So, 2022 is coming to a close soon. Before you start planning champagne toasts and morning-after resolutions, take time to prepare your business for the end of the year.
End-of-year preparations make tax time easier, ensure all your financial info for the current year is accurate and up to date, and let you start the next year out on the right foot. So, your business keeps earning, and you stress less in the coming year.
Did you know that tax returns can be filed for free under most circumstances? With that being said, here are five more steps you can take now to prepare your business for the end of the year.
1. Organize your bookkeeping
Organizing your bookkeeping for the year’s end will help you rest easy at night. You’ll know that all your numbers for the year add up and that the information on your year-end financial statements is correct. That makes for a less stressful tax season.
One of the easiest ways to take care of your bookkeeping is to sign up for a remote bookkeeping solution. If you’re looking for a service provider to take care of your bookkeeping year-round and to help you skip the tax season crunch, we recommend Bench.
Double-check all your transaction categories
Go back and ensure that every transaction you’ve recorded for the year is correctly categorized. If you made a categorization error in February and then kept repeating that error, it could have a significant impact by the end of the year.
For instance—let’s say you’ve been incorrectly categorizing credit card processing fees for your store as part of your overhead. That could give you a fluctuating monthly overhead expense; use it to make financial projections for the new year, and your numbers will be off. Fixing the problem now will save you trouble once the books are closed.
Balance the books
All your credits and debits must match up if you use the double-entry bookkeeping method. Otherwise, some accounts may hold less value than your books say.
You can do this at the same time you’re double-checking your transaction categories. Ensure that another charge is debited the same amount each time an account is credited, and vice versa.
Reconcile your bank accounts
When you reconcile your bank accounts, you ensure your bank statements match your books. It’s how you ensure your books reflect reality—the cash you have to work with.
Reconciling bank accounts isn’t complicated, but you must follow the steps accurately. The bench has a helpful guide to bank reconciliation for your business.
Talk to a professional
Especially if this is your first time filing taxes for your business, it’s wise to enlist the help of a CPA. They can double-check your books and make sure everything adds up so your tax filing is accurate. What’s more, they may be able to identify tax deductions you’ve overlooked. That means your business will save more money in the new year.
Close the books on Dec. 31st
On the last day of the year, close the books. That means adding up all your numbers for the year, making sure everything is balanced, and preparing year-end financial statements. You’ll use those statements to file your tax return.
If you have a bookkeeper, they’ll close the books for you. They’ll also complete other preparation steps, like checking transaction categories and balancing the books.
2. Back up your itemized deductions with paperwork
If you’re claiming itemized deductions on your tax return, you must ensure that each tax deduction is backed up by documentation. You’ll need those receipts to support your claims if you’re audited. The IRS can penalize you if you can’t prove that your deductions were valid.
Make sure you hold on to the following:
- Cash register tapes
- Deposit information (cash and credit sales)
- Canceled checks or other proof of payment/electronic funds transferred
- Credit card receipts
- Bank statements
- Petty cash slips for small cash payments
- Accounts payable and receivable
- Payroll records
- Tax filings
- Previous tax returns
- W2 and 1099 forms
- Any other documentary evidence that supports an item of income, deduction, or credit shown on your tax return
Receipts for business purchases are one of the most common business records. You should hold on to every receipt for at least three years. That’s the length of the statute of limitations—the time the IRS has to audit you.
On every receipt you keep, be sure to list the following:
- The date
- What you paid for
- What the purchase was
If you’re writing off a business meal, list on the receipt who attended the dinner and the business-related topics you discussed.
The best way to keep track of expense records
A shoebox is not a filing cabinet. If you’re forced to sort through all your receipts and put them in order at the end of the year, it’s time to switch to a new system.
Going paperless cuts down on clutter and helps ensure nothing slips through the cracks. Apps like Expensify allow you to photograph and categorize your receipts, then upload them to the cloud—where they’ll be organized by type and protected from hazards like sudden gusts of wind.
3. Set aside money for taxes
When you’re self-employed, it’s up to you to figure out how much you owe in taxes and pay it to the IRS.
That may sound like a big responsibility. But don’t worry: A few shortcuts can help.
Follow the 30% rule
Generally speaking, be prepared to pay the IRS about 30% of your gross income as taxes. If you’re going back retroactively to put together money for tax payments, get together 30% of your annual income. (This is when it’s handy to have year-end financial statements—so you can quickly see how much you earned for the year.)
Next year, save yourself the hassle of sorting out taxes retroactively: Set them aside as you earn.
