Start Planning Now for Next Year's Tax Season
Congratulations to all of you on surviving another tax season. If you're like most self-employed people, you're probably saying to yourself, "I am not putting myself through this again next year!" But of course, next year rolls around, and because you haven't corrected the bad habits that made this tax season so miserable, next year is just as bad.
But that doesn't have to happen. Here are some things you should start doing now to make your life--and your accountant's--easier next year:
Turn your hobbies into businesses. If you had trouble coming up with enough deductible expenses this year, think seriously about turning your hobbies, such as buying and selling stuff on eBay, into an actual business. Real businesses can deduct lots more stuff than hobbies can, but you have to be disciplined about doing the paperwork and take your new business very seriously. You should get a federal tax ID number, register for state and local taxes (such as sales and use taxes), and file your returns on time. Oh, and don't get greedy--don't start collecting ancient Greek coins because you think having your annual directors' meeting on a yacht in the Aegean Sea will be deductible.
Know your deductions . . . cold. You, not your accountant, are responsible for knowing what's deductible in your business and what isn't. Many accountants won't help you identify deductions, either because they don't have the time, they aren't familiar enough with your business, or they're worried about the ethical implications of "volunteering" information about deductions. I repeat, it is your responsibility to uncover every single deduction you can take on next year's taxes. Are you better off using mileage or actual expenses to deduct your car? When exactly are meals and theatre tickets deductible? Take the time to find out.
Do your bookkeeping every month, not once a year. A lot of self-employed people wait until January to begin doing their bookkeeping for the entire preceding calendar year. Shame on them! You should do your books at least once a month. If you don't, you're missing out on a lot of vital information about your business, and how the devil can you properly calculate your estimated tax liability?
Set up an escrow account for your estimated taxes. I've said it before, and I'll say it again: Paying estimated taxes is a no-brainer as long as you have enough money in your checking account to pay the taxes with. The surest way to make sure there's money available to pay Uncle Sam when the due dates roll around is to escrow your tax money so you don't end up spending it. Here's how it works:
- Set up a separate, interest-bearing account with your bank for your business.
- At the end of each calendar month, total up your gross receipts.
- Take 35 percent of your gross receipts and "sweep" it into the new escrow account.
- Run your business on whatever's left over in your business checking account.
- When taxes are due, write the estimated tax checks from the escrow account.
Automate your bookkeeping. There's simply no excuse in this day and age for using a manual bookkeeping system. Make this the year you learn QuickBooks or another of the more popular bookkeeping software programs. Your local community college probably offers a basic "Introduction to QuickBooks" course for less than $200. Take it. It's deductible.