It's the beginning of a new year, which also means it's time to wrap up the last year and file your taxes. Which also means, that it's the most stressful time of the year for most business owners.
I understand that tax time isn't fun for most people, but when you are prepared ahead of time and don't wait until the tax deadline to even think about getting prepared, tax time can be easy and basically stress free.
This year, let's make your tax time a lot less stressful.
Getting Organized for Tax Time
Let's start with getting everything you need organized. This process is going to be as hard or as easy as you want it to be.
If you have been working with your business bookkeeping throughout the year, almost everything should already be mostly organized for you.
Business Income Organization
The things you need for your income include:
- Any 1099's that you have received in your business from money that you received
- The total amount of income you made BEFORE any processing fees (this is the amount that you billed your client)
- Any income that you received in the form of products or gifts, these include things that you might have received to review in your business, items you've received to give away on your blog, anything else you may have received in lieu of compensation.
When you categorize your income for your business, you can put it into different categories (i.e. affiliate income, consulting income, coaching income, book sales, course sales, etc.), but when your report it on your tax return, all sales go into one category - Sales. The different categories are only for your purposes.
NOTE: If you are filing your tax return yourself using online software, for any 1099's you received, the income amount from the 1099 needs to be subtracted from the total income you reported. For example, you have a 1099 totaling $4500 in sales and another one totaling $5500 in sales and for the year you made $50,000 in sales. You would report the $10,000 in sales on the 1099 line and the other $40,000 in sales for your business's gross sales.
Organizing Your Income Receipts
Most online business owners use PayPal and Stripe to receive their income. There are some other ways to receive money as well and their systems are similar to PayPal and Stripe.
When you log into your account, the system you are using will have an account activity tab somewhere that will tell you the payments that you received for the period you select.
I personally recommend that you do this step monthly, but if you haven't done it yet for last year, you can do it for the whole year.
You want to select the activity for the period you are looking at. Then you want to download the activity to your computer, it usually comes in an Excel file. This way, you always have a back up of the total sales you have received. You will need this in the case of an audit. It's much easier to get the documentation now when it's completely free, than to need it 3 years down the road and find out that in order to go that far back in your records you have to pay for it.
NOTE: As an auditor, I have had multiple clients have to pay to get this detail after the fact because they never thought they would need it. Get it now and save it, just in case. It's much better to be prepared ahead of time, than up a creek without a paddle.
When you store these files on your computer, create an income folder labeled Year Income (i.e. 2019 Income, 2020 Income). Create a new folder for each year and keep them separated. This makes it much easier for you to find anything.
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Business Expense Organization
Hopefully you already know by now that you should have copies of every single receipt that shows money you spent this year.
If you use Quickbooks or Freshbooks, both programs have ways that you can easily take a picture of the receipt with your cell phone and store the receipt in your bookkeeping program. That way the receipt is attached to each expense item in your bookkeeping detail.
Or since almost everything is electronic, you receive a receipt in your email after every purchase. Create a folder in your email inbox for your expense receipts. Again, you are going to want to have a new folder for each year (i.e. 2018 Expenses, 2019 Expenses, 2020 Expenses). These folders can be in your inbox or create a folder on your computer to store them in.
Suggestion: If you keep the receipts saved on your computer, when you name the file for each receipt include the vendor name and the date of purchase (i.e. a receipt from Active Campaign on 12/5/19 would be named 12.5.19 Active Campaign in your expense file in your computer). This makes it easier to find the files on your computer if you need to look for something.
Your Qualified Business Expenses
If you need more information on the business expenses, check out this very detailed guide I wrote to help you with your business expenses.
The items that qualify as expenses for your business include the necessary and ordinary to run your business. In plain English, necessary and ordinary means things that you would regularly use for your business.
For example, as an online business owner, an email provider (like Active Campaign, Drip, Convertkit, etc.) is considered necessary and ordinary for your business, whereas car expenses are not considered necessary and ordinary because most online business owners work from their home and do not have a need to be driving somewhere for their business.
The most important part of your business expenses is that you have copies of your receipts.
In the case of an audit, if you do not have a receipt, you will not get credit for that expense as a deduction.
You also want to make sure you have a separate bank account for your business than your personal account. Pay yourself from your business to your personal bank account.
The Home Office Deduction
As an online business owner, you are most likely working from home. This means you may qualify for the home office deduction.
Check out this detailed guide to see what you need to do for the home office deduction and if you qualify.
Do You Need to Issue 1099s and W-2's?
If you paid contractors from your business more than $600 throughout the year, you may be required to issue a 1099 to your contractors.
A 1099 is how you will the IRS that you paid someone money that they need to report on their tax return. You can check out this detailed guide on everything you need to know about 1099's for online business owners.
If you have employees in your business, then you need to issue W-2's to your employees.
Both W-2's and 1099's must be filed with the IRS and mailed to your contractors/employees by January 31.
Have You Paid Estimated Taxes?
Have you been paying estimated taxes this past year in your business?
If you owe more than $1,000 in tax, you are required by the IRS to pay estimated taxes throughout the year.
When you are getting the paperwork prepared for filing your taxes, you are going to need copies of the stubs that show you paid your estimated taxes each quarter.
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Other Information Needed for Your Tax Preparation
- 1099-MISC - these are income you received from your clients, it's required for business owners to send these if they paid more than $600 in one year to a business
- 1099-INT - interest your earned during the year
- 1099-DIV - dividends paid to your during the year
- 1099-R - retirement funds you've received
- 1099-B - sales of stocks
- W-2s - employment income from a traditional job
- 1098 - mortgage statement
- Childcare expenses
- 1098-T - tuition expenses paid
Whether you are preparing your taxes yourself or working with a preparer, this information is what you need to have for your business and your personal taxes to file your return in a timely manner.
After your return is filed, make sure you still keep all of this documentation together in one folder with a copy of your return.
It is required that you keep a copy of everything for a minimum of 3 years. But the IRS recommends you keep everything for 7 years.
Need Organization or Bookkeeping Help?
Are you looking for help with organizing your files or your bookkeeping? Let's chat and see if I can help you with your business.
It's to Get Organized for Tax Preparation
If you stay organized and on top of everything throughout the year, tax time is much easier.
But this list is a very detailed list of everything you need to get organized for your taxes whether you are preparing them or someone else is preparing them for you.
Also by following this list and getting yourself organized, you will be prepared in the case of an audit. Obviously you don't want an audit to happen, but if it does, it's better to be organized ahead of time, than have to do it as you are giving the paperwork to the auditor.
Get organized in your business today and make your life less stressful at tax time. You will be more than happy that you did.
