Tis the [Tax] season, are you ready?
Tax season is here, and whether it’s your first year in business or your tenth year, it always feels like there’s an endless list of tasks to get through to file your return. If you live in the US, this step-by-step guide will help you get organized so you can get a jump start and file your 2016 tax return well before it’s due.
Source: 8 Steps to Prepare Your Online Business for Tax Time
The preceding article offers some great tips for any small business. If you’re self-employed, a freelancer, or run an e-commerce store, these tips can help you better prepare for this and upcoming federal tax returns. I invite you to read the Shopify article in full, but here’s a summary:
Step 1: Remember Your Tax Deadlines
At the time of this writing, here are some of the 2017 federal tax deadlines (past and present for this year).
- February 2: Forms 1099 and W2 Postmarked
- March 16: Partnership Returns Due
- April 17: Corporate Tax Returns Due
- April 17: Individual Returns Due
Step 2: Get Your Receipts In Order
I personally have a mixed bag. Some of my receipts are in paper form, while most are filed digitally. Do what I do, monthly (at the beginning of the sales month) collect any and all business receipts, scan/log them into an online database, and get organized monthly vs. at the end of the year. This will prevent added headaches and potential misreporting of your expenses.
Here’s a few tools recommended in the article:
Step 3: Get Your Bookkeeping up to Date
Organization is key to a smooth tax season. Think about it, you’ve already began operating this calendar year, and hopefully you’ve earned a few sales. Get organized NOW for next year’s return.
There are many tools available, Freshbooks.com, Quickbooks.com, xero.com and many more. Not much of a DIY’er? Hire a local bookkeeper or find a reputable bookkeeper online.
Step 4: Submit 1099s
If you paid an independent contractor more than $600 during the tax year, you should have already sent a Form 1099 to the contractor by February 1 and you’ll need to submit a copy to the IRS by March 31, 2017.
Step 5: Understand Sales Tax Requirements
Sure, sales tax laws can be complex, but everything depends on your state, your industry, and the products or services you provide. Consult your accountant, and check out how sales tax applies to online businesses.
State tax requirements are dictated by a legal concept called ‘nexus’. Nexus means that a business needs to have some physical connection to a state in order to collect sales tax there. If your business develops nexus in a state, you must collect sales tax in that state.
There are numerous instances that develop nexus in additional states. E-commerce businesses where drop shipping may be used, pay special attention to nexus! This may mean you have to collect sales tax in any location where your business has developed nexus. And yes, that means you have to know the tax laws of that new state.
Step 6: Consider Filing for a Tax Extension
Need more time to correctly complete your tax returns? File for an extension. To do so, you’ll need to complete the tax extension form that corresponds with your business and an estimate of the amount of taxes you owe for the year. Submit the completed form and your payment for taxes owed to the IRS electronically or via mail on or before April 15 (March 16 for corporations). The shopify article lists the different types of business structures and the extension deadlines. For example, Partnerships automatic extension (using Form 7004) is March 15, 2017. Corporations? Form 4868 and April 17, 2017.
Step 7: Consider Your Tax Deductions
Online sellers, here’s a few commonly available deductions (consult with your accountant as some of your expenses could fall under ‘start-up’ costs):
- Home office deduction
- Education
- Phone and Internet Costs
- Web Hosting and Online Store Themes
- Contractor Work
- Shipping Costs
- Vehicle Use
- Online Service Fees
- Equipment
- Professional Services
Step 8: Find the Right Accountant and Ask These Questions
The first year I completed my own business taxes I used two different tax preparation software sites, in addition to the paper and pencil method. I got the same result. I then took my documents to a trusted and recommended accountant, and had a similar result (although not exactly the same as when I did it myself). Moral of MY story? It pays to have a professional look at your taxes. This year I will be doing the same because I prefer having the peace of mind of having a professional review my own book keeping. When you’re a business owners, it may be more beneficial to spend your time growing the business vs. playing business. It’s easy to get wrapped up on the day to day operations of your business, but remember, you are not in the business to play business… you’re in the business of growing your company and serving your audience.
If and when you hire an accountant, Shopify implores you to consider asking these three questions:
- Are there any local tax credits available? (this is a big one that entrepreneurs often miss)
- Does my business have nexus in any other states? Have I dealt with sales tax properly?
- Are there advantages to changing my business structure?
I know tax season can be overwhelming, but with a little planning, you can navigate through with ease and better learn for this year’s prosperous tax returns (which are due in about a year!).
Do you have any additional tips you’d like to offer? Comment below!