In the days before you owned a small business, taxes were simpler. To file your personal taxes, you gathered up a few documents and brought them to an annual accountant - that’s pretty much everything. Maybe you’d even push it off for a little while, as many people do.
Now you know that taxes - especially business taxes - are a big deal. The more financial activity your business does, the more advanced its taxes get. Even businesses that can do their bookkeeping in-house almost always go to an annual accountant for taxes. You should also be able to walk into every tax season with confidence, not just in getting your taxes prepared and filed correctly, but also in minimizing your tax liability. What if you had a better understanding of everything that goes into small business taxes?
At CSI Accounting & Payroll, we’ve spent more than 50 years guiding small business owners through their taxes. Here’s our beginner’s guide:
Chapter 1: Doing Your Own Accounting
If you’re on the DIY train, you’ll want to know the details about doing your own business accounting. While you might think that accounting only consists of bookkeeping and taxes, it also includes a critical tool to help guide your business: financial statements.
Doing Your Own Bookkeeping
Many small business owners will either do their own bookkeeping or have an administrative employee step up to do it. Because it’s relatively simple to do, it’s also simple to correct bookkeeping mistakes if they’re caught quickly. However, if they’re not caught and corrected in a timely manner, the cost to do so can be more than what it’s worth to do your own bookkeeping. Plus, without a professional accountant by your side, you’re on your own in the case of an audit.
While you’re closing your books each month, you should also be reconciling your bank accounts. We consider failing to do this to be one of the top mistakes a small business owner can make. Most are only doing this once per quarter – or whenever they get the chance. Reconciling your bank accounts means matching up your accounting software to your bank statements. This is essential to ensure that all transactions have been completely and accurately captured in the accounting record on an ongoing basis.
If you don’t reconcile your bank accounts each month, you could be at risk for:
- Misappropriation of cash
- Increased risk of basic accounting errors
- Inaccurate financial and tax reporting
- Loss of deposited funds from bank errors
- Various penalties and fees with NSF checks or overdrafts
Making Your Own Financial Statements
A monthly accountant will provide you with monthly financial statements to help you year-round, but you can make your own as well! Self-preparation methods of accounting, such as through software like QuickBooks or Xero, are widely used. Read about how CSI manages the subscription fee of some accounting software here.
When you put in extra time and effort to use accounting software instead of outsourcing, you're counting on it saving you some money. What happens when it doesn't? The consequences of inaccurate records include:
- Penalties and interest
- Missed reimbursable expenses
- Time-consuming audits
Fixing these consequences will also take up a lot of the time that you could have put toward making profits. If you don't have a background in accounting, you may not even realize you're getting lost. How can you tell if your bookkeeping is getting mixed up? Start by taking a look at your financial statements. This link will give you more information about the following common red flags in financial statements:
- Negative balances
- Shareholder loans
- Balance Sheet income doesn't match Profit & Loss Statement income
- Titles such as "forced total", "suspense", and "clearing account"
- Large miscellaneous expense account
Doing Your Own Taxes
A big part of doing your own taxes is categorizing your own receipts. When you do this, you should be fairly broad to summarize the expenses and just hold onto the receipts.
Even small business owners who do their own bookkeeping will still usually have an annual accountant do their taxes. However, a common complaint of annual accountants is that they don’t make time for their small business clients. Unless your accountant specializes in small businesses, it can sometimes be hard to walk the line between large businesses that have a larger accounting workload than you and individuals who come in swarms to get their personal taxes done. Being put on extension also isn’t ideal because it doesn’t extend the date that your money is due.
There are consequences if you don’t file your taxes on time, and then you will need to get your back taxes done if you fall behind.
Chapter 2: Year-Round Tax Strategy (Planning & Projections)
With the day-to-day hustle of running a small business, it’s easy to fixate on the short term. Accounting, however, is not just about keeping track of today’s numbers. Small business owners should also use accounting practices that forecast future potential and identify any financial risks ahead. With the need to look to the future, there are many issues to consider, including opportunities for growth.
