A 5-Step Guide to Manageable Tax Prep for Entrepreneurs

Not only are taxes time consuming, confusing, and a nuisance, but they can also be a drain on your wallet if you don’t prepare well. This is especially true for entrepreneurs who, aside from having to deal with the complicated tax filing process of running a business, also have to actually run the business.

If there’s one thing all entrepreneurs can agree on, it’s that they dread tax season.

In fact, a recent survey by the National Association of Small Business (NSBA) reveals that 38 percent of small businesses reported they spent more than 80 hours a year dealing with federal taxes. That’s two whole workweeks! That same survey found that almost 50% of small businesses spend $5,000 or more annually on the accounting process alone—before paying their taxes!

Not only are taxes time consuming, confusing, and a nuisance, but they can also be a drain on your wallet if you don’t prepare well. This is especially true for entrepreneurs who, aside from having to deal with the complicated tax filing process of running a business, also have to actually run the business.
Whether you choose to do taxes on your own or hire an accountant this year, here’s a quick guide on how to knock tax season out of the park:

1. Familiarize Yourself With the Lingo

One thing we shouldn’t complain to the IRS about is the amount of tax breaks they offer. Tax breaks give small business owners and freelancers a great opportunity to win back some of that money they’ve been spending on their business, and it’s a unique way to encourage entrepreneurship.

However, there is a small caveat to this: it’s hard to keep track of what’s what. There are important differences between deductibles, refundable credits, and non-refundable credits. Each can help you in distinctive ways, so it’s useful to know which expenses qualify for which tax break as you track your finances throughout the year. Investopedia and the IRS website are helpful tools that can break down tax vocabulary into simple terms.
 

Deductibles

Benefits: Lowers taxable income and total tax liability. Can help with items that represent reductions in ability to pay tax (i.e. casualty losses).
What Does That Mean: Because deductions cannot reduce taxable income below zero, their value is limited to the filer’s tax liability before applying the deduction. Value depends on the taxpayer’s marginal tax rate, which rises with income.
Examples: Health care expenses, mortgages, car loans, investment-related expenses
 

Refundable Credits

Benefits: Decreases a person’s tax liability. Same value for all taxpayers with tax liability at least equal to the credit.
What Does That Mean: Treated as payments of tax you made during the tax year. When total of credits is great than total tax owed, you get a refund for the difference. Credits are more appropriate for subsidies provided through the tax system.
Example: Earned Income Credit, Additional Child credit, Small Business Health care credit.
 

Non-Refundable Credits

Benefit: Lower tax limit as low as it can go. Represents the majority of credits.
What Does That Mean: Credit cannot be used to increase tax refund or to create a tax refund when you wouldn’t already have one. Savings cannot exceed amount of tax you owe.Example: If you only owe $200 in taxes, and the only credit you’re eligible is for $500, the $300 difference is non-refundable.
Example: Child and Dependent Care Expenses credit, Saver’s tax credit, Adoption tax credit, Foreign tax credit.
 

2. Don’t procrastinate

Unless you want to have a very stressful week, don’t wait until right before April 18 (note – usually tax day is April 15) to prep and file your taxes! Last year, the IRS reported that 28% of Americans waited until the last few weeks before tax day to file their return. Sure, you can file for an extension if you can’t make it before the IRS deadline, but there are drawbacks to this, like late fees. And, just because you file late doesn’t mean you get extra time to pay taxes if you owe the government money.

Plus, when you take your time to carefully approach a tax filing, it won’t seem as stressful or time consuming. You’re more likely to make an error or miss out on a deduction if you rush the process.
 

3. Stay organized

By far, the easiest way to minimize the hassle of tax season is by staying organized and keeping updated records of receipts, payments, and expenses. The IRS demands documented proof for claims, so having everything stored and accessible can reduce a substantial amount of time and pressure.

Organization also helps maximize deductions and reimbursements without the hassle of scrambling to find misplaced financial records. It also makes it possible to file taxes at the earliest possible time because paperwork is readily available at your fingertips.

Shoeboxed’s mission is to streamline this process so that you can focus on more important things during tax season, like running your business or taking care of your family. We process and organize your receipts so that vendor, total amount, date and payment type are extracted and available in a searchable online account—without you ever having to lift a finger. You can also tag receipts as reimbursable or deductible so when you file taxes, your documents are already catalogued appropriately.
 

4. Stay informed

There’s a lot to swallow these days when it comes to tax codes, especially since the IRS makes changes on a yearly (and sometimes, even seasonal) basis. It doesn’t hurt to take some time researching professional blogs and news sites that can keep you informed on the latest tax changes. The extra initiative will take a few hours of time on your end, yes, but not nearly as much time it would take to prep taxes with little to no knowledge on how to maximize returns. This is especially helpful for entrepreneurs who do not have their own accountant.

Without a guiding hand, it’s easy to make misinformed decisions with tricky nuances (like filing status, for example). Some helpful sites that give excellent pro advice are Don’t Mess With Taxes, TaxGirl and AICPA.
 

5. When in doubt, ask a pro 

With an endless supply of information, the Internet of things can answer any question you may have related to taxes. Sometimes though, having 10+ pages pulled up with an overwhelming amount of information can make material difficult to digest. If your questions are very intricate and situational, it may be best to approach a tax expert or CPA. Examples of these questions may include:

  • Do I have a limit for my charitable contributions?
  • Should I itemize deductions? How in-depth?
  • When should I contribute to an IRA?
  • Should I file jointly, as single, or as head of household?
  • I have all these miscellaneous business expenses and reports, but which ones should I keep for reimbursements and deductions?

Sometimes it’s easy to do a quick Google search for these common tax questions. Other times, the answer depends on your business situation, among other variables.

