How To Use The Holiday Season To Prepare For The Tax Season?
Ask most Americans what they hate, and we bet one of the top answers will be — filing their tax returns. Not only individuals but businesses too have to get their act together. Just after the gravy train of the holiday season leaves the station, one has to file the paperwork.
To most accountants, tax season means handling the taxes of various clients simultaneously. But for millions of American business owners, it is a very confusing time.
So, here is a guide to paying your taxes and how businesses should start using the holiday season to begin their tax preparation. As they say — well begun is half done.
1. Pay Your Taxes Regularly
Your tax is not due for quite a while. But that does not mean you should not have paid most of it by now. Paying it regularly every 1–3 months makes sense and helps you avoid a considerable burden. For those who draw a salary, the monthly deductions go a long way to cover the tax liability.
If you are self-employed, make sure you have paid at least some taxes by now.
2. Get Documents in One Place
W-2 and 1099 forms are dreaded words to individual taxpayers. But they are the only way to relate to IRS how much you earned. As a brand new year rolls around, you would start getting these in your mail. Keep all of them together in one large folder for easy calculation in March.
3. Changes to Tax Status
If you got married or divorced in the last year, it affects your total income. So does the number of children you have and if any of them left and became independent.
These changes affect not only your returns but also those of your spouse. You have to hold a discussion and find how many dependents you actually have and can claim for.
4. If You Need, Get an Extension
April 15 is the D-day. But if due to some reasons you cannot get your tax statements prepared by then, you can claim an extension.
Form 4668 allows you to receive an extension valid for six months. All that you have to do is make sure that you filed an application for it in time.
5. File Electronically
Thankfully, the IRS offers completely digitized service. If you are below the $66,000 threshold, you also qualify for free assistance. Electronic filing of income tax returns is the quickest way to get tax refunds.
If you do not have a social security number, you can use temporary identification numbers issued by IRS to file electronically. Ensure that they are still valid, and its tenure has not been exhausted.
6. Collect Sales Tax Accurately
You can pay tax post the holiday season when you have collected it correctly. It is particularly important for those who own e-commerce stores since they are frequently sending goods across state borders.
There is also the matter of economic nexus. Simply put, it means having a significant presence in another state. There are, of course, different limits, but one of the most accepted is $100,000 in sales or 200 transactions.
7. Type Of State
Sales tax depends on origin and destination state. Collecting tax in origin-based states is straightforward — a percent of your selling price. In the case of destination-based states, it is harder since different states have different tax rates.
The most important thing to understand is that if there is any shortfall, you have to pay out of your pocket.
8. Note Sales Tax Due Dates
Every state has a slightly different due date for tax. In some states, it is the 20th of the month following the sales and in others the end of the month following the sale.
If you are filing for more than one state, it is necessary to automate your tax payments using software tools. As an incentive, 24 states provide sales tax discounts for those who file on time.
9. Use Tax Write-Offs
As a businessman, you can save a large amount of money through write-offs. This is usually in the form of depreciation. From cars to laptops, whatever is used, or business can be depreciated, and in the end, it means less tax has to be paid.
However, there are cut off dates for purchase, and you can avail of this benefit only if you schedule purchases of assets in a timely manner.
10. Keep Track Of Deductible Expenses
Whether you are an individual or a large business, you have to ensure that you maintain documentation of all of the expenses that you have shown as a deduction.
These include travel expenses, hotel receipts, and even phone bills. Up to a limit, even medical bills can be adjusted. If you have entertained customers and employees, then you can write off half of that. But the key is to have proper invoices arranged chronologically. This saves time when you are filing taxes.
11. Take The Help Of A CPA
It is quite possible to do a large part of the work yourself or with clerical support. However, taxation requires knowledge of tax laws and recent amendments to it. That is why it is often necessary to employ a CPA who can advise you.
In many cases, you are also required to audit the financial reports (income and expenditure statement and balance sheet). Such a financial audit that verifies your records can only be performed by a CPA.
Conclusion
Taxes are painful, but they need not be the end of this world. If you have a haphazard approach, you would surely suffer but not otherwise.
At the end of the day, accounting is a simple matter of stating what is earned and spent. It is readily done by attention to detail and having a reasonable understanding of tax laws.
In recent years, a plethora of cloud tax software solutions has been launched that completely automates the process of fund management and calculation of tax. If the process is overwhelming, all that you need to do is use such software, and in a jiffy, your tax return will be filed.
