Year-End Tax Planning Checklist for Small Business Owners

When Does the Tax Year Start and End?

The IRS defines a “tax year” as an annual accounting period for keeping records and reporting income and expenses. There are two types of tax years you can use to determine the end of the tax year:

  • Calendar year: 12 consecutive months beginning January 1 and ending December 31
  • Fiscal year: 12 consecutive months ending on the last day of any month except December

End-of-Year Business Checklist

Stay on top of your business as you close out your tax year, whether it’s based on a calendar year or fiscal year. Use this handy checklist to organize and prepare for the coming year.

  • Organize your financial records. Having your books in excellent order will be an advantage for the new year.
  • With the help of your accountant or CPA, conduct an audit, review or compilation – whichever financial report is most appropriate for your business. Determine your financial status after examining your balance, cash flow management, accounts receivable and income statements.
  • Evaluate your current tax strategy. Is your current business structure the best plan for your tax strategy? Decide what to change for next year’s small business tax plan.
  • Create a new business plan, reflecting off the end of year reports for your small business. Set fresh goals based off of this past year’s achievements.
  • Review your client and vendor list, and make sure all the contact and profile information is correct. Additionally, update records for current and past employees in your payroll system.
  • Prepare payroll records at the local, state and federal levels. Your accountant or CPA can help ensure that you comply with all payroll regulations. Decide if you will give a year-end bonus to your employees. Just like regular pay, employee bonuses are subject to income tax withholding.
  • Start preparing your tax documents. Will you need to request an extended filing deadline? Confirm your deadlines based on your business’ structure. You can find which end of year tax forms for small business you’ll need from the IRS.

Need Help Completing Your End of Year Small Business Checklist?

If you need help organizing your books, finalizing your payroll records or preparing your tax documents, contact Watson CPA today. Small business owners in Carmel, Westfield and the greater Indianapolis area can request a free consultation to successfully close out this tax year and plan for 2019. Call 317-848-9938 now to get started!

How to Become a Sole Proprietor

What does “sole proprietor” mean?

A sole proprietor is someone who owns an unincorporated business by himself or herself. The business and owner are legally the same. The business is not a taxable entity; all assets, liabilities and income are treated as belonging directly to the business owner.

The advantages of a sole proprietorship include:

  • No state filing required to create a sole proprietorship.
  • No separate business income tax filing. Any business income or loss is reported on your personal tax return, and any tax is paid at the individual level.
  • It is relatively quick, easy and inexpensive to establish a sole proprietorship.
  • Fewer ongoing requirements and formalities than an LLC or corporation.

Can a sole proprietor have employees?

A sole proprietor can hire employees, and there is no limit to the amount of employees that can be hired. As with any other employer, the sole proprietor is responsible for filing taxes and the appropriate paperwork regarding his or her employees.

Does a sole proprietor need an EIN?

Any business owner must acquire an Employee Identification Number before hiring employees in order for to IRS to identify the taxpayer. Even if the sole proprietorship does not have additional employees, the owner may consider obtaining an EIN to establish notoriety as an independent contractor.

Without an EIN, a sole proprietor would use his or her Social Security number when filing taxes. The sole proprietor would then share his or her SSN with clients. But in the case of identity theft, having an EIN could help protect your SSN.

Additionally, the sole proprietor would need to obtain an EIN if he or she sets up a 401(K) retirement plan, buys or inherits the business, or wants to form a partnership or LLC.

Can a sole proprietor be an LLC?

A sole proprietorship and an LLC are two separate business types. In a sole proprietorship, the business and the owner are the same entity. In an LLC, the business and the owner are separated. You can convert your sole proprietorship into an LLC, following the guidelines given by your state. Each state has guidelines that define how to change from a sole proprietor to an LLC.

The main difference between a sole proprietorship and an LLC is the protection that the business owner gets in an LLC. If someone were to sue an LLC, the business suffers the blow while the business owner is personally protected. But in a sole proprietorship, where the owner and the business are the same, the business owner may suffer major loss in a lawsuit.

Does a sole proprietor need a business license?

Most sole proprietorships need a general operational license to establish it as a legitimate business. Depending on the business type or industry, you may need additional licensing or permits. Industries such as child care, construction, finance and real estate require professional licenses to operate a business. Positions like massage therapists, dietitians, tattoo artists and fitness trainers would also need a license to prove they have the legal authority for these roles.

Many sole proprietors consider filing a DBA (doing business as) to establish a difference between the names of the business and the owner. Otherwise, the business’ name is the same as the owner’s. Potential customers, banks and other vendors may prefer you have a DBA, as it gives more legitimacy to your business.

Filing Taxes as a Sole Proprietor

Because a sole proprietorship is not seen as a taxable entity by the IRS, all business income or loss must be reported on your personal income tax return. You will need a file a Schedule C with your 1040 to inform the IRS about your business’ profit or loss for the year.

If you are a sole proprietor or small business owner in Carmel, Westfield or the greater Indianapolis area, you can learn how to file taxes as a sole proprietor from Watson CPA. Call us today to get your free consultation from Watson CPA.

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