The new tax year is undoubtedly a challenge for the taxpayer, who independently keeps records of his financial transactions. At the same time, everyone wants to avoid mistakes and minimize the amount of taxes to be paid.
It is necessary to know and apply preparation secrets to the new tax period to achieve these goals.
We are ready to give you 6 tips on properly preparing for it.
1. Keep incomes and expenses accounting up to date.
This rule is equally important whether you are an employee, a business owner, or an independent contractor.
It will help you efficiently fill up tax reports at the end of each tax period.
Check your account books regularly.
Accounting should be continuous. And the bookkeeping should not have errors. It will save you unwanted troubles with the IRS. In addition, do not forget about the generally accepted accounting principles.
Save your payment documents.
The information contained in the payment documents is the primary for accounting.
Real pay stubs are required to prove your solvency when renting a house, buying an apartment, car, or other high-value items.
It is a precise and detailed account of your income, taxes paid from it, and other deductions for a specific period.
Business owners, independent contractors, and employees, with the employer’s permission, can create and edit it.
Separate business and personal bank accounts.
A bank account is an indicator of your business productivity. Dividing the funds will make it easy to track the amount of income received and expenses incurred. It will also be effortless to monitor the income level. After a certain income level, you are obliged to pay the tax.
2. Special attention to the forms of tax reporting.
Many tax forms are used when reporting. It is crucial to understand which of them you can use.
Determine the status of the counterparty.
The difference in the status of an individual may not be clear. Thus, a person may be:
- an employee
- an independent contractor
- an owner of the business.
The difference between the first and the second, for example, is in the level of control from the person to whom the service is provided.
Each of these groups makes the payment of taxes differently.
Pay detailed attention to the 1099 form.
An exceptional tax return is provided for the payment for services of at least $600 paid to a person who is not an employee.
We are talking about a 1099 tax form for independent contractors.
There are several rules for submission of this form:
- Report on Form 1099-NEC when payments are made in the course of your trade or business only.
- If you must file Form 1099, you need to deliver a statement to the recipient.
- You can find information about filing a 1099 tax form on the IRS website. Some cases exclude 1099-s.
- For the tax year 2021 reporting, you must use the 2021 version for filing and furnishing Forms 1099.
3. Keep an eye on legislative changes.
It is necessary to monitor all innovations in the laws to avoid mistakes in managing your finances.
Check the validity of the report forms.
The IRS informs of any changes in reports, including changes to their forms or rules of filing and transferring.
For example, the Department of the Treasury and the IRS have the right to reduce the total number of tax returns, which is now 250. If this happens, such changes will be sufficient from 2023.
Many forms are available for online completion.
Do not allow late payments.
To not be fined for late payment of taxes, enter the last payment date in your calendar. Or better yet, pay taxes in advance to be able to correct mistakes.
4. Create an annual tax plan.
Planning is one of the critical principles of a profitable business. An individual should pay taxes in advance. So it is vital to remember the rules for recording expenses.
Find out about possible tax deductions.
You should be aware of all groups of expenses that can reduce taxable income. These can be office expenses, medical insurance, accounting services, etc.
Tax incentives are also available.
Purchase equipment, other non-current assets, and consumables. It will help you reduce the amount of income. From this amount, you will need to pay the tax.
You can also prepay for services for the following year.
We pay taxes based on the information from the report about the previous period. Therefore, it is important to increase expenses at the end of the tax year.
5. Use the services of a licensed tax professional.
If you think it’s expensive, then no. This person can save you from fines, minimize taxes and increase profits.
The accountant will ensure that the calculation of income, expenses, and taxes is correct.
He will also ensure timely payments.
You do not have to understand all the difficulties by yourself.
He can also control your bank accounts and their usage in economic activities.
6. Use digital technologies.
We live in the 21st century. Fortunately, this is the period of mass digital transformation.
Optimize access to payment data
If you have not yet converted your payments into electronic form – do it immediately. Banks can conduct transactions online and save and systematize information about them. It makes it possible to simplify the calculation of the money received and the necessary payments in the future.
Use online methods to store and transfer information.
It seems like it’s impossible to find a man who does the paperwork by hand right now. Nevertheless, I would like to recall the possibilities of electronic communication and e-commerce. Filling reports is also possible online. There are online banking and even online real paystubs generators.
In addition, online learning tools can be found in the public domain. For example, the IRS offers an open virtual workshop for individuals, small businesses, and tax professionals. The workshop will provide an opportunity to learn about rights and responsibilities in taxation.
Thus, following our advice, your business will be fully prepared for the new tax period, organized, and profitable.