Tax season is always stressful.
Compiling all your paperwork, crunching numbers, staying organized. There’s a reason most people put it off until the last minute.
But if you’re a solo entrepreneur, tax season can be even more daunting. Whether you’re filing as an LLC, sole proprietor, or something else, here are some best practices to prep for tax season.
1. Set aside 30% for taxes before you do anything else.
When you’re your own boss, you’re responsible for paying your own taxes — as opposed to a W2 employee, where your taxes are automatically taken out. I see too many entrepreneurs going into debt or dipping into their savings to pay their taxes, because they didn’t set them aside as they made money.
To ensure that I have enough to cover my taxes and make sure my money is working for me, I set aside a portion of my tax money in a high-yield account (like this one, from Personal Capital) before “paying myself” an income. If you’re an entrepreneur or have a side hustle, it may be worth it to do the same.
Staying ahead of the game by automating a portion of my earnings to a high-yield savings account means I don’t have to worry about quarterly or annual taxes sneaking up on me — why not make some interest off it at the same time?
2. Do the heavy-lifting throughout the year
To save yourself from a last-minute panic (trust me, this was me last year), make sure you’re keeping track of your profit and loss throughout the year. Know where your money came from, how much you paid contractors, and more.
I also use this amazing spreadsheet from my friend and fellow entrepreneur Mallory Rowan to keep track of where all my money is going for my business (and it always gives me a fun little buzz when I get to enter an invoice!) It splits my income into expenses, taxes, owner’s comp, and more – so I know exactly what should be in every account.
3. Invest in an accountant.
Yes, you could do it yourself. And if you feel confident enough to do that, go for it! But back when I was working a day job AND running my business as a side hustle, I invested in an accountant. It was the best decision I made.
I spent about $400 a year to have someone do my taxes correctly, get me deductions I didn’t even know existed, and help me optimize my SEP IRA contributions. (Bonus: it’s a business expense, so I get to write it off next year.) I’d rather pay an expert to know something this important was done right — and, if I get audited, he’s there to guide me through the process and advocate for me.
Overall, staying organized is the best gift to yourself during this stressful time. If filing your 2019 taxes isn’t going as smoothly as you expected, put good habits into place throughout 2020 to prep.
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