In this episode, we had the Sidekick Accountant, Megan Schwan, giving us tax preparation and financial tips for tax season! This time of year can be confusing and/or stressful for business owners! Megan gives useful and practical advice to help you stay organized and prepared for tax season.
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Financial Tips for Tax Season
With tax season just around the corner, Megan Schwan, the Sidekick accountant, shares some amazing financial tips for people to have a successful business.
Tip #1: Prepare for Tax Season
Many people are afraid of numbers and tend to get overwhelmed, especially during tax season. To overcome this and remain organized, try to make bookkeeping part of your schedule. One way to do it is to incorporate it into your schedule every quarter, but the best way is to do it once a month. It’ll help improve your business overall as well.
For newbies, it’s important to understand what qualifies as an expense. The IRS defines expense as something that is ordinary and necessary to run your business. For example, you can take classes for your business and that will count as an expense. Just make sure that it remains “ordinary.” You need to be able to justify your expense.
Remember, keep your business account and your personal account separate! This will make bookkeeping and filing taxes much easier.
Save at least 25-35% of your net income (income-expenses = net income) as a rule of thumb.
Tax Season Tip #2: Make Quarterly Estimated Tax Payments
If you owe money, regardless of if you’ve made money, you need to pay. With most people that are working a job, they have enough being withheld that they don’t need to make these payments.
April 15th, July, October, and January 15th are the dates for the Quarterly Estimated Tax Payments for the tax season. If there are taxes to be paid, be sure to pay them off before April regardless if you file taxes or not because there will be interest and a penalty.
When should you file to become an LLC?
There is no income cut-off to file as an LLC. The reason people choose to file as LLCs is because of liability. LLC stands for limited liability corporation which basically means that your personal assets are protected in case of any financial issues. Your business is considered a separate entity from yourself.
You can choose to file your LLC taxes as an S-Corporation (once you reach a $50,000 income), which will provide many tax benefits. You have to be on a payroll, which means that you would be paying yourself reasonable compensation and then filing a W2 form.
What happens when you have multiple streams of income?
Depending on the umbrella of your business, you can file the income under one LLC. If you have multiple streams of income under one niche, then they can be kept together under one umbrella. But if you have income streams from various niches, you might be better off filing them under different LLCs.
Tax Season Tip #3: How to File as a New Business Owner
When it comes to being a new business owner during tax season, you would file your income as “self-employed,” which is legitimate, especially if you’re a sole proprietor. Being a sole proprietor is actually the best way to get started when filing taxes as a new business owner because, down the road, you can elect to be taxed as an S-corp or a C-corp.
The biggest advantage to filing, regardless if you’ve had a profit or a loss is that filing taxes creates history, much like a credit history. Therefore in the future, if you require funding, this will make it easier.
Tax Season Tip #4: Your Numbers are Contingent on Your Business
Many people get overwhelmed by numbers during the tax season. While this is normal, it’s important to shift your mindset to realize that your numbers are not contingent on how great at math you are but more on how well your business is doing. So if you’re looking to build your business, it’s important to pay attention to numbers from Day 1.
At the end of the day, you need to understand the difference between a business and a hobby. If you’re not sure how much time and effort you’re going to invest in your side hustle or business, then it’s best to wait before declaring it an LLC. Why? The IRS may prevent you from claiming losses incurred during the lifetime of your business. But if you’re actively working towards it and bringing in income, then an LLC is a great option. Keep your books organized throughout the year and tax season will be a breeze.
About the Author
Sonal Gadkar is a freelance writer for hire, based out of Long Island, New York. She writes long and short-form blog posts, provides content for social media (specifically for Instagram) and more! Need a writer? She’s your gal!