The Benefits of Keeping Tax Records All Year Round
Although we think of tax season as that period between January 1 and mid-April, it’s an ongoing event. If you shift your perspective when it comes to tax records, you may find that not only is Tax Day less stressful, but so too are estimated tax deadlines throughout the year. Furthermore, you’ll have a better sense of how your business is making progress toward your goals and your strategic plan.
Record things as they happen
If finance isn’t your thing, you may not even think about recording income and expenses as they happen. Instead of throwing receipts in a file, or spending time reviewing your calendar to see when you had to drive somewhere, you record the expenses in your accounting software or, at the very least, in a spreadsheet. You don’t wait for your 1099s to arrive at the end of the year, either: when you receive a payment, you record it. Then, on any given day, you know exactly what your revenue and expenses are for the year, how much money you made, and how much money you are owed.
Accounting packages are easier than ever to use, too. There are a few that are designed for people who are self-employed or gig workers, with simple interfaces and enough power to do what you need them to do but not so much that you need to be a CPA to figure them out. (Freshbooks, Zoho, Xero and Kashoo are among some of the more popular systems).
It’s easiest to start a new accounting package on the first day of the year, but it’s okay to jump in at any time.
All the revenue, all the expenses
If you record your income and expenses, then what is there for your accountant to do? Plenty. Your tax accountant can add real value to your business by giving you advice on types of deductions that are allowed that you may not know about, helping you select a retirement plan that works best for your circumstances and offering guidance on the structure of your business.
The U.S. tax code allows you to deduct most of the expenses involved in earning a living. These can range from pens to utilities to networking lunches. There are limits on some types of expenses, especially those related to travel, clothing and home offices. Still, if an expense is legitimate, you should take it. Ask yourself, if you worked for someone else and spent money on something, would you expect your employer to reimburse you? Would your employer provide it in the first place? If the answer is yes, then you probably can and should deduct the cost.
Employers generally pay for pens, utilities and networking lunches. They generally do not pay for commuting, power suits or guest rooms for visiting aunts.
You also need to record all the income you receive. Some people wait until they receive 1099s from their clients, but that is a bad idea for several reasons. One is that you won’t know where you stand during the year. The second is that a client may have sent a 1099 to the IRS, but your copy got lost in the mail. Awkward! Also, you may receive payments from clients that don’t have to issue 1099s, such as those based in other countries. In that case, your bank account tells all.
Keeping tax records
An IRS audit is not fun. Some people try to avoid one by not taking all their expenses, but that means paying extra taxes and is no guarantee. If you have records, then you go and sit down with the IRS examiner and explain what you did. (It happened to me! It was a hassle, but I didn’t owe any money because I had all of my receipts. And then I went home and recorded the costs of traveling to the IRS office).
The IRS requires records to be kept for three years, in most cases. There’s an interesting exception for people who don’t file taxes, report all their income or commit fraud – these folks are required to keep tax records indefinitely. This isn’t because the IRS expects crooks to keep scrupulous records, but rather to give the agency additional legal tools to find and punish them.
Accounting and recordkeeping don’t come easily to all self-employed people, but it is easier to keep your books now than ever before. As you do the work, you may find that not only is it easy, but it gives you great insights into the strengths and weaknesses of your business.
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Source: Startup Nation
Author: Ann Logue