It’s that time of year again and you need to get ready to pay your taxes. We all know what a highly stressful process this can be for the self-employed, and especially if you aren’t prepared for the impending paperwork and expense. That’s where tax prep can make all the difference, and it’s why many people benefit from using a tax prep service to help get their paperwork in order.
If you’re looking for tax prep to help you plan and save, there are a variety of new services and tax prep tools that have been released this year that makes filing even easier!
For those that are new to paying tax, it’s important to understand the fundamentals of what it involves. Essentially, your job is to report on your profit for the year, which is different from your revenue or turnover. While turnover refers to the amount of money that passed through your business, profit refers to the amount of money that you were actually able to keep personally, or to invest back into your company.
For example, if you were selling a handmade piece of art that cost $20, and you managed to sell 4,000 units over the course of the year, your turnover would be $80,000… not bad!
But if each one of those items cost you $10 to make (because it was made from expensive materials), and $2 to package and send, then your profit would actually only be $8 per unit. That’s a yearly profit of $32,000. Now if you are also renting an office for $15,000 for the year, and spending $2,500 on bills, your overall profit is actually just $14,500. THIS is the amount that would be taxed, and not the turnover that you made each year1.
With that in mind, what information do you need to collect as you are running your business?
The cost of the materials and the rent will thus be “written off,” meaning that they won’t be included in your tax calculation (though this doesn’t mean you will “get” any additional money for it, which is what some people seem to believe!).
Information to Collect
To begin your tax prep, you therefore need:
- A total tally of ALL the money that was paid into your business over the course of the year
- A list of all the individual expenses that your business paid
- This includes one-off purchases
- As well as ongoing fees, bills, and debt
- In some cases, a company may still be paying off initial debt that was required to get the business up and running. This in turn can
In order to write something off against your tax, you need to be able to prove that you spent that money. In other words then, you can’t claim something as tax deductible if you don’t have a receipt or a similar proof of purchase.
This is one of the biggest jobs involved in tax prep: collecting and organizing receipts and invoices!
Likewise, you should also be able to provide evidence of your income that the IRS can use in order to check where the money has come from. That means you should have invoices for any clients you billed, and copies of receipts for products you purchased.
A good piece of advice is to try and enter all of this data into a spreadsheet of some sort. You can this way keep a tally of everything that has come into the business, and all the money you have spent. That then allows you to run quick sums to find out the totals.
Some other things to consider:
- Capital gains: money that your business
- Loans and fees that you may be paying back
- Interest earned from investments and savings accounts
What Does a Tax Preparer Do? And Do You Need One?
The job of a tax preparer then is to help an individual or business to go through their paperwork and documents, in order to pull out the relevant information. They can help to provide you with a calculation early on (which prepares you for the amount you need to pay), and to ensure that you have all the documents you are legally required to present in case of an audit.
Tax preparers will also be able to handle the actual process of filing the tax returns and entering the data online/via post. This can save you a considerable amount of time and stress.
What’s more, is that a good tax preparer should be able to save you money: and in most cases you’ll save more money that you will spend on the preparer. This is because tax preparers have far greater familiarity with the tax system, and therefore know precisely what can and can’t be claimed. This means you’ll be able to save more money and pay less back.
Do You Need a Tax Preparer?
The answer to this question will largely hinge on the type of business that you are running, as well as your confidence in dealing with financial matters.
For some businesses, tax is actually a very straightforward matter. If you run a service-based business (perhaps you offer writing for instance) and you are a sole proprietor, then your accounting will largely be a matter of logging how much work you have done and thus how much payment you have received. From there, you’ll simply need to list a few minor expenses: such as the cost of a new computer every few years, and some of your electrical bills. There’s a high likelihood that a tax preparer can still save you money by finding more opportunities to write off expenses, and could potentially save you trouble by ensuring that all of your books are up-to-date and to satisfactory standards. If you ever get audited, you will be more than happy that you got a tax preparer to help! That said, this is still not a “must have” in that most people should be able to understand and formulate their tax returns.
On the other hand, if you run a limited business or even an incorporated business, then you will have a far more complex tax return to fill out. Likewise, if you run a business that sells a product with lots of expenses and overheads, then the sheer time commitment involved might necessitate a tax preparer.
Keep in mind that any time you spend filing and organizing taxes is time you have taken out of your business: time that you could have spent providing value to your customers and clients.
Tax Preparer vs Accountants
Either a tax prepare or an accountant can handle tax prep for businesses and individuals. The key difference is that a tax preparer specializes in tax prep, whereas an accountant will provide a range of additional services, usually over a long-term arrangement.
In both cases, the IRS requires service provides to pass an examination demonstrating their competency preparing 1040 tax returns2.
Whatever you decide, the main takeaway is that you should aim to be as organized and prepared as possible for the next tax return. You’ll save money, time, and significant headache!