Well, my fellow small business owners, you’ve got a month left to get your taxes together. If you’ve got your ducks in a row, then you’ve probably been done for weeks. If you’re not so organized, then you’re probably dreading the next month.
While it might be too late to help you this year, I want to share some things we’ve done to simplify our small business tax situation, so you won’t have to dread taxes quite so much next year!
And because we’re far from perfect and just learning as we go along, I’m also sharing what we’re doing differently this year to make things even easier for next year. I’d love to hear your ideas and experience in the comments!
Track income and expenses faithfully
Just like your family finances, your business finances need regular attention. If you’re not in the habit of tracking your business income and expenses, then tax time may very well be a nightmare. Going back through twelve months of bank and credit card statements is a great way to bring on a migraine.
Save yourself the trouble and track your business income and expenses along the way. Use any tool that works for you, a notebook, a spreadsheet, or a software program, but track expenses and income as they happen! Trying to reconstruct income and expenses for months at a time will leave you drained and dissatisfied. And you’re a lot more likely to have errors.
When I ran an Etsy shop, I kept a simple spreadsheet where I tracked my income each month from sales and shipping fees, as well as my expenses such as supplies, postage, Etsy fees, and PayPal fees. It wasn’t pretty, but it showed me the profit I was making and had all the numbers I needed for tax time. We always did our own taxes, so when we got to the parts for self-employment, I would simply read off the numbers as my husband asked for them. Easy peasy!
By the time I started blogging, I was already faithful at tracking my business finances. I tweaked and improved my spreadsheet system from my Etsy business to make it tailored for blogging. Then the numbers nerd in me added some extra features. If your small business is a blog, you should check out my Blog Finance Spreadsheets. In addition to tracking your blog income in categories that make sense for bloggers, there is a ledger where I track my business expenses in the month they occur. It’s even set up for categorizing your expenses according to the Schedule C tax deductible expenses. You can see the other cool features here.
Some business miles can be a tax deduction. Before you get too excited, your normal commute from home to work is not tax deductible. If you use your personal vehicle to travel to more than one work site, or have to visit customers, or run errands, miles from your primary place of business to those other sites and back are all tax deductible.
Mileage logging can be intimidating and frustrating, leaving you feeling like you’re constantly failing. If you’re going to claim miles, you need to track them. That doesn’t mean sitting down at tax time and approximating your mileage over the past year. That won’t hold up in an audit. In order to claim your business miles as a tax deduction, you need a record with dates, mileage, purpose, and beginning-and end-of-year odometer readings.
If keeping a record sounds overwhelming or tedious, have no fear. Technology’s got you covered. My husband uses MileIQ which makes it super simple. He carries his phone with him everywhere, and the MileIQ app uses the phone’s GPS and WiFi signal to track of all his trips.
At the end of the day, he opens the app. For any trip that is personal, he swipes left. For any trip that is business-related, he swipes right. Left and right swipes let him choose which category the trip falls in (between offices, customer visits, errands, medical, charitable miles, commute, etc.)
If the trip wasn’t in his normal commuter car, he selects the correct vehicle. If he needs to add notes, he puts in a quick description or details of the trip. Most days it takes just a few seconds a day, and MileIQ prepares a spreadsheet showing the dates, times, starting and stopping locations, category, vehicle, and additional details that makes it super easy, at tax time, to get to a simple number of miles for each deductible category (business, charitable miles, medical miles).
He was a little hesitant when he started using it that it would be worth the $5 a month cost. Spending money to save money is always iffy, but at 54 cents a mile, all it takes to pay for itself is one trip a month he otherwise would have missed, and that’s before taking into account the convenience factor (which is huge!). After a year and a half of MileIQ, he can’t live without it. If you’re interested, you can sign up for a test run with this this link and if you decide to pay for it, you’ll get 20% off your annual subscription, taking the cost down from $60/year to just $48/year.
Meet with a tax advisor
Depending on what your business is, you might want to talk to a tax advisor from the very beginning. However, if you’re starting a blog or opening an Etsy shop, I don’t think that’s necessary right from the get-go. My husband and I have had side businesses for years, but we didn’t meet with a tax advisor until last year, when our incomes significantly increased and our tax situation got more complicated.
After explaining the basics of our businesses to our tax guy, he was able to clue us in on some tax deductions that we weren’t taking (and weren’t even aware of!), like deducting the mileage between his day job and small business. He also shared with us some overall tax strategies that with some foresight and planning could really benefit our individual situation.
We’re still learning as our situation changes, but we are really appreciating having an expert by our sides.
If you’re looking for a tax guy who works specifically with online businesses, let me introduce you to my friend Mark Tew at Not Your Dad’s CPA. He’s savvy about online business (but does all the personal tax stuff too), so he can definitely help you out no matter the stage your business. In fact, right now, on his website, you can get a free checklist of things you should be doing right now to avoid business or tax surprises, which will help you get off to a great start!
Set aside money for taxes/ pay estimated quarterlies
If you’ve been following us recently you’ve heard me mention that our tax bill this year is pretty hefty. On first glance (or after scrutiny) you might think we’re just irresponsible, but hear me out and I’ll explain why we did what we did and what we’ll do differently for next year.
Probably the easiest way to prevent getting hit with a hefty tax bill is to set aside money for taxes each month. The popular amount (at least among many online entrepreneurs) is 30%. Of course the actual amount you’ll pay in taxes when you’re self-employed takes in so many other factors that it’s impossible to make a rule across the board. Clearly, if you’re setting aside 30% (or any percentage for that matter) you’ll be better off than the person who sets aside nothing.
And that was us.
In 2016 we earned much more from our self employment than we ever have before, yet we set nothing aside. Of course, that was because we were working tirelessly to pay off six figures of student loan debt as fast as possible. so we made a conscious decision to put our self employment taxes off until the last minute (which has us scrambling right now).
Be sure to pay your estimated quarterly tax payments, both to avoid the penalty for not doing so, and to ease the burden of a huge sum due on April 15th. While they might seem like a pain, they force you to not procrastinate your taxes until the end.
One way to satisfy the estimated quarterly tax requirement is to pay the safe harbor amount, which is essentially one fourth of the tax liability from the previous year (which isn’t necessarily 1/4 of what you paid in taxes). Be careful to still set aside money for tax time (in addition to your estimated quarterlies) if you’re seeing growth in your profits. We paid estimated quarterlies during 2016 (according to the safe harbor amount) and still have a hefty tax bill.
This year we are going to practice what I just preached. 🙂 We’re going to set aside extra funds for tax time next year even though we don’t anticipate huge growth (my husband is hoping to cut back on his private firm work to have more time at home). Plus we will be paying estimated quarterlies based on the previous year’s taxes (our big tax year), so the payments will be much bigger.
At the beginning of the year I started putting 30% of my blogging profits into a savings account earmarked for taxes. My husband essentially does the same. Next year’s taxes will be much simpler when we don’t have to scramble to come up with the money we owe for taxes!
Advice to new business owners
If you’re just starting out, you might not have very much income to speak of. In fact, depending on your business, your expenses may far outweigh any income. Making the effort to set up a system to track your income and expenses might sound unnecessary and tedious at this point.
Don’t make the mistake of waiting until you’re earning money to start keeping your financial records.
Tracking your business finances is an easy habit to start from the beginning. Just find the system that works best for you. Then, when your business starts getting busy making money, you’ll have a system already set up to handle everything! When tax time rolls around, you’ll be so glad you’re prepared!
How about you?
- What tax tips do you have for small business owners?