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This post by Nellie Akalp was originally featured on the Freshbooks Blog on November 16, 2015.While some details may not apply to our Canadian readers, the key messages still make for great advice.
By the time the end of the year rolls in, you're probably wishing you had a CFO who could magically handle all your books, year-end tax planning, and budgeting. But for freelancers and small business owners, wrapping up the year-end finances is just another thing to add to an already busy schedule.
However, getting your business financially fit for the new year doesn't have to be overwhelming.
Take on as much as you can in November. As busy as you may feel now, things will only get more hectic in December. Keep these seven tips in mind as you close the books on 2015 to give yourself every possible tax advantage (and avoid costly penalties) come tax time.
Review your estimated tax payments
As a self-employed business owner, "tax time" isn't just once a year. You're typically responsible for making estimated payments four times a year to the IRS. Keeping up with these tax payments will help ease the blow of having to make a massive single payment in the Spring, as well as helps you avoid any underpayment penalties.
Assess your revenue for the year and review what you've already paid toward your 2015 taxes to date. If you're at risk of underpaying, make up the shortfall now or on your final 2014 estimated tax payment (due Jan 15, 2016).
Plan out your end of the year expenses and revenue
By now, you should have a fairly good idea about how 2015 stacks up compared to previous years. Did you have a banner year or were things a little slow? If your income is higher than normal, you may want to think about sending out invoices for December projects until January (just make sure your clients don't require bills to be in by end of the year).
In addition, you may want to pull the trigger on some additional equipment purchases or other business expenses this year if it will help you from reaching a higher tax bracket. Spending wisely on your business (i.e. those things that will help you increase productivity or expand your business) is one of the smartest investments you can make.
Squeeze in state tax payments
Purchasing a new computer isn't the only way to lower your taxable income for the year. Pay your state taxes now, as well as squeeze in an extra mortgage payment at the end of December. You'll need to pay these bills eventually, and making the payments before the calendar turns to 2016 means you can deduct these expenses from your 2015 taxable income.
Think about turning your sole proprietorship into a corporation or LLC
If you started out as a sole proprietorship, you may want to consider incorporating or forming an LLC (Limited Liability Company). The main reason to do so is to separate your personal and business assets, and help protect your personal assets from things that happen in the business.
In addition, these business structures can give you extra flexibility in how you pay your taxes. Talk with a CPA or tax advisor to see if incorporating and electing S Corporation status could help lower your self-employment taxes.
Take some time now to research the different business structures or chat with an expert. If you decide to move forward, the best time to submit your paperwork is by the end of the year or the start of 2016. It simplifies your tax filings and paperwork if your business is the same business entity throughout the entire tax year.
Meet with a tax expert now
Do you typically wait to contact your CPA or find a tax advisor in March or April? At that point, experts can help you prepare and file your taxes, but it's too late to strategize on any actions to lower your tax bill. Schedule an appointment in November. This will give you plenty of time to act on their advice...for example, make a large equipment purchase, open a new retirement account, or form a corporation.
Maximize your retirement contributions (as much as you can)
Self-employed individuals need to be extra diligent about their retirement savings, since you don't have a traditional 401(k) and automatic withdrawals taken from each paycheck. It's all too easy to push these contributions down to the bottom of the financial priority list. Retirement accounts, like IRAs, not only help you build a much-needed retirement nest egg, but contributions also lower your taxable income for the year.
If you aren't already contributing the maximum to your retirement plan ($5,500 per year for a Roth/Traditional IRA), check your budget to see if there's any extra money you could move now. Also consider setting up an automatic contribution for next year to help keep you disciplined: you're less likely to miss money you never saw in your checking account in the first place.
Close an inactive business
If you started a business but are no longer actively pursuing it, you need to officially shut it down. If you formed an LLC or Corporation, you'll need to dissolve this business entity with your state. If you applied for a reseller's license or other permit from your local municipality, you'll need to terminate those permits.
This is one task you shouldn't procrastinate on. If you don't officially close the business in 2015, then you'll be expected to file taxes, file an annual report, pay annual dues for 2016. Save yourself the headache and extra fees, and get this paperwork in before the end of the year (it won't take too long).
Take stock for next year
This is the perfect time of year to assess where you are, and where you want to go. Assess your current financial situation by running some rough profit & loss estimates. You'll want to dive into the nitty-gritty bookkeeping numbers, as well as set aside time for big picture soul-searching.
Are you happy? Do you feel in control of your business? Do you feel confident and financially secure? Make a plan for 2016 by doubling down on the positives and focusing on the areas that need improvement. Remember that you're not just a freelancer, you're a business owner: make sure you are calling the shots on your future.