5 Tips to Prepare Your Small Business for Tax Season

1. Classify your business correctly

There are several business structures to choose from, such as sole proprietors, LLCs, and corporations. The types of taxes that you have to pay, and the specific forms you need to file, can differ based on your business classification. Because of this, it’s important that your business is classified and registered correctly. Otherwise, you may be overpaying or underpaying your taxes.

Some common business classifications include:

• Sole proprietorship: Sole proprietorships do not produce a separate business entity, meaning your business assets and liabilities are not separate from your personal assets and liabilities. This type of business classification can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business.
• Partnership: There are two types of partnerships – limited partnerships (LP) and limited liability partnerships (LLP). LPs have one general partner with unlimited liability while all other partners have limited liability; in LLPs, every owner has limited liability. Partnerships can be a good choice for businesses with multiple owners and for professional groups (ex. attorneys).
• Limited liability company (LLC): An LLC protects your personal assets (your vehicle, house, savings accounts, etc.) from being at risk in face of bankruptcy or lawsuits. This business structure can be a good choice for medium-to-high risk businesses and owners with significant personal assets they want protected.
• Corporation: Corporations offer the strongest protection to its owners from personal liability, but they can be expensive to form. Corporations also require more extensive record-keeping and reporting. Corporations can be a good choice for medium-to-high risk businesses and businesses that plan to “go public” or eventually be sold.

If you’re unsure about the best business structure for your business, this guide from the Small Business Association can offer additional information. If you have already decided on a business classification, make sure your business is properly registered in your state.

2. Separate your business finances from your personal finances.

If your business finances are mixing with your personal finances, calculating your taxes can be extra frustrating. The best way to keep your finances separate is by having a dedicated business bank account. This way, your business finances will be better organized and easily accessible in one place.

Digital accounts, such as Grasshopper’s Innovator Business Checking, can be a great option for small business owners. Having online banking and a mobile banking app means that you can get access to your funds any time of the day, from wherever you are. Grasshopper accounts also come with an array of digital tools to help make it easier to manage your finances, including:

• Contactless debit card
• Remote check deposit
• Bill payment services
• Wire transfer services
• Accounting integrations
• Online bill pay
• eStatements & more!

Having these kinds of tools included in your business checking account can help to make it easier to manage your money. Knowing that your business funds are well organized will make tax season even easier for you.

3. Keep adequate records.

Having adequate records of every business transaction is important. Keeping track of all of your business transactions gives insight into the financial health of your business and can help you identify ways to improve your business processes.

Proper bookkeeping is especially vital when doing your tax preparation. By maintaining adequate records, you can feel more secure about the accuracy of your tax return. You also reduce the risk of being audited. For help with the bookkeeping process, check out our small business bookkeeping guide.

Managing your bookkeeping on your own can be tricky, since every single business transaction needs to be properly recorded. Using accounting software can help automate your bookkeeping, making the process easier for you. With Innovator Business Checking, you can easily connect your account information to Quickbooks, a popular accounting software for small businesses.

4. Know what tax forms you need to file.

You probably have experience filing a standard tax return form for your personal taxes. However, when you’re a small business owner, there are several tax forms required to report your business income. The specific forms that you’ll need to file based on your business classification and/or the industry you are in may vary.

Generally, the types of taxes that businesses need to be aware of can be organized into 5 main categories. Each form of taxes comes with its own set of tax forms which need to be filed:

• Income tax: All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized.
• Estimated taxes: Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year.
• Self-employment tax: Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the social security system.
• Employment taxes: When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file.
• Excise tax: If you manufacture or sell certain products, operate certain kinds of businesses, receive payment for certain services, and/or use various kinds of equipment, facilities, or products, then you may have to pay excise taxes.

For information regarding specific forms your business will have to file for each of these taxes, refer to the  Internal Revenue Service (IRS) requirements before filing. This will ensure that you have all the necessary forms for your specific type of business. If you’re still unsure of what you need to file for your specific business, consult with a tax professional for assistance.

5. Hire the right accountant.

If you don’t have a full understanding of your taxes, it’s always best to seek help from a professional. A good accountant will work with you throughout the year to track your profits and make sure you have good cash flow. They can even offer advice on how to grow your business.

When looking for the right accountant for your business, there are a few things you’ll need to do. First, you need to determine what functions you want an accountant to assist with. Make a list of priorities that includes both items that need attention right away and items that will need to be addressed within the next six months. Then you’ll have to determine how often you’ll require an accountant’s services. This will help determine whether or not you need a dedicated employee or if your accountant can be outsourced.

When outsourcing an accountant, you’ll need to pick if you want to work with an independent accountant or an accounting firm. If you need help finding the right accountant for your small business, this Forbes guide may help.

Bottom Line

At Grasshopper we pride ourselves in offering a variety of digital banking tools to help business owners save time and money. With Innovator Business Checking, you can manage your finances confidently. Additionally, you will receive personalized support from product experts for your business.