Tax season is usually a hectic time for any business, regardless of size. If you’re a solopreneur, you’re already juggling numerous tasks. The upside is that Tax Day is predictable every year, so you can plan for it beforehand. As both an accountant and a business owner, I can tell you that managing your taxes throughout the year is the best approach. This habit won’t just save you from penalties; it will also help you dodge the last-minute scramble that tax season brings. And remember, saving time is akin to saving money.
Let’s talk about where to begin:
Keep Your Books Updated
In my years as an accountant, I’ve seen many clients caught off guard with cash demands during tax season, mainly because they weren’t prepared. Staying organized makes tax season far less stressful. As a solopreneur, handling everything by yourself can make it tempting to put bookkeeping tasks on the back burner. But keeping a close eye on your finances does more than help during tax time. It provides insights into your financial trends, helping you identify where you might need to cut costs or allocate more budget.
To stay organized, use a digital storage tool like Google Drive or Dropbox to store all your receipts and tax documents safely. Make it a habit to scan and upload every business document you get, and consistently review your books weekly to keep everything updated. Plan ahead by working backward from the tax deadline, dedicating some time in January or February to review everything. This way, if you need more time, you’ll be able to file for a tax extension comfortably.
Separate Business and Personal Finances
It’s important to regularly fund your business account and use it solely for business expenses. You might wonder why it’s necessary if all your money ends up the same place. But by having a dedicated business account, tracking becomes much simpler when tax season rolls around. For instance, if you buy business supplies with a personal credit card and get audited, it becomes cumbersome to justify those expenses as business-related. If you’re among the 81% of solopreneurs using personal cards for business, can you confidently prove those expenses to the IRS?
Using a business account ensures accurate records of all deductible transactions. Plus, you can link this account to your bookkeeping system, allowing for automated and categorized tracking, something a personal account can’t do alone.
Set Aside Money for Taxes
It’s not uncommon for clients to worry about their tax bills and fear they haven’t saved enough. This constant anxiety is a lot when you’re running a solo operation. That’s why I suggest creating a separate account to save for taxes throughout the year. Staying on top of your books gives you a clearer picture of your expected tax liability, letting you allocate savings more effectively.
If you’re still figuring out your cash flow, consider setting aside about 30% of your profit for taxes. If your payments fall short at tax filing, at least you’ll have partially prepaid what’s owed. Conversely, overpayment means a refund, with leftover funds available for future taxes, expenses, or reinvestment into your business.
As a solopreneur, managing everything during tax season can be overwhelming, especially if your books aren’t ready. By adopting a year-round tax planning strategy, you can ease stress and save time, which frees you up to focus more on growing your business.
