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The days are flying by, and before you know it, January will roll around, marking the start of tax season. To ensure your tax return is accurate, there are steps you can take before January 1. These crucial actions will reduce stress and prevent potential issues with the IRS. Let’s explore the six things you should do now to prepare.
1. Update Vendor and Customer Information
One of the common sources of tax errors is having incorrect information regarding your vendors and customers. To avoid these mistakes, it’s essential to review your contacts and make sure both you and your business partners have the most current information about each other. Waiting until the tax season to collect information can lead to inaccuracies and complications. Instead, be proactive. When making payments to vendors or independent contractors, send them a Form W-9, Request for Taxpayer Identification Number and Certification. If you have a QuickBooks subscription, you can efficiently send this form via QuickBooks for secure completion and submission. Not only is QuickBooks secure, but it’s also a faster process, eliminating the need to chase down vendors or contractors afterward.
2. Record All Income and Expenses in an Accounting System
If you haven’t been using an accounting system to track your financial transactions, you should do so immediately. Consider hiring an Accountant or Bookkeeper to help organize your records. A widely used accounting system is QuickBooks, which can simplify your record-keeping process.
Even if you already have an accounting system in place, ensure your records are up to date. Don’t forget to provide information about any business expenses or income that might have flowed through your personal accounts. This includes tasks like petty cash reconciliation and ensuring you’re reimbursed for any business mileage, travel, and meal expenses. Make any necessary month-end adjustments, such as recording depreciation on fixed assets.
3. Start Processing Payroll Properly
If you’re a business owner and don’t have a payroll processing provider, it is imperative that you get one as soon as possible. As a sole proprietor or partnership, you may not get a W-2, but you might still need to file 1099-NEC or 1099-MISC for some of your vendors. A reliable payroll processing company, such as QuickBooks Payroll or ADP, can handle these tasks and ensure you remain compliant.
Employees vs. Independent Contractors
Understanding the distinction between employees and independent contractors is crucial. You cannot classify employees as independent contractors just to avoid paying payroll taxes. The IRS relies on three common law rules to differentiate the two:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
If your answers align more with these common law rules, you are likely dealing with an employee.
2% or More Shareholders of an S Corporation:
If you’re a 2% or more shareholder of an S Corporation, you’re considered an employee. If you’ve paid yourself without withholding FICA (Medicare and Social Security taxes) and Income taxes or filing payroll tax returns, there’s still time to correct this. Subscribe to QuickBooks Payroll or ADP and report all payroll payments made without tax being deducted as salary advance or employee loan. From now until year-end, record that amount as payroll either in a lump sum or allocated until year-end. The salary advance and payroll will offset each other, leaving you with the payroll tax amount that wasn’t paid. Ensure that your salary is reasonable compensation and complies with IRS standards. Shareholder distributions cannot exceed the salary amount. Also, health insurance paid by the company for shareholder-employees is considered salary and should be classified as S Corp owner’s health insurance.
4.Year-End Tax Planning
Year-end tax planning is crucial for entities, and it’s vital to follow specific guidelines. Make sure you have all the partners’, shareholders’, and/or members’ information, including Social Security Numbers, Employer Identification Numbers, percentage ownership, and other relevant details. Once bylaws, operating or partnership agreements are signed, ensure this information is safely stored. It’s also a good time to consider updating your agreements if necessary.
Ensure Your S Corporation Status: To maintain your S Corporation status, you must meet certain criteria. These include having no more than 100 allowable shareholders, which are individuals, certain trusts, and estates. Partnerships and corporations cannot be shareholders. Foreigners should not have an ownership interest. There should be no more than one class of stock, ensuring identical rights to distribution and liquidation proceeds. Be sure that distributions are based on shareholders’ stock ownership percentages and correct any discrepancies by year-end. Whether your entity has one or multiple shareholders, schedule your annual shareholder meeting and document the newly elected officers and plans for the next year.
5. Review Your Current Year Tax Obligations
Ensure your business complies with the requirements of state, county, and city jurisdictions. Verify that your business’s status has not been revoked by any jurisdiction. File any required sales and use tax returns and prepare for the Tangible Personal Property Tax return by writing off disposed or sold fixed assets from the books. For sole proprietors, partners, and high-income taxpayers, ensure you’ve calculated and paid the correct amount of Estimated Income Tax Liability. Consider year-end tax deductions, such as making significant purchases of fixed assets in the last quarter of the year instead of waiting until January.
6. Review Your Prior Period Tax Return
It’s never too late to correct errors in your tax returns. If you discover omissions or inaccuracies, take action to fix them before the IRS detects the issue:
- Check your prior-year tax return’s opening balances to ensure they match the financial statement and make necessary adjustments if they don’t.
- File an amended tax return if required.
- The IRS has a six-year window to assess additional tax if over 25% of your gross income was not reported. However, do not amend tax returns that are more than six years old as the statute of limitations has expired on those returns.
By following these six year-end steps, you can significantly reduce the chances of inaccuracies in your tax return. As the year-end approaches, these six steps can significantly reduce the risk of inaccuracies in your tax return. Taking proactive measures now will not only ensure a smoother tax season but also minimize the chances of IRS troubles down the road. If you need assistance with your taxes or have questions, don’t hesitate to reach out to me. Your financial future and peace of mind matter to me.