With tax season 2019 firmly in the rearview mirror, small business owners everywhere are breathing a sigh of relief. Now, you can spend the rest of the year focusing on connecting with new customers and growing your business.
As tempting as it is to ignore taxes for the next eight months, it’s also risky. The next tax season is never too far away. And when it arrives, small businesses will need to go through the time- and labor-intensive process of gathering the necessary documents, jumping through the required hoops, and eventually cutting a big check.
If you wait until spring 2020 to start preparing, it’ll be a scramble to get everything in order — ultimately distracting you from your bigger business objectives. Thus, even if you meet the deadline, your business has lost out on opportunities along the way.
The better strategy? Prepare for next tax season as soon as the last one ends. Keeping your tax records in order year-round makes filing quick, easy, and error-free. If you want tax season to be effortless, get started now and don’t stop.
Keeping Records in Order
“What records do I need to keep?”
This is one of the most common questions for new and first-time entrepreneurs. Businesses generate tons of documents, but how many of them actually need to be filed away for tax purposes?
Employment taxes make up a significant part of your tax burden, so it’s important to keep extensive records about your staff. As a requirement under the Internal Revenue Service, small businesses must keep employment tax records from the last four years(although best practices suggest six years), meaning you need to start collecting them as soon as you make your first hire.
As part of the employment tax records, track the date and amount of all wage, annuity, or pension payments (as well as records of any fringe benefits). Tips must also be recorded if they apply to your business, along with payments made during periods of sickness or absence. Depending on type of business and nature of employment, there may be other required documents. Plus, relevant documents must be preserved, even if an employee quits or is let go.
Taken together, the amount of records needed for small business taxes (even businesses with one employee) is hefty. Collecting them systematically throughout the year makes things manageable. Waiting until tax time to get started makes things frantic.
Tips for Tax Record-Keeping
Once you get in the habit of saving relevant tax documents, the record-keeping process basically runs on autopilot. That’s the goal: You want this process to be thorough without being distracting. Follow these strategies to lighten the burden:
· Hold on to supporting documentation: In addition to employment tax records, keep documentation related to your finances. That list includes gross receipts — defined as business income before deductions — and all receipts for business purchases. Invoices for all business expenses should also be included. All these documents should be organized according to type and year. If you’re unsure whether to save something, err on the side of caution.
· Investigate state rules: Tax law is different in every state and may require supplying records not required by the IRS. For example, in some states, you must keep records about what you spend on employee training or state unemployment insurance. To determine what exactly you’re required to supply, contact the state agency responsible for tax collection. It’s smart to check in regularly to stay current with rule changes.
· Destroy documents on schedule: Once it’s no longer required for documents to stay in storage, they should be destroyed systematically. That involves disposing of documents effectively using shredding or other permanent methods as well as keeping a destruction log proving the destruction was carried out. A paper trail is only necessary for as long as the law requires, but you should always be able to prove that sensitive employee records have been handled correctly.
Tax record-keeping is a little different at every business. Instead of trying a one-size-fits-all approach, discern what works for you based on your business, staff, and tax obligation. It helps to draw on advice from experts, but be sure to vet any advice you find online. Your best bet: Seek out a local accountant or tax attorney who can tell you exactly what the law requires. No matter what track you take, get started soon. You won’t regret it next tax season.
Thomas Murphy is managing partner of employee benefits company Sonus Benefits. With a decades-long background in the employee benefits space, Murphy works with his team and clients on focusing on building strong benefit programs that support their culture and produce better outcomes.