Even if you do your own bookkeeping and taxes, strategy takes a lot of time and research to master. Year-round tax strategy also goes beyond what an annual tax accountant can provide for you since they’re only in your books once per year. If you make any big moves throughout the year, it can completely throw off whatever they had planned for next tax season.
The full tax package should include planning, projection, and preparation. These services make all the difference when it comes to finding the best tax strategy for your business, and luckily, monthly accounting covers it all! Monthly accounting is hands-on throughout the year to consistently monitor your money moves. Not only that, but a monthly accountant can offer expert advice based on the financial statements they create for you and the discussions that occur in your meetings.
Tax Planning
What is tax planning? It’s so much more than just preparation and filing; it’s a year-round strategy to monitor your tax situation and legally minimize your tax liability. Your tax return only records the history of the prior year, but tax planning focuses on the moment. This is why an annual accountant can’t provide much when it comes to tax planning, but a monthly accountant can check in throughout the year!
When you use proper tax planning on a monthly basis, you:
- Reflect on how last tax season went and adjust this year’s strategy accordingly
- Strategize to legally minimize your upcoming tax season liabilities
- Receive tax projections to prepare for the amount you may owe
Tax planning and strategizing can also help you avoid making tax decisions that would pay off in the short-term but cost you big in the long-term.
Tax Projection
During tax planning, you should receive tax projections. A tax projection is a complex process of adjusting your last tax return for changes that you know are occurring in the current year, then using these inputs to calculate your estimated tax return ahead of time. These tax estimates help you figure what you can pay throughout the year to reduce the sum due by the end of the year. This set of assumptions helps you reduce your tax liability, eliminate tax season surprises, and guide your business decision-making by keeping you aware of your finances and how they apply to the upcoming tax season.
Most businesses should be receiving two or more tax projections per year. You should expect to receive a projection in the Fall because more is known about the current year's finances at that point, and it still gives you time to apply the projection to the upcoming tax season. You should get additional tax projections if:
- There has been a large change in your finances
- There has been a change in tax laws that affects your business
- You have a complex operation and are having fluctuations in your finances
- You have just signed on as a client with a new accountant
If you’re not receiving tax projections already, it’s likely because of who you are working with. Big-name financial institutions can’t legally give tax advice, and an annual tax accountant can’t give you accurate projections since they are just comparing a prior year’s return to this year’s return instead of using complete, monthly data. A monthly accountant is the only one who can provide accurate tax projections.
Tax projections aren’t required, but if you had the opportunity to see your future, wouldn't you take it? Next time, you can avoid receiving large tax bills - especially if they’ve been coming to you with no warning.
Chapter 3: Falling Behind (Consequences and Solutions)
You’d be surprised at how often small business owners fall behind on their bookkeeping and taxes! Sometimes procrastination seems like the simpler option if you’re trying to contact a too-busy accountant or worry that you couldn’t pay the taxes you might owe. There are lots of moving parts when it comes to running a business, and when you’re facing the extra challenges that tax season throws at you, due dates can sneak up on you.
There are benefits to keeping up with your taxes:
- The earlier you file, the faster you get your refunds!
- You’re less likely to be audited by the IRS.
- Your accounting is accurate and up to date.
- If you owe money, you are aware of that fact. You can pay it or create a payment plan and avoid the following consequences.
What the IRS Does When You Don’t File
You missed the due date for filing your business’s taxes. Now what? It all starts with the IRS sending you notices and letters.
1. You will receive a 90-Day Deficiency Notice. This notice allows you 30 days to pay the amount the IRS says they think you’ll owe. Without you filing your taxes, this is just an estimate that is typically on the higher end.
2. You will face paycheck and bank account levies, as well as property liens. At this point, if you still don’t pay, you’ll be living by cash and unable to refinance your house.
In the meantime: Interest and penalties will accrue. The faster you get this taken care of, the better off you’ll be. The longer you wait, the worse the consequences get.
