Someone reminded me that Friday the 13th in September was a nice premier to the Halloween season. We will have Veterans Day, Halloween, Thanksgiving, Indigenous People’s Day, and Hanukkah, just to name a few big days before year end. This season will be more focused on the harvest, friends, and family.
For most people, tax season may be the last thing on their minds.
For small businesses, and some of the previous year’s tax filers, this means getting your quarterly payments made and wrapping up extensions. For tax-savvy investors, it’s tax loss harvesting. For many retirees, it’s taking your RMDs.
But for the day-to-day individual earning wages, the holiday seasons can be most celebrated all the way through New Years Day. This will come full circle in February when all of the federal forms are mailed out, marking the dreaded start to tax season.
Recently, I had someone call in with a general question about canceling a life insurance policy that happened to have a cash value. Thankfully, a question with a simple solution, but this led into a conversation about getting started with my firm as a new client. The average tax filer can typically wait until the filing season to get a jump on their returns, but many small businesses with more complicated tax returns could benefit from getting such a head start, especially when they’re new to the tax practice.
I’ll give you an example. You’re a small business, like a sole proprietorship, LLC, partnership, or S-corporation, with inconsistent income streams. Most people know that you need to hold money off to the side from your income to pay on your quarterly taxes.
Just how much to hold is a calculation a lot of us don’t want to do, but there are online calculators that can help. The remaining income after taxes and business expenses can be taken from the business to pay yourself for your own household expenses, fun activities, savings, what have you. These are owners’ draws, and are considered post tax, once you’ve paid your quarterly estimated taxes.
In order to be comfortable with paying yourself, you have to have an idea of what you make and how many expenses you have. This means having some mechanism to track this – otherwise known as bookkeeping. You’ll want gross receipts (money you’re paid) and receipts for items you purchase with business funds, for business purposes. There’s a little complexity when you have to divide your expenses into categories, but if you know how to do this, you can just about do this on your own. Just like any budget, your income needs to exceed your expenses. Having your profit and loss statement gives you a summary of business activity so you know what you can take from the business account for yourself.
During the tax filing season, when you file in April each year, you will have to calculate estimated income taxes. Once calculated, you can pay what you owe in the current year in each quarter to avoid getting slapped with interest and penalties. Not paying on a quarterly basis is one of the few reasons people get into tax trouble with their small businesses. If you’re new to this space, just understand that wage employment has federal and other taxes withheld from your paycheck whereas a small business won’t. Paying into quarterly taxes is similar to tax withholdings from a paycheck.
If you do this already, then working with a new firm is simpler. For those needing guidance in this area, it always helps to get ahead of the season so the preparer can understand your cash flows before the season begins. This can be a lengthy process, and getting a jump on this before next year rolls around can help you avoid filing a tax extension, which could cost more in interest payments. Make the call to a return preparer, and they can help or point you in the right direction to get the help you need.
Tree City Tax is accepting new clients for the upcoming filing season, including small business returns. You can book a consultation by calling at (330) 539-4231. Small businesses that schedule a consult before the end of the year reduce their likelihood of filing an extension.