First the usual disclaimer: nothing in this article should be considered tax advice. Please consult a CPA or tax professional before making any tax decisions.
It sounds glamorous, doesn’t it? To be able to be your own boss and not have anybody breathe down your neck. The freedom to access sales reports using a cloud-based point of sale system (POS) from the comfort of home with just your pajamas on and doggie by your side.
But as any self-employed small-business owner will tell you, being your own boss is no stress-free picnic. Rare is the small biz retail or hospitality proprietor that’s not married to his or her job. Healthy life-work balance—what’s that?
And one area that demands extra attention and responsibility in running a business is properly preparing taxes.
Long gone are the days when you worked for a company and your employer withheld some of your pay in the form of taxes, and ultimately it was very simple to file your tax return and enjoy getting money back.
But now that you’re an entrepreneur you have to be diligent and keep meticulous records.
“I Love Getting Letters From The IRS”
Being a self-employed offers tax advantages. But here’s what you need to remember to avoid being audited by the IRS.
Let’s say you have a food truck operation. Technically, you don’t have a brick-and-mortar location. But you do take cash or mobile payments. Therefore, you are a business, virtually no different from any other retail location. And that means that you should be keeping track of your business records.
(This is one advantage of having a best-in-class POS; you can easily record expenses and revenue.)
Here are 3 things you should be diligent about when it comes to record keeping:
- Payments received
- P&L statements (monthly)
Although keeping receipts may seem archaic, especially when you can track all payments online, it’s a good idea to back up electronic documentation with paper receipts whenever possible. If you don’t like holding onto paper, you can take a photo of all your receipts and keep them in an electronic file.
Deciding On What To Deduct
Do you check sales reports from home? If so, even if you have a brick-and-mortar location, you may be able to take a tax deduction for your home office. Employees don’t have this advantage so score one for being your own boss. In addition, other common deductions include your vehicle for getting to and back from work and office/business supplies, Internet, cell phone and travel expenses. (That Carribean cruise you took earlier this year was for business, right?)
Accounting software makes it relatively easy to prepare and file your own taxes. However, paying a professional accountant or CPA is worth it if you feel less than 100% confident in preparing estimated taxes yourself, or simply don’t want the hassle of filing on your own.
If you are going to file on your own, you should be making quarterly estimated payments via tax form 1040-ES. Failure to do so can result in a penalty along with interest charges. (And in case you’re wondering, no, you are not able to deduct IRS penalty charges from your taxes.)
Don’t forget to deduct your personal health insurance and any retirement plans that the IRS allows as a deduction (such as a traditional IRA; but not a Roth IRA). If you’re not sure, again, it’s best to pay a professional tax preparer rather than risk making costly mistakes.
Don’t Mix Business With Pleasure
When you get paid by a client or customer, where does the money go? Hopefully, it goes into a business account. If you’re dumping profits into your personal checking account, that can create a big headache when it comes time to preparing your taxes.
Same goes for expenses. Don’t buy supplies with your personal credit card. Instead, open a business line of credit so that it’s easy to track expenditures.
Keeping profits and expenses in separate business accounts will make it much easier for you, if you’re filing yourself, or for your accountant. If you do get audited, the business deductions you claim will be far more likely to get accepted if the expenses are kept in a separate business account.
The bottom line is this: keeping meticulous records and claiming every deduction allowable by IRS regulations will, well, increase your bottom line. And if you’re going to use a tax professional, meet with him or her at least a couple times a year just to make sure you’re staying on top of things, rather than scrambling at last minute, digging through a shoebox of paper receipts in order to file your taxes.
Need to upgrade to or purchase a best-in-class Point of Sale (POS) system? You can deduct it as a business expense. Contact us today for a demonstration.