Each year, businesses file their taxes. The season includes hard deadlines, fees, not to mention potential fines and other penalties imposed by the IRS. Add these to the fact that you (potentially) have to pay a portion of your profit — it all equals a stressful time for many startups and entrepreneurs.
As with most challenges in life and business, preparation is the key. Preparedness, in this case, comes in the form of a tax readiness checklist. In this article, there are five key components to track and gather.
Compile and gather everything on the checklist to:
- Mitigate the fear and uncertainty
- Reduce incurred tax burden and fees
- Better understand how to account for taxes in your organization
Then, when you meet with your CPA or accounting service, they’ll have everything needed to navigate you through filing.
“The hardest thing in the world to understand is the income tax.” — Albert Einstein
1. Gather Payroll Data
Businesses are responsible to track, withhold and pay income tax and FICA for their employees. Most of this is tracked automatically via intuitive software, like Gusto or functions in QuickBooks.
Necessary items for your payroll reporting include:
- All withholdings (federal, state, local, Medicare, Social Security, etc.)
- Unemployment, medical leave, Worker’s Comp, etc.
- All wages, per employee
Important: As an employer, you’re responsible for gathering, withholding and paying these income taxes (as well as FICA). Employers are also responsible for filing the paperwork surrounding these payments.
PPP Loan Payroll Report
The Paycheck Protection Plan complicates tax filing in 2021 for any business who received a PPP loan to keep your staff on the payroll. In order to request forgiveness of the loan, your business must meet certain criteria. And you (or your accountant) must submit certain details to the loan provider.
In addition to the wages, additional payments and calculated withholdings — loan forgiveness will require other details including:
- Mortgage interest, rent and/or lease payments for the 8 weeks following when you received the loan
- Utilities during the same 8 week period
- Disclosure of any disaster relief advance via the EIDL
Note: If you don’t meet the full requirements for PPP loan forgiveness, you may be eligible for a partial forgiveness. Reach out to a qualified accounting service, like Founders, to find out where you stand.
2. 1099 Contractors
Many startups work with freelancers and contractors. Whether it’s marketing, sales, accounting or many other services you may need a 1099 — if you paid them more than $600 during the year.
Typically, it’s much easier to 1099 contractors than it is to track withholding taxes on staff in your business. That said, track all payments made to individuals and services to present to those doing the tax preparation. Many CPAs will also ensure 1099s are filled out in a timely manner.
3. Have Clean and Accurate Books
Taxes are paid either quarterly or annually. But (hopefully) your business earns income more frequently than a few times per year. Unfortunately, many organizations choose to begin figuring out what happened dangerously close to the last possible day.
Waiting isn’t just a headache for the CPA. Procrastination also begs for missed deadlines, mistakes and/or overpayment.
Regular, monthly bookkeeping is vital for the financial success of any company. Not only will you better run your business, you can actually plan for expenses (including taxes) while having a great idea of what’s ahead (via budgeting and forecasting).
3 Things to Track Monthly
- Cash Flow: Probably the most helpful metric in determining the health and trajectory of your business. Also a useful component to determine future tax payments.
- Expenses: Many expenses are deductible, but some aren’t. This is covered further down, in more detail.
- Payroll: As we covered, payroll data should be kept regularly and accrued until used for tax purposes.
If you’re reading this between December and March, it’s likely you don’t have a full year of cash flow statements at the ready. So, get your taxes filed this year — and immediately begin tracking financials monthly, from here out.
4. Gather Loan (or Investment) Information
Loans and investments are common among early-stage businesses. The terms on your loan are, at times, easier to decode for tax purposes. Depending on the setup with an investor or venture capitalist, documents and data needed for filing may vary.
For loans, the provider is required to send you a 1099-INT form showing the amount of interest paid during the year. In most cases, you simply provide this document to the person doing your taxes.
Investors will likely need documentation from you (if they don’t already have it). Most of these are given during the actual agreement. A few to understand (and communicate to your tax professional) include:
- Term sheet: Essentially, this compiles all terms and agreements in a particular investment. It’s typically non-binding but useful to provide both the investor and your CPA.
- Incorporation details: There are tax implications for each type of corporation. Very important to disclose this to your accountant, regardless of loan/debt type.
- Stock purchase agreement: These are key details for you and your accountant. Number of shares, purchase price, etc. and more finer print details are included.
5. Look for Deductions
“Collecting more taxes than is absolutely necessary is legalized robbery.” — Calvin Coolidge
Deductions are really the battleground for determining tax incursions. Amazon and other companies (infamously) use investments, expenses and tax incentive programs to reduce their tax burden as much as possible.
Scrutinizing deductions is very important. But there are as many myths (as to what you can deduct) as there are missed opportunities.
4 Commonly Missed Deductions
- Startup expenses: Initial startup costs are ripe deductions to take advantage of for up to 15 years after your business starts. (If you’ve yet to officially “launch” keep detailed records, because only planning and development costs fit into this category.)
- Credit card interest: If you use a business card, and hold a balance, the interest is deductible. Hopefully, it’s not a lot but it’s a great example of small deductions that compound into more accurate filings.
- Accounting services: Want a service to keep the books, help you budget/forecast and handle the taxes? It’s deductible.
- Employee perks: Give your employees professional development budgets and other gifts (e.g. book funds, health stipends, etc.) and it could be deductible. You can also write off that annual company party, in most cases.
Note: Again, the PPP loan complicates 2021 deductions. Since loan forgiveness potentially constitutes a massive amount of money, deductions would be a “double benefit” for businesses, according to the IRS.
Begin Planning for Next Year
By now, you may notice that it’s not great to section off a couple weeks towards the end of your fiscal year to throw everything together. One of the biggest tax mistakes companies make is failure to plan for them. Tax planning is a whole different ball game from tax prep and filing.
Tax prep is determining what happened the previous year and figuring out how much you owe to various governments and institutions. Tax planning is a proactive approach to pay exactly what you should — nothing more and nothing less.
Interested in having an accounting service to help you? Get in touch.