If you have an accountant, keep in touch with them throughout the year. There’s no reason you should wait until tax season every year to speak to them. CPA’s are experts in their field and they’re a great resource that can put you up to date with all the latest changes in tax policy. Stay organized, plan ahead, and you can get the most out of your tax season.

3 Ways Shoeboxed Can Help Take the Stress Out of Tax Season

Tax season is officially upon us, and the entire Shoeboxed team is here to support you during this stressful time! We hope to be your partner in organization to help you file your taxes with as little time and effort as possible.

Tax season is officially upon us, and the entire Shoeboxed team is here to support you during this stressful time! We hope to be your partner in organization to help you file your taxes with as little time and effort as possible.

So how can Shoeboxed help you with your taxes?

Good news! All of our digital receipt images are IRS-accepted.
The IRS has been accepting digital images of receipts since 1997. We make sure we meet their requirements over here at Shoeboxed by ensuring that your receipts are legible and that they link back to other purchasing references, like credit card spending. This can be a lifesaver in case of an audit!

Our Magic Envelopes are a great way to catch up on paper clutter.
Simply drop all of your receipts, invoices, and important tax documents into one of our prepaid envelopes and drop it in the mail. Within a few days, you’ll have a searchable online archive to help you find any document you might need to file your taxes.

Not on a premium service and don’t have Magic Envelopes? Upgrade and try a free trial of our Classic, Business or Executive plan and we’ll send you some!

We automatically categorize your receipts into default tax categories.
Shoeboxed uses an algorithm to automatically put your receipts into the correct default tax category, like Office Supplies and Meals/Entertainment. You can also customize the categories to make it even easier to find tax deductions and write-offs.

Have any questions about other ways Shoeboxed can help? Feel free to visit our Help Desk or drop us a message.

Here’s to a hassle-free tax season in 2016!

7 Documents Every Independent Contractor Should Keep

Freelancers and contractors are projected to make up more than 40 percent of the US workforce by the year 2020, likely leading to more scrutinized employment laws. Protect yourself by keeping important documents securely stored and easily accessible.

Keeping track of business documents seems like an obvious obligation for an independent contractor, but the “what”, “why” and “when” of this obligation remains a gray area for many. With Uber’s recent legal challenges concerning the worker classification of independent contractors, documented proof is only sure-fire way to defend against fees and legal claims from the IRS.

But do you know exactly what to keep, and how long to should keep it for? Leaving a paper trail to prove independent contracting work is more important now than ever before, and Shoeboxed wants to make sure you understand the benefits of keeping the following documents safe, secure and accessible:

Invoices (7 years)
Key business ledgers like invoices should be kept for a minimum of seven years, and for good reason. It’s the best way to protect your contracted accounts against a conflict with a client project. Invoice statements also verify that you are subject to profits and losses, which is one of the factors in the Twenty Factor Test for an independent contractor. In the event of an IRS audit, this will help prove your status as a contractor.

Travel Mileage Logs (3 years)
Like any good expense reporting habit, keeping travel mileage logs ensures protection against tax audits and business disputes. They can also be used for travel deductions, earning you up to 57.5 cents for every mile you claim. There are plenty of travel miles that qualify, including business travel to and from airports and hotels, errands and supply runs, travel to client offices, and to and from business meals. Don’t miss out on those valuable deductions!

Business Cards (Forever)
Being a successful contractor requires agile networking skills. At any given moment, there’s a chance that you will stumble across your next great project, partner or client. Unfortunately, contractors collect dozens of business cards every month that are habitually trashed or misplaced. Keeping business cards can help secure resourceful relationships; you never know when one of those contacts will come in handy. Working for multiple clients is also part the IRS’s Twenty Factor Test, and business cards may provide evidence that you are not controlled by a single employer.

Service Advertisements and Listings (Forever)
Keeping copies of past service advertisements and listings is yet another easy way to formally and legally prove a contractor-client relationship. The IRS says that making services available to the general public on a regular and consistent basis demonstrates autonomy in the nature of the work. It also confirms your intent of work in the event that a client wants to claim you as an employee rather than a contractor.

Project Records (7 years)
Contractors are required to fill out form 1099-MISC, a detailed document that asks what you made for each individual job. Project documents, including the contract, change orders, correspondence, logs, monthly reports and schedules provide the specifications and technicalities needed not only to fill out a 1099, but they also provide detailed insight of your contract work to the IRS if your worker classification ever comes into question.

Tax Returns  (3 years)
Due to the IRS statute of limitations, three years from the date of your tax return (or from the date of filing, whichever is later) is typically the standard time to keep business tax returns for tax-related business documents. The statute states that you have three years to file a claim for a refund, and the IRS has three years to appraise a tax if your income was not accurately reported. Even if these two situations don’t apply to you, keeping recent tax records protects you from any doubts that may be raised against your tax filings in the future. (Source)

Professional Licenses and Insurance Certificates (Forever, or until expiration)
Many jobs require contractors to be professionally certified in a given field of work in order to complete a client project. Though the regulations vary state-by-state and city-by-city, having these documents on hand and ready to present to a potential employer streamlines the hiring process, increases the probability of getting hired for the job, and may even increase your potential pay. Clients want to know they are legally protected and are hiring the right person for the job — it pays off to gain their trust from the get-go. (Source)

Lastly
Freelancers and contractors are projected to make up more than 40 percent of the US workforce by the year 2020. Make sure you’re protected against new contract work laws and save your documents for secure and easy access. Shoeboxed offers mail-in services with premium plans, allowing contractors to send in their important documents and never have to worry about being able to find and provide legal supporting documents for their contract work. Focus on working for yourself and doing what you love — we’ll handle the paperwork.