To learn more, download our free eBook, The Consequences of Falling Behind on Accounting and Taxes.
Tax Payment Plans
The fear of a large tax liability is a common reason to delay filing taxes, and that stems from a very real possibility. If you find yourself owing a large amount that you cannot afford right now, there’s an option to help you.
Depending on how much this is, your accountant can work with the IRS to get you a payment plan. It’s an automatic acceptance if you owe under $50,000, but if you owe more, you can still apply to see which plans the IRS can offer you. Once this plan is in place, the IRS will stop sending you notices.
Working on Back Taxes
If you have not filed previous tax returns, they need to be resolved before you can accurately move forward. This is because prior numbers build on themselves; if you’re just picking numbers and “plugging them in” to avoid having to redo all of your prior years of taxes, you can find yourself in a big mess with an audit.
When you come on board with a new accountant, they will refer to your years of missed taxes as “back taxes”, meaning they will have to “go back” to fix the unfinished work. A monthly accountant can tackle your back taxes, and you can even get multiple years of back taxes filed at once if you have fallen that far behind.
Chapter 4: Going Through an Audit
Audits are one of a business owner’s worst fears; they are stressful, time-consuming, and can be expensive. Not only does an audit put you through the stress of potential consequences, but it also takes up time that you could have spent increasing your profitability instead.
A tax audit is the government’s way of verifying income and expenses for a business. There are two types: sales tax audits and income tax audits. While an audit can come as a letter in the mail, businesses tend to have in-person visits since your business’s information can’t be verified by third-party sources.
Sales Tax Audits
Sales tax audits are related to filing and paying a sales and use tax with the State. They are relatively common, and most of these audits are completely random. Unless you’re not paying your sales tax or are doing something completely wrong, you’re not likely to trigger an audit. It’s much more probable that you will be chosen at random because the State has a goal of auditing every business in the state every three years for sales tax.
Income Tax Audits
Income tax audits are related to your tax returns and are rare. They usually occur for two reasons: chosen at random, and because there is mismatched information between your tax return and third-party sources. With a trusted expert on your side, an income tax audit won’t fall on your shoulders.
Chapter 5: Getting an Extension
If you think you won’t be able to file your taxes on time, one thing you can do is get an extension. This is something that you can do on your own or with the assistance of a professional.
Benefits of Tax Extensions
Extensions can help you in some ways, but there are also some misconceptions about the benefits. Here are the five reasons why extensions are good:
- They’re simple to do. You only need your name, address, and Social Security number.
- If you’re working with an annual tax accountant, they will do a tax estimate with your extension. You can then begin making payments toward the amount.
- Extensions can help you avoid a failure-to-file penalty by moving out the start date of the penalty to the extension deadline. (Note: You are still susceptible to a failure-to-pay fee since the extension only extends the due date of the paperwork.)
- If you don’t owe any money back to the government, there are no downsides to an extension done correctly!
- If you do owe money back to the government, they can offer you a loan to reduce a failure-to-pay penalty by 50 percent. (Note: This is paid back in installments, but it will include interest.)
Consider Why You Need an Extension
If you were trying to file your own taxes and had trouble getting your information together, it may be time to consider working with an accountant. Some things are certainly less DIY-able than others, and your expertise is in running your business, not filing your taxes.
If you already work with an accountant, were you unable to provide them with all of the documents they needed on time, or do they have too many clients to file all of their taxes by the deadline? If you provided the information on time and your accountant still placed you on extension, how do you expect them to spend time on larger projects like tax strategy?
Chapter 6: Analyzing and Amending Business Tax Returns
If you stayed on top of taxes this year, you should get your business tax return toward the end of Spring or the beginning of Summer. Congratulations on making it through yet another tax season while keeping your business running as efficiently as ever! Once you get your return back, it’s time to analyze it and decide if it needs to be amended (but hopefully not!)
