saved to pay their taxes when that bill comes in. That’s a lot of worry to manage when you are already running a business alone. This is why I always recommend clients set aside money throughout the year in a separate bank account to put towards your taxes.
If you’re keeping your books up to date year-round, you’ll have a better understanding of how much you’ll likely owe in taxes when the time comes and can plan your saving allocations accordingly. If you’re still working through tracking your cash flow, consider setting aside about 30% of your profit for taxes.
If you haven’t paid enough at filing, you’ll at least have put a dent towards prepaying what is ultimately due. On the other hand, if you’ve paid more than was due you’ll get a refund. As a bonus, any money left over in your tax account can go towards the next tax season, other expenses, or be reinvested back into your business.
As a solopreneur, you’ve got plenty on your plate during tax time, and preparing your books in a time crunch shouldn’t be one of them. Practicing the habit of year-round tax planning can help remove the uncertainty and stress around tax season and help you save time that you can put back into your business.
Keila Hill Trawick, CPA and Founder of Little Fish Accounting
After tax season stock image by RomanR/Shutterstock
