The tax season is pretty much hated by everyone except us tax attorneys. But if you’re not ready, it can be a lot more painful than you think.
Here are three ways to make proper tax preparations and one step ahead of tax officials coming in March.
1. Budget by percentage, not total
For those of you who are self-employed, chances are you have a lot of income streams, perhaps with very different rates. If you work with clients, you may have multiple employment reports for different time periods and rates.
The result is a confusing tax situation, and a real challenge in predicting your annual income with all the precision.
To avoid getting caught, try budgeting by percentage rather than totally. Many self-employed service providers work on their annual earnings projections at the beginning of the year and save their taxes on them.
For example, if you plan to make $ 50,000 and you have a tax rate of 20%, you may be tempted to save like a madman in the first few months to cover your $ 10,000 liability.
But what if you did not make $ 50,000? What if you earn MORE than $ 50,000 and you have a higher tax liability?
By budgeting throughout the year with a percentage, you can control your savings better and make sure you have enough money to cover your tax expiration.
2. Digitize your tax records
Always, always digitized. If you have a receipt, take a picture with your smartphone. Scan and save signed PDF documents, contracts and statements every month.
And make sure you archive all your bank credit card statements as well as your business email. Then, return all this information into the cloud so you have a clear and clear record of what happened and when. The IRS can audit you until six years ago, so you may want to keep a record of paper so far.
But with cloud storage very cheap and easy, there is no real reason to destroy your digital data. It also means that you can draw records for years and years before you are audited to prove that the year in question is actually equivalent to previous years.
3. Avoid cash. Always.
Finally, the best way you can prepare for the end of the year is the tax rush to keep everything digital. Cash is hard to trace, hard to prove, and there is generally a disruption in terms of tax preparation. You want to avoid that but you can.
Fortunately, it’s not that hard. For business transactions, most small business traders or self-employed people work digitally.
If you’re frustrated with the level of fees charged by mobile payment processors like Square, it’s worth shopping around to find lower (lesser known) processors that cost less. If not, simply fold their pieces into your annual tax rate and call it a business expense. If IRS audit is as you see fit, you will be grateful for the digital paper trail.
There he is. Three great ways to prepare for the tax season.