7 Tasks to Ensure Your Business is Prepared for Tax Season
Did you recently receive a massive bill from your CPA because you weren’t able to keep up with the books this year? According to AdvisoryHQ, did you know the average owner’s CPA charges $200-$250 per hour? If you haven’t stayed current with your books, you are probably paying for it. Maybe you are still in the long process of cleaning up your books, trying to avoid the extra cost.
Either way, there is good news- it doesn’t have to be this way! Here’s a list of 7 tasks that can be completed on a monthly basis to ensure that you are 100% prepared for tax season. Not only that- but you can avoid spending a fortune on your CPA in years to come and save yourself time and stress.
1. Open a tax savings account.
Open up a savings account specifically for your tax savings. This account should only be used for saving taxes- nothing else! The purpose of the tax savings account is to separate your tax savings from your business expenses. When you see a large balance in your checking account, you’re probably tempted to spend more money than you actually have. Transferring a percentage of your income into a tax savings account helps you to know your true balance.
How much do I transfer and when?
At the beginning of each month, look at your net income amount on your Income Statement from the previous month. It’s recommended to take about 30-40% of your net income, and immediately transfer it into your tax savings. It’s smart to put a tax savings reminder in your calendar at the beginning of each month. This way, when it’s time to pay your taxes at the end of the quarter, you’re prepared and don’t have to think twice about it!
On the plus side, you will have a pretty good return if your tax amount due is lower than expected. It’s always better to play it safe and save more than you think.
2. Keep up to date on recent tax law changes and code accordingly.
It’s important to keep up to date on tax law changes. For example, one change in recent tax law was that entertainment expenses are no longer deductible. This means that you can no longer take a client to a ballgame, golf tournament, etc. and write it off as an entertainment expense. Staying current on tax law changes helps you know when to say “No”, and will save you money later on.
Where can I find recent tax law changes?
Search blogs and websites about tax laws and subscribe to the ones you like best. My personal favorite and top recommendation is the IRS website, which has many newsletters you may subscribe to here, including a “New Releases, Tax Law Updates and General Tax Information” newsletter here. This newsletter is a general update on taxes– a necessary subscription in my opinion!
Coding income and expenses to the correct accounts is also crucial. When you code incorrectly, you might be wasting money because your CPA will have to clean things up for you. Coding needs to be completed on a monthly basis in order to reconcile and prepare accurate financial statements at the end of the month. It all comes back to Step #1 (tax savings account)- without doing these monthly tasks, you have no idea how much to put back for taxes each month!
3. Reconcile every month.
After coding income and expenses, reconcile your bank account balance to your QuickBooks (or other accounting software) balance at the end of each month. This is a fairly simple process if you’re staying on top of things. However, if you’ve gone multiple months without reconciling, it can be a difficult process.
Reconciling helps you realize if you accidentally duplicated transactions or forgot to include transactions throughout the month.
4. Stay on top of Accounts Receivable.
Stay on top of your customers who aren’t paying their invoices on time! Are you sending reminders or statements if they haven’t paid? Maybe you feel too awkward doing that? That’s what’s great about having a monthly bookkeeper- they can do it all for you. Your bookkeeper has no problem sending monthly statements because they don’t have the personal ties you do, so it’s strictly business to them!
It’s so important to keep up with unpaid invoices because it helps your monthly cash flow. Having a ton of invoices over 90 days due can be detrimental to your business.
5. Stay on top of Accounts Payable.
The same rule applies to payables- do NOT pay your bills late. This causes late fees and can add up over time. Plus, it looks bad on you and your business. Put a reminder in your phone or calendar and remind yourself to pay your bills on time.
6. Keep up with receipts.
Bookkeeping Myth: I don’t have to keep up with receipts, as long as I remember what it was for and write it down in the memo. Incorrect!
Bookkeeping Fact: If you ever get audited by the IRS or if your CPA has any questions at tax time, receipts are required. There are so many ways to store receipts now- my personal favorite is through QuickBooks. You can now download the app on your phone and upload pictures of your receipts, and then match them to the expense within a matter of minutes. It’s so easy! You can also make a folder named “Receipts” in your email for any receipts you receive through email. Just simply move it to that folder. Or, you can download the Google Drive app and upload photos of receipts on your phone.
A lot of people think of “keeping up with receipts” as putting everything in a shoe box or having to go through the difficult process of scanning things to the computer. No more of that! There are so many systems in place to make it much easier on you as a business owner.
7. Financial Statements
Once you’ve completed these tasks, you can view your financial statements for the month. The Income Statement will tell you exactly how much money you need to set aside for taxes. It’s that easy! To get a solid view of how your business is performing, I always look at the Income Statement (Profit & Loss), Balance Sheet, and Statement of Cash Flows.
That’s it! Only 7 simple steps each month to guarantee you’re 100% ready for tax season. Notice that these are all monthly tasks. It’s imperative to stay on top of your monthly bookkeeping in order to be fully prepared for tax season. Waiting until February can cause major stress and might force you to rush through things without carefully reviewing each transaction, which could potentially cost you even more money to clean up the mess.
After reading this post, you might be asking:
What is net income? How do I look at my Income Statement? How do I “code” income and expenses? How do I reconcile my account? If you are new to bookkeeping, it can certainly be overwhelming.
Thanks for reading and subscribe below for more bookkeeping resources!