Analyzing a Tax Return
You shouldn’t have to analyze your own tax return if you work with an accountant who’s able to make time for you. (By the way, if your accountant doesn't have time to talk you through this critical document, they definitely don’t have the time to take full advantage of tax strategies for you.)
If you find yourself in the position where you have to take a look at a 30 to 80-page tax return by yourself, you’re going to need to know what to keep an eye out for! This link will give you more information about the following things you need to analyze when you get your business return:
- Your current entity type and if it needs to change
- Fees and loans
- Depreciation
- Officer salary
- Officer distributions
- Gross profit margin
- Net profit margin
Amending a Tax Return
If something doesn’t look right on your business tax return, how do you fix it? You can either work with your accountant to amend it, or you can do it yourself! There are a variety of other reasons why you might want your business’s tax return amended. Here are some examples:
- You feel that your tax bill is a lot larger than you were expecting and wonder if your accountant did something wrong. If it’s discovered that the return is not correct, amending your return gives your accountant another chance to right those wrongs.
- You noticed that something is missing on your return. Maybe you have some deductions on your return to lower your tax liability, but they somehow didn’t get recorded.
- While this is less common, you may see something on your return that shouldn’t be there. For example, there is a large sum under “other expenses,” which is a red flag. If you amend the return and remove that, you can help prevent an audit.
Amending a tax return is only as difficult as filing it the first time around. Here are the steps to amend your business return:
- Gather all of the original documents that you used to file your tax return the first time.
- If something was missing from your return, gather the additional documents that were not included last time.
- You can do this yourself, or else your accountant will prepare your tax return on Form 1120 as normal, making sure to include the details that were left out of the original form. The only difference is that you should now check the box that says it’s being amended.
Read about the timeline and cost of amending a business tax return.
Chapter 7: Working With an Accountant
Whether you do your accounting in-house or outsource with an accountant, there comes a time when you should take a look at your current situation and some alternative options. Monthly accounting isn’t the right fit for everyone, but let’s examine some situations in which it might be.
You Do Your Bookkeeping In-House and Use an Annual Tax Accountant
Even if you do your bookkeeping in-house, it’s not likely that your accounting and taxes are done in-house too. Many small businesses that have an internal bookkeeper (or another employee who does bookkeeping on the side) will also outsource taxes to an annual accountant. This clearly isn’t the most effective accounting process.
When you work with a monthly accounting service like CSI, you can still work with your annual tax accountant - but why would you? It won’t save you money (since your monthly fee includes your annual filing), our accountants have great reputations, and we have over 50 years of satisfied clients to back us up.
It can be difficult to make the switch, but there are situations when resisting professional help is a major mistake. Because your area of expertise is in running your business, you can benefit greatly from placing your accounting into the hands of a professional.
A monthly accountant should help you with large financial decisions where there can be repercussions for doing them incorrectly (especially if the discussion can’t wait until an annual meeting with a tax accountant), such as:
- Buying equipment
- Taking out a loan
- Taking money out of the business
- Considering offering a new product or service line
- Selling something when you have little knowledge of sales tax
You Do All of Your Accounting In-House
Larger businesses usually have a full-service accountant on staff. While there are benefits to having someone fully dedicated to your business, it’s possible for a smaller business to hire an in-house accountant before they’re ready for that step. What do you do then?
Outsourcing monthly accounting costs much less than having an accountant in-house, especially when you consider the costs of employee benefits, hiring and onboarding, and employee retention measures versus a set monthly fee.
If your business is small or medium-sized and growing, consider the steps it takes to transition from in-house to outsourced accounting.
You Work With an Online Accounting Service
Another way that some small businesses do their accounting is through online accounting services. These can fall into three categories:
- Foreign-based online accounting service
- Big-name (large conglomerate) online accounting service
- Disjointed U.S.-based online accounting service
When you work with online accounting services, some work within your company is still required. Oftentimes, this means the work falls onto the owner or an administrative employee. However, it should be less work than is required if you were to do your bookkeeping in-house.
