"Those who do not learn history are doomed to repeat it.”
Every year, you pay your taxes. Every year, you wonder why you pay certain taxes. And every year, the process never becomes any more enjoyable. While you’re never going to welcome the action of giving the government your hard-earned money, here are several mistakes you can avoid to make the entire process less painful.
Waiting Until The Last Minute
Most tax deadlines are rigid, so don’t wait until the last minute to start. Just as you’d charge a customer extra for a quick turnaround on a project, so will your tax accountant.
Start the conversations with your accountant long before your returns are due (April 15th — or Sept. 15th for corporations and Oct. 15th for individuals, if you file for an extension). Know what inputs she or he will need, and when you'll expect to have them. Get on their good side and your tax accountant will be more likely to try to dig up some possible deductions to save you money.
Another thing you shouldn’t wait to do is remitting your estimated taxes. Individuals, sole proprietors, and S-corps filing at the individual level who expect to owe $1,000 or more in taxes need to be filing quarterly estimated taxes. The same goes for corporations expecting to owe $500 or more. Based on how much you owe, if you wait until filing time to pay the government, you’re more likely to be charged penalties and interest.
Having Your Tax Advisor Compile Your Financials
It’s important to have your financials in good shape when it comes time to file, so all your tax accountant needs to do is file them. However, if compiling your financials is cumbersome due to the poor shape they’re in, your tax accountant will likely charge a higher hourly rate just to clean them up.
Your management financials must also be in good standing in order to make your tax accountant’s job easier (and cheaper). Work with an experienced bookkeeper every month to maintain your financials: This will help you analyze cash burn, calculate customer acquisition cost (CAC), and measure profitable revenue streams (to name a few benefits). Your tax accountant will be thrilled to receive airtight and reconciled financials come filing time, as opposed to having to do the heavy lifting themselves.
Filing Tax Extensions Every Year
One of the biggest blunders I see business owners make is not learning from last year’s mistakes. For example, some businesses file for extensions year after year, and the last thing they want to think about in September is paying the government and digging into numbers from over a year and a half ago. Take the time to get it right and file on time. You didn’t particularly enjoy paying penalties and interest last year, so start making estimated payments now to eliminate that headache.
Mixing Business And Personal Expenses
Imagine if you got to deduct every dollar spent on groceries, rent and every night out with friends when you filed your personal taxes — essentially calculating a personal net income. In this imaginary world, you’d be taxed on that number, rather than on all the money you made per your W2 and 1099s. However, if you’re constantly buying business items on personal cards and vice versa, deciding “well, this meal was for a client, and this one wasn’t," you’re essentially cheating the system, which can get you in serious trouble with the IRS. My advice? Avoid this situation from the beginning. Set up different bank accounts and credit cards for business and personal expenses.
Need more guidance on what you can and can't deduct? Check out our article, Top 20 Tax Questions from Small Business Owners.
Trying To Handle Payroll Liabilities Yourself
You should run your own payroll every cycle. It’s an excellent way to improve your financial knowledge and to understand employer vs. employee taxes, what the cost of a W2 vs. a 1099 contractor means, etc. However, you should not be manually filing your payroll liabilities each month and quarter (i.e., what you owe to the state and federal government for employer portions of taxes, Social Security, etc.). Leave this to the professionals. When it comes to full-service payroll providers, there are many solutions out there that are a fraction of the cost compared to the opportunity cost of your time manually filing reports to the federal and state governments. Let professionals handle reporting and filing, so come tax season, you aren’t scrambling to come up with your employer portion of the cash you owe, or end up paying penalties.
Preparation is key when it comes to taxes. Instead of waiting for your tax accountant to email you a request list two days before your filing date, send them an email in early 2017 (or even now in late 2016) asking to hop on the phone to discuss what they’ll need from you. Have your financials in shape to hand over to your tax accountant, but also for you to analyze and help make better business decisions. Trust me, taxes are not that painful if you are prepared.
This article originally appeared in Forbes.