Unless you’ve been living under a rock, you’ve seen the online panic come in waves around March 15h, April 15th & September 15th every year.
“Preparing for taxes as an entrepreneur is not for the faint of heart.” 🫠
“Being an entrepreneur is fun until you have to figure out taxes.” 😵💫
“Why am I rummaging through bank statements & receipts minutes before tax deadline… again?” 😖
The oh-so-dreaded tax season dates that plague the entrepreneurial world!
I can only imagine that you’ve experienced one of those sentiments yourself. I know I have!
Then comes the Captain Obvious rebuttals.
“Tax season doesn’t sneak up on us.”
“Don’t forget to get prepared now for next year!”
“Stay on top of your taxes all year long.”
But H-O-W?
More spreadsheets? A new software? Hiring someone? Another bank account?
In this post, I am going to talk you through creating a system.
By the time you’re done reading this– instead of just burying your head in the sand whenever you see the word taxes, you’ll be able to pull out the bits and pieces you’d like to implement for yourself and create a simpler way to approach tax season.
Here. We. Go.
Prerequisite
Separating your business & personal finances is an absolute must. Not only does it protect your assets (if you’re an LLC or a Corporation), but it also makes things less complicated when it comes to tracking.
If you haven’t done this step yet. Run, don’t walk, to make this happen.
[Note: You don’t have to open an official business account; you can open a secondary personal account and use it solely for business purposes.]
Tax Write-Offs
Let’s start off by defining a tax write-off.
A tax write-off is a business deduction allowed by the IRS for the purpose of lowering taxable income.
Everyone’s business is different. So, a one-size-fits-all list of write-offs does not exist.
However, having an example is a good place to start considering what might apply to you.
Examples:
If you’re worried you aren’t documenting everything you should, consider these two options:
During your tax appointment, ask: What are some commonly overlooked write-offs? Does it seem like I’m missing anything?
My tax preparer likes to play a little game she likes to call… “Can I find anything that Melissa forgot?” And, even though I am uber thorough, she typically does.
Check out this article written by SCORE, The 10 Most Common Tax Deductions Small Businesses Might Miss
One caveat to write-offs… typically, we think, “Get my total tax bill as low as possible!” but that also means making your taxable income as low as possible.
If you are looking to make a major purchase, such as a vehicle or a home, you may want to show more profit in your business. A mortgage broker can give you deeper insights into that if it’s on your radar.
Getting Yourself Organized
Step 1: Check with your tax preparer
Check with your tax preparer to see if they have a preferred way to categorize write-offs.
[Note: If you don’t have anyone you work with, prioritize that! If you need recommendations, feel free to reach out. I have a few referrals you can contact to see if they’d be a good fit.]
The company I work with provides a worksheet for me to fill out each year. Then, I match my software app with those categories. It makes my life easier + theirs. Any opportunity to save them time during tax season earns you brownie points!
If they don’t have anything for you to follow, that’s fine. Just use the categories you decided on from the write-offs list.
Step 2: Determine your method
Finding the system that’s the right fit for you may take some time. I know that’s not ideal, but with anything in business… as your knowledge grows, your preferences change. The point is to pick something and start.
Questions to ask yourself:
Do I like manual entry? Or prefer transactions to be automatically downloaded for me?
Manual entry: could mean either a spreadsheet or software that does not connect to your bank account
Automatically downloaded: you’ll need software that connects to your business bank accounts
Do I have working knowledge of spreadsheets (ex: formula creation)?
If yes, spreadsheets are a fine option,
If not, don’t hassle with trying to figure out a spreadsheet– let the software handle the number-crunching
Do I want to easily see numbers on my phone?
If yes, your best bet here is software. Although you can see spreadsheets on your phone, it’s definitely more cumbersome.
If not, either option would be fine
Based on how you answered above, which one seems better: spreadsheets or software?
System Set-Up
I'd like to remind you to keep things as simple as possible to begin with. You can always add bells & whistles as needed.
Spreadsheet Option
You’ll want to start a new spreadsheet using Excel or Google Sheets.
