This blog series is for all the photography business owners who want to run for the hills when they hear the word TAXES. Don’t be afraid; be prepared! Read on to learn tax prep strategies and other tips for making tax time a breeze!
Taxes. The word alone is enough to make even the most organized of us want to run for the hills. Despite the fact that I’ve had my own business for eight years now, I still sometimes have a knee jerk anxious reaction when I think about taxes. Over the years though, I’ve found that there’s one big secret to making this not-so-fun season a little more bearable.
BIG SECRET: Don’t save your tax preparation for tax season.
Yes, as fun as it may be to cram all of your tax preparation into the last remaining milliseconds before your taxes are due, there are ways to avoid the frantic activity that comes from trying to cram a year’s worth of tax preparation into a few short days. Doing your “homework” all year long will make tax time a lot easier and help keep your stress level to a minimum.
From someone who’s learned some lessons the….ahem… hard way, here are five tips for making tax season a breeze (or, at least, easier.)
1. Set aside a specific amount of money for taxes from every payment you receive.
As small business owners, we need to make sure that we’re withholding money for tax payments in the same way that a corporation withholds money on behalf of it’s employees. To be sure that you’re setting aside an adequate amount of money for the tax that you’ll owe, sit down with your accountant and determine what tax bracket your business falls under. By looking at previous years’ information along with your Profit and Loss Statement from the current year, your accountant can help you determine roughly what percentage of your income you need to be setting aside for taxes.
Once you know this, you can automatically deduct this percentage from every payment you receive and transfer it into a separate bank account. There are a lot of places where you can sign up for a free savings account (I love using a free ING online account) but it’s important that this account is totally separate from your current business checking account. Whenever you receive a payment, you’ll transfer this percentage into the account. Unless it’s time to pay taxes, you shouldn’t touch the money that you set aside.
Sticking with this important habit is a real lesson in discipline. It can be hard not to forgo setting money aside, especially when finances are tight. If you can’t set aside the full percentage when you receive a payment, make a note of the remaining amount that should be transferred so that you can hopefully make it up later. There’s nothing worse than ending up with a monster tax bill at the end of the year and realizing you’ve already spent the money.
2. Keep your financial records up to date and review them quarterly with your accountant.
A huge part of tax preparation throughout the year is keeping your financial books up to date. Whether you enter information yourself into Quickbooks (or some other accounting software) or you have a bookkeeper, it’s critical that your books are up-to-date with all of your transactions. If basic accounting terms sound like a foreign language or you can’t remember the last time you opened Quickbooks, it’s time to hire a bookkeeper. Usually, you can hire a separate bookkeeper whose hourly rate will be less than your accountant’s; they’ll be able to update your books monthly or quarterly, depending on the specifics of your particular business. The cost of paying someone to take care of your bookkeeping is more than worth it when you consider the time and headache you’ll save trying to learn how to properly set up and maintain your accounts.
As someone who has done her share of hunting down copies of old checks and trying to dig up old credit card statements, I can attest to the necessity of keeping your books up to date. Trying to enter in a year’s worth of activity into your books when tax time comes is stressful and leaves room for error. Even more than that, having updated books will make it easy for you and your accountant to look at different tax strategies and because you’ll be doing this throughout the year, you can make adjustments to your spending and saving before December 31st rolls around.
3. Save (and FILE) your receipts.
You know this one: You must save all of your business receipts. End of story.
Make it easy on yourself and invest in a scanner to keep track of your receipts. I scan all of our business receipts using Neat Receipts twice a month and upload them for backup. By scanning receipts, I save myself the trouble of paper filing and keeping stacks of receipts in the office. If you’re an uber-geek like me, you can separate the receipts out into categories using Neat Receipts. This will make it easier to track down receipts later if your bookkeeper needs them or if you need to pull some receipts for reference.
The key ingredient to making this system work: Don’t save twelve months of receipts for filing at the end of the year!
4. Make it easy – automate.
Whether you’re paying estimated taxes quarterly or monthly, work with your accountant to come up with a plan to help make these payments as automated as possible. I utilize EFTPS (Electronic Funds Transfer Payment System) to easily make monthly deposits online. This system is connected to my bank account and each month will automatically withdraw the amount that I have specified. It saves me the hassle of mailing in monthly payments and helps me avoid making late payments when I’m traveling or busy with other projects. Depending on what your schedule is for making tax payments, find ways to automate the process as much as possible so that you don’t waste time sending in paper payments and risk making late payments.
5. Don’t recreate the wheel – save information from prior years.
After you’ve gone through tax season once for your business, keep notes of your previous year’s information. Make note of what information your accountant requested so that you can keep track of this throughout the year and have an easy reference for when they ask the following year.
In order to easily gather information when tax time rolls around, I scan pertinent tax information (including tax payment confirmations and other tax related forms) into a folder that I keep on my computer. Scanning these pieces of information as they come in will save significant time when it comes time to gather tax-related forms.
Want to learn more about some of my tax organizational must-haves?
•A great Accountant – the best way to find an accountant who understands the particular tax issues pertinent to photographers is to ask photographers in your area for a recommendation.
•An online savings account through ING – www.ingdirect.com
•Neat Receipts Scanner – www.neatreceipts.com
•Electronic Funds Transfer Payment System – www.eftps.com
Written by Katie Humphreys