As a newer service, online accounting either appeals to its audience or makes them feel more cautious. You should have peace of mind when deciding on the best accounting option for your business. Here, we take a deeper dive into the following features of online accounting services:
- Customer service
- Reputation
- Price
- Service offerings
- Local expertise
You Work With a Monthly Accounting Service
Online accounting services are a form of monthly accounting services. However, when we say “monthly accounting services”, we are talking about firms that are similar to CSI Accounting & Payroll. The things that set us apart from online accounting services include:
- A designated point of contact
- Face-to-face meeting opportunities for local businesses
- A smaller, or lesser-known, reputation
- Comparable prices when considering a larger service offering
- Combined services under one roof
- Extensive knowledge of local tax laws and credits
Chapter 8: Documents Needed to File Small Business Taxes
When you work with an accountant, you need to know which documents are required to get your taxes filed. There are a lot of details that go into running your business, and you should have records of virtually all of them. That’s a lot to sort through if you don’t know what’s most important! Unfortunately, there aren’t any set documents that everyone needs to use for their business taxes. However, we can make some generalizations.
The first general documentation that you need to have is some form of wages paid to your employees and contractors.
The other general documentation you will need is categorized expenses. If you work with a monthly accountant, these will be shown on your Income Statements and Balance Sheets. That saves quite a bit of time because if you don’t work with a monthly accountant, you’ll need to do the work to categorize your expenses.
Luckily, despite there being thousands of documents and forms possible to use to file your taxes, working with tax software or an accountant can help eliminate any doubt. Both options have their pros and cons, but you will feel more confident in filing your taxes correctly.
Chapter 9: How Much Money to Put Aside For Taxes
Before you file your taxes, you should have a good idea of how much the whole process of filing business taxes will cost you. This amount will vary based on a few critical factors, including what your unpaid (or overpaid) tax liability is and who you work with to get your taxes filed.
Tax Liability
There are three options when it comes to tax liability - you break even, get a refund, or owe money.
If you’re expecting to owe money or are a new business, we recommend that you set aside one-third of your gross income for the year. This includes some buffer room to account for any surprises.
If you break even or get a refund, then you won’t have to set any extra funds aside. Getting a refund isn’t necessarily a good thing though; the money could have been invested back into the business throughout the year instead of sitting with the government. Monthly accountants can help you strategize year-round to get closer to breaking even.
Accountant Fees
Don’t forget about paying your accountant! If you work with an annual tax accountant, then you should receive a bill with a fee ranging from $500-$2,500 annually. This range depends on:
- The firm you work with, including their experience and size
- How much accounting activity your small business has
- How complex your accounting operations are
- How much time you spend working with the accountant
Things are different if you work with a monthly accountant since they already know what your taxes should look like. When you work with a firm like CSI Accounting & Payroll, the fee to file your taxes at the end of the year is included in your monthly accounting fee. (Clients with the ideal business activity to work with CSI usually have a $1,200-$2,000 filing fee.)
Total to Set Aside
It’s time to consider the total amount to set aside for your taxes! Total up the following factors that apply to you:
- If you expect to break even with tax liability: $0
- If you expect a refund for overpaid tax liability: $0
- If you’re expecting to owe money or are a new business and don’t know what tax bill to expect: ⅓ of your gross income
- If you work with an annual tax accountant: $500-$2,500
- If you work with a monthly accountant: $0 (since the fee is spread out throughout the year)
Still Have Questions About Small Business Taxes?
We covered a lot of aspects of doing your own accounting or working with an accountant. From the good to the bad and everything in between, you should feel more confident in your knowledge of small business taxes. For more information:
1. Check out the links throughout this page that expand on the chapters.
2. Download the Small Business Accounting Kit to increase your confidence in financial statements, tax due dates, end-of-year payroll tasks, and contacting your accountant.
3. Schedule a consultation with one of our experts to examine your unique tax situation.