The first expense tracking spreadsheet I used had four columns:
Date, Description, Amount, Tax Category
You can either share the entire spreadsheet with your preparer or quickly total up how much you spent in each tax category using filters.
(If DIYing your set-up isn’t up your alley, I walk you through exactly how to set up, categorize, and use your new system during my live group program, Getting Comfy with Your Business Finances. You can learn more about that program here.)
Software Options
Don’t want to connect your bank account?
There’s one software in particular that I think is perfect for entrepreneurs if you don’t want to connect a bank account: Expensify.
It’s free to use. You can customize your categories. It does the math for you.
You have one document with all your expenses neatly categorized in one place.
Want to connect your bank account?
There are two ways you can go here:
With a budgeting software
If you don’t have/want to send invoices from the software, a budgeting software will suffice. My favorite option for this is You Need a Budget (YNAB).
With an accounting software
If you want a one-stop-shop system where you can send invoices + track your financials, an accounting software is going to be your answer. My favorite option for this is Wave Accounting. Three other great options are FreshBooks, Quickbooks Online, and Xero.
[Note: I highly recommend working with a professional when you’re setting up your software systems. Having to do a financial clean-up a few months after using it is going to take you way more time and energy than having help setting it up!]
Capturing Receipts
This part of the process, admittedly, is a tad annoying because we get receipts in several forms. But here’s how I handle it.
I create a [YEAR] Tax Receipts folder for my email inbox + in Google Drive. Any emailed receipt I get goes in the appropriate folder. Any physical receipts get their picture taken (say cheese!) and stored in the Google Drive folder.
I do not upload them to my accounting software because it’s a waste of time (CPAs, close your eyes and pretend you didn't see that 🙈). In the event that I need it, I know where to look.
Handling biz + personal items
Remember the prereq that I mentioned of not co-mingling your funds? Well, there are a few circumstances where that’s impossible for me to avoid.
I am a digital nomad and work out of my RV full-time. I have a home office in the “garage” of the RV. The following items are paid out of my personal checking account, and a percentage is written off on my taxes:
Internet
Mobile Phone
Rent
Utilities
I keep track of these in my personal budget software and print off the yearly totals at tax time. My preparer then takes a percentage of each for a deduction.
Paying Quarterlies
According to the IRS, here is who has to pay taxes. “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.”
Which equates to pretty much everyone.
Now that you know you have to pay, let’s talk about how much.
The IRS offers Form 1040, but it’s about as clear to me as my windshield after driving through a buggy night.
Lucky for us, an acquaintance of mine named Rosemary, Founder of Quick Guide Tax, has a very helpful resource on her website for estimating quarterlies. Click here to be directed to the resource. Once there, you’ll want to direct your attention to the “Quarterly Payment Spreadsheet.”
[Note: If you don’t pay quarterlies and should have, an underpayment penalty with your name on it will most likely be waiting for you at tax time. Dun dun dun.]
Filing an Extension
Almost every business owner has had to file an extension–life happens. Filing an extension is fairly straightforward and totally acceptable. No one gets a gold star for filing on time, anyway!
[Note: an extension to file your taxes (the paperwork) is not an extension to pay your taxes (the money you owe the IRS). Even if you receive an extension, you’re still required to pay your estimated taxes by the original due date. You’ll likely face a late payment penalty if you don't pay on time.]
A few quick tidbits:
You can file online or through your tax preparer
You get up to six months to submit your paperwork
Preparing yourself for tax season
If you’re feeling like you need a better strategy…
You’ll want to check out my Getting Comfy with Your Business Finances group program.
You’ll have me to walk alongside you in creating the right system for you, whether that’s spreadsheets, budgeting software, or accounting software.
We’ll do the following together:
💵 Decide where you want to track your financials
💵 Initial set-up of that system
💵 Determine what categories you need (for right now)
💵 Set up a plan for receipt capturing
💵 Walk through how to extract the pertinent data
and…
😅 Make taxes easier
Here's to you,
Melissa Mittelstaedt
Money Coach | Accredited Financial Counselor®
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