Required reading for first-time and frequent filers.
As a self-employed entrepreneur or small business owner, maintaining organized records throughout the year can go a long way at tax prep time, helping you to claim the deductions you’re entitled to and helping you to be prepared for the possibility of an audit.
While it’s always a good idea to use a tax professional, as they should be aware of IRS regulations and changes that impact your business (and their fee is usually deductible!), it’s important to have a general understanding of tax terminology and IRS requirements, and to be prepared throughout the year for filing season.
Here are five tips for sole proprietors, including most owners of single-member limited liability companies (LLCs), as you prepare for the 2015 tax filing deadline of April 18, 2016:
- Stay organized: Avoid the stress of scrambling for records and receipts around tax time by keeping accurate records throughout the year. One way is to use an organizer your accountant may send to you. If you have your own system, keep files of all receipts, cancelled checks and credit card statements (at a minimum), as well as any other records needed to support the numbers on your return. For other prep tips, access this checklist from H&R Block.
- Don’t leave deductions on the table: The tax credits and deductions you’re entitled to can change each year, which is another reason to use a tax professional or ensure your tax software is current. Deductions may include things like certain start-up costs, home and mobile office expenses, travel expenses, and charitable donations. Check out the IRS’s site for information on the credits and deductions you may take.
- Familiarize yourself with the forms: As a sole proprietor, including most owners of single-member LLCs, you can file your return using a Schedule C form, which reports your net losses or profits. It’s helpful to watch this IRS video before filling out the form. If you’re a very small company with business expenses under $5,000 and meet other qualifications, you may be able to use Schedule C-EZ, which is less complicated to prepare.
- Classify workers correctly: A common misunderstanding is that there are different responsibilities for hiring independent contractors versus employees. The IRS advises that seasonal or part-time workers should be treated the same as employees, requiring you to have an employee identification number (EIN), and making you accountable for withholding, depositing, reporting and paying employment taxes.
- Avoid common mistakes and red flags: Check and recheck your return, even if it was completed by a professional, before mailing or e-filing it. Pay special attention to potential pitfalls, such as using a wrong Social Security number or EIN or filling in a computation on the wrong line. The Taxpayer Advocate Service, which operates within the IRS, provides guidance on how to identify and correct typical mistakes, and Kiplinger has identified 16 audit-triggering red flags that may increase the risk of your return being singled out.
Your chances of being audited are statistically low — the IRS examined 0.84 percent of federal tax returns in the 2015 federal fiscal year, its lowest rate since 2004, according to USA Today.
However, if you receive a call or a letter from the IRS after you file your taxes, don’t panic. Find out what steps to take to prepare for an audit — and what you can expect after it’s finished.