Set aside taxes well in advance
There are three methods for setting aside taxes as you earn an income: Per-payment, monthly, and yearly.
Per-payment works well if you invoice clients. Every time a client pays you, take 30% and set it aside for taxes.
Monthly is best if your business goes through many transactions every month—for instance if you run a bustling ecommerce business. In that case, set aside 30% of your gross income each month.
The yearly approach only makes sense if your business is small, you earn income infrequently, and you don’t need to make estimated quarterly payments. If your business is still in its side hustle phase, it may be okay to go back and set aside cash at the end of the year. Still, there’s no reason you can’t start using the monthly or per-payment method now—it’ll establish good habits for later on when your business grows, and your income is higher.
Create a separate account
Dipping into your tax savings is a major no-no. You don’t want to come up short at the end of the year, unable to pay your taxes. The best way to keep your tax withholdings separate from the rest of your income is to create a different savings account. That way, you’ll know exactly how much you have—and you’ll be less tempted to spend it.
4. Get up to date on tax reforms
Fight the urge to nod off. “Tax reforms” may not be the most thrilling words in the English language, but they’re essential.
That’s because, every year, the IRS makes changes to tax laws. That could mean you’re no longer eligible for certain tax deductions, or the deadlines for filing certain forms have changed.
For instance: The most recent tax change was the Tax Cuts and Jobs Act in 2018. It set a new tax rate for C corporations—so if your business were incorporated, you’d end up owing less than you may have planned. It introduced a new deduction for so-called “pass-through entities”—so if you ran a sole proprietorship or single-member LLC, you had a new way to write off expenses. And it made changes to which deductions businesses could claim across the board.
These changes are essential to stay on top of. Every year, the IRS puts out Publication 5318. It tells businesses what kinds of changes to tax law they can expect in the coming year. Make sure you read it when it’s published.
You may want to hire a CPA to file your taxes. They must stay on top of the latest tax law changes and ensure you comply.
Better yet, if you use Bench to do your bookkeeping, you can opt for BenchTax. Your bookkeepers will work one-on-one with tax professionals to get your taxes filed and 100% compliant with the current year’s tax laws.
With BenchTax, you don’t need to bring your books to a CPA and explain how your business works. Since your Bench team produces all your financial statements throughout the year and has hands-on knowledge about your expenses, they can work with professional tax filers to ensure your return is prepared accurately, taking advantage of write-offs.
That means no forms to fill, no accounting software, and no trouble for you at tax time—just an accurate, complete filing for your business handled by professionals.
5. Get the new year off to a great start
This New Year’s Eve, resolve to run your business more smoothly and effectively than you did the year before. Here are a few simple steps you can take to make it happen:
Do an internal audit
Don’t let the word “audit” scare you. An internal audit looks at your accounting processes and operations and ensures that everything is running as efficiently and cost-effectively as possible.
Reviewing your standard practices—how and when you record transactions on the books, store your business records, and your invoicing cycle—can highlight ways to improve. That could mean entering sales on the books nightly instead of weekly. Or, it could mean putting a whole new accounting system in place. Either way, your business will benefit.
Prepare financial reports
If you haven’t been disciplined about preparing financial reports, now is the time to start. Make sure that, by the end of January, you’ve got an income statement, cash flow statement, and balance sheet for the month. Then rinse and repeat: You aim to have accurate, up-to-date financial reports for every month of the year.
These taxes won’t only make it easier to file your taxes at the end of the year. You’ll have all the information you need to make informed business plans—like deciding how to reinvest income or where to reduce expenses. That could mean more profit for your business in the long run.
Put together a financial forecast.
When you create a financial forecast, you look at how your business has performed in the past, then project that performance into the future. It helps you prepare for upcoming events and see where your business will end up depending on your company’s moves.
Once you’ve created a financial forecast, you can refer to it throughout the year to help you make business decisions. For instance, a prediction can help you identify your busy and slow seasons and how investments in your business will pay off. That could affect everything from your operating hours during certain times of the year to whether you take out a loan to expand your business.
Bench’s guide to financial forecasting is straightforward and includes examples you can use to create your forecasts.
By taking five straightforward steps at the year’s end, you can ensure next year goes smoothly.
Part of your job is wrapping up the previous year’s accounting neatly and making sure everything adds up and makes sense. Then you’re ready to file your taxes or have BenchTax do it for you.
The other part is putting processes in place to ensure next year is off to a good start. For help with your year-end finances and tax preparation, check out Bench.