How to prepare for taxes

The second you earn income, you need to pay taxes. However, when you're self-employed, you need to do a bit more work to get to the point where your tax liability is determined. You need to gather income from various sources, and then you need to keep track of your expenses, which is probably the most laborious part of the task. In order to make tax season less stressful, here are some things we recommend you do.

Tax liability - quarterly taxes

Be aware that you have to pay taxes. We recommend that you either move them to a savings account so you don't spend them on any other business expenses or even salary depending on your business structure. Starting out with using a tool like Lunafi that helps you track all your business expenses and eliminates the guessing of taxes is a great first step.

Good records - keep your receipts!

In case of an audit, you have to prove that what you were spending your money on is a legitimate business expense with an actual business purpose. Does that mean you need to keep every single $5 receipt? In reality, yes, you should! Is that 100% doable? Probably not because some places like a parking structure might not issue you an actual receipt.

Keep all those receipts and best-case scenarios file them in a cloud-based environment archived by month. Take a simple pic, store it in the cloud, and always keep the print receipt too.

Keep in mind that audits can happen years later where you don't really know anymore what that $5 receipt was about, so having everything organized is crucial.

Retirement accounts

Maxing out your retirement accounts is a great way to reduce your tax burden. Depending on your business structure, there are different retirement solutions, such as 401k self-employed IRAs.

Write-offs

Make sure you write off every business expense, including home office expenses, internet bills, software, and subscriptions. Anything related to your business is a potential tax deduction and will lower your tax liability.

Get help if you can't answer all questions yourself.

If you are seriously overwhelmed with doing your taxes and have very specific tax scenarios, talk to a tax professional that understands the ins and outs of how you're making money. Someone that's responsible, on top of things, and can file your documents.

Don't forget that taxes are ultimately your responsibility and not your CPA's. If your CPA is missing documents from you, they won't be able to do their job correctly. Make sure to nurture that relationship so everyone can benefit.

Start early! If you're looking for an accountant in March or on April 15, he or she is likely going to be busy, and you might not find the best fit for your business in time.

Do your research

Apart from income taxes, be cognizant if you're doing something that's subject to sales tax. Some services are subject to sales tax in the US, so if you're selling a product, it's most likely subject to sales tax. So you need to understand that as well.

Deadlines depending on the formation

If you're an S corporation, there are certain rules you need to follow, like paying yourself payroll and other additional compliance requirements that come with it. There's a potential to save money, but you would need to prepare your S-corp tax return prior to doing your individual taxes. The deadline for those is March 15.

If your business structure is a sole proprietorship, then your income is not taxed separately. It's just part of your personal income. The deadline to file for taxes is April 15. Read more here.

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Listen the whole conversation with Jonathan Medows, CPA on your favorite podcast streaming platform.

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