Tax season is pretty much unanimously detested by everyone except us tax lawyers. But if you’re not prepared, it can be a lot more painful than you might expect.
Here are three ways you can undertake proper tax preparation and stay one step ahead of the tax man come March.
1. Budget with percentages, not totals
For those of you who are self-employed, odds are you have multiple revenue streams, possibly at wildly different rates. If you work with clients, then you’re probably going to have multiple statements of work for different time periods and rates.
The result is one confusing tax situation, and a real challenge in predicting your annual income with any sort of accuracy.
In order to avoid getting caught out, try budgeting with percentages rather than as a total. Many self-employed service providers work out their annual projected income at the start of the year and save their taxes for that.
For example, if you are planning on making $50,000 and you have a total tax rate of 20%, you might be tempted to save like crazy in the first few months to cover your $10,000 liability.
But what if you don’t make $50,000? What if you make MORE than $50,000 and you have a higher tax liability?
By budgeting throughout the year with percentages, you can better control your savings and make sure you have enough cash to cover your liability come tax season.
2. Digitize your tax records
Always, always digitize. If you have a receipt, take a picture of it with your smartphone. Scan and save down PDFs of documents, contracts, and signed statements every month.
And make sure you archive all your bank credit card statements as well as your business email. Then, back all of this information up in the cloud so that you have a full and clear record of what happened and when. The IRS can audit you for up to six years ago, so you may want to keep paper records back that far.
But with cloud storage so incredibly cheap and easy, there’s no real reason to ever destroy your digital records. It also means that you can pull out years and years of records should you be audited to prove that the year in question was in fact on par with previous years.
3. Avoid cash. Always.
Finally, the best way you can prepare for the end of the year tax rush is to keep everything digital. Cash is hard to trace, harder to prove, and generally a nuisance when it comes to tax preparation. You want to avoid it however you can.
Fortunately, it’s not that hard. For business transactions, most small business merchants or self-employed individuals will work digitally.
If you’re frustrated by the level of fees charged by mobile payment processors like Square, it’s worth shopping around to find a lower (lesser known) processor who as lower rates. Otherwise, just fold their cut into your annual tax rate and call it a cost of doing business. If an IRS audit comes your way, you’ll be grateful for the digital paper trail.
There you have it. Three great ways to prepare for tax season.