When you’re new to the world of self-employment, getting your first tax returns filed can be especially confusing. Even if you kept good records, there may still need to be some work done to get them organized so your tax returns can be prepared.
Ideally, you’d be able to walk into my office with a clean Statement of Profit and Loss for the year, copies of your business’ Balance Sheet from both the beginning and end of the year, a list of all your fixed asset purchases, a summary of your business mileage records, and your worksheet of home-office related expenses.
Your business might not be quite ready for that yet, and that’s okay. I’m not going to scold you if your records need some more straightening up before we get to work on the tax returns.
You’ve got a few options for how to whip things into shape.
If money is no object, go ahead and drop off your “shoebox” of receipts and records with your CPA, and let them categorize everything and add up all the totals. But, expect to pay CPA rates in the hundreds of dollars per hour to get this bookkeeping work completed.
If you want to reduce the amount you’re paying for a CPA, and you still don’t want to do the bookkeeping yourself, hiring a professional bookkeeper to get things in order is a great option. Bookkeepers’ rates are typically significantly lower (around $50-$75 per hour) than what you would pay a CPA.
When you’re just starting out, and you don’t have a ton of business transactions (or enough revenue to justify paying for a bookkeeper), your best option may be to organize your records yourself.
If that sounds like you, there’s a basic system that I use with my new small business clients when they come in, and their records aren’t quite ready for me to start working on their tax returns.
There aren’t a ton of steps to it, and it looks like this:
- Organize your income and expenses into appropriate categories. (We give our clients an organizer that lists some of the most common categories that the IRS will expect to see.)
- Record your annual totals for each category.
- If you bought any pieces of business equipment that cost more than $2,500, make a separate list of those items that includes: a description of the item, the date you put it into use and how much you paid for it.
- For business use of your vehicles, write down: a description of your car (ex. 2010 Subaru Forester), the total number of miles driven during the year and the number of business miles driven.
- Fill out the home office worksheet for the business use of your home. (It’s part of the tax organizer)
That’s it. Not too hard, right?
If it only takes you an hour or so to go through and get organized, congratulations, you may have just saved yourself hundreds of dollars on your tax preparation bill! If it takes you more than 5 hours, your savings might be in the thousands of dollars!
Once you’ve finished organizing your business records, you’re probably ready to make an appointment to get started on preparing your tax returns.
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