End of year financial, business and tax strategies and tasks to consider
Gather W9s:
Paying contractors to provide services for your business is just as common as paying employees. However, unlike setting up payroll where the new employee provides their social security and withholding information, business owners often neglect to collect this very important data before paying their contractors. If you’re a business owner who uses contract labor in the operations of your business, make it a habit to collect a W-9 from anyone before paying them if you intend to write that expense off as a deduction to your business income. This is very important because you, as a business owner, are required by the IRS to issue contractors that you paid more than $600 a form 1099-NEC before January 31 of the following year. Without their taxpayer identification number, you won’t be able to do this.
For current revisions and recent developments on the form W-9 visit:
https://www.irs.gov/forms-pubs/about-form-w-9
Get your books accurate and up to date:
You will need an accurate and up-to-date balance sheet and profit and loss, also referred to as an income statement. These two reports will help your tax preparer prepare your taxes against a set of books that will back you up in the event of an IRS audit.
Keeping your books up to date throughout the year is optimal not just so you have your affairs in order but these two financial statements provide valuable information to the savvy entrepreneur who can read them and draw conclusions and financial decisions based on their data.
Accounting Freedom has your back here and specializes in cleaning up books and getting your business financial reports to you on a monthly basis.
HSA, 401(k) and IRA Contributions:
If you can and if you have any of these set up and qualify to contribute, max out contributions to HSAs, 401(k) plans and IRAs.
More about HSAs: https://www.irs.gov/forms-pubs/about-form-8889
More about 401(k) plans: https://www.irs.gov/retirement-plans/401k-resource-guide
More about IRAs: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras
Do a Backdoor Roth IRA conversion:
Money in a Roth IRA is post-tax. It means you made money, paid tax on it and it’s now sitting in your bank to spend however you want. One of those options is to put it into a Roth IRA where it will grow tax-free and be able to be distributed after a certain age without paying tax on the distribution.
This is contrary to how other IRAs work where they are often funded with pre-tax dollars. Either your employer has set this up to withdraw from your salary or wages before the taxable wage is determined for the year. Or you as a self-employed individual have contributed to a SEP IRA in anticipation of deducting that amount from your business income for the year. That means you avoid paying taxes on the dollar amount you have put into an IRA.
If you’re young and expect to live a long life, or you’re in a low-income bracket, converting your IRA funds over to a Roth IRA is often beneficial. You do not receive a penalty for this type of trustee-to-trustee transfer which is technically a distribution however, you will be taxed on it.
Why would someone do this? Because having your retirement funds grow from a young age tax-free is sometimes better then letting them grow and taking the deduction right away. It’s planning for the future and anticipating your retirement fund will grow with time.
If you are in a low-income bracket, converting your IRA dollars to Roth IRA dollars is beneficial because you won’t pay as high of taxes on them as you may in a later year where you may earn more money putting you in a higher tax bracket, resulting in more tax paid on the same amount.
Consult your financial planner for specifics of you and your family’s situation for the best results.
As mentioned earlier, there’s no penalty but there will be taxation on the trustee-to-trustee distribution. If you convert a large amount from your IRA to a Roth IRA, you may be paying more than you’re ready for or more than was withheld from your paycheck throughout the year. Therefore, it is wise to pay estimated taxes throughout the year to cover for the large amount of distribution that will appear at the end of the year. This way you will avoid penalties for not paying as you go and for underpayment of tax.
You don’t have to be a business owner to pay estimated taxes. Learn more about estimated taxes (basically just extra payments to the IRS ahead of tax season) or how to set up extra withholding with your employer here:
Visit this page to see all payment options and ways to pay:
We highly recommend not to send paper checks in the mail anymore. Follow the above link and sign in to your personal account with the IRS where you can see what you’ve paid, what you owe, and pay anything remaining or estimated. Payments you send here go to the same place as where your withholding goes from your paycheck. Keep track of payments made here to include on your tax return. If you’ve paid too much, you’ll get it back just like any other year that you received money back previously.
Issue bonuses through payroll and THEN write the check:
Many business owners will issue year-end or holiday bonuses to their employees. Often times they’ll just write a check and give it to them. These bonuses are supposed to be considered wages and need to have either the business or the employee pay taxes on them. Some employers issue a bonus check outside of payroll, and try to remedy it by issuing that employee a 1099. This is not the classiest or most courteous way to give a bonus. It will also raise a red flag to the IRS. Instead, run the bonus through payroll and then write them the check. It will cost a little bit more because you’ll need to add the employer portion of FICA taxes on to the gross amount so that the check will come out at an even dollar amount. Giving someone a bonus check that says $2,000 even is classier than one that’s for $1,692.72 and saying it was for $2,000.
Gather tax documents:
Preparing for taxes before tax season is not on most people’s holiday season to-do list. We get it! Not everyone thinks like an accountant or organizes documents like a border collie herds sheep. But what you can do is file everything in a big folder or drawer or box as the mail begins to come in, or as you get receipts from purchases. Don’t leave the work until April 1st when your tax preparer is beginning to see red.
Step it up a notch and note which documents you needed for taxes last year so you can work off a checklist to make sure you get everything to your tax preparer the first time around. If you forgot something, expect to owe more money to have you tax preparer open your files up again if the return has already been submitted.
Notate changes from the year:
For the individual taxpayer be sure to let your tax preparer know of any life changes like marriages, divorces, births, deaths or name changes. If your name changes, remember to record that with the Social Security Administration as well.
For the business owner, be sure to let your tax preparer know of any changes in partners, shareholders, new fixed asset purchases or sales and entity structure changes.
The best way to approach the event many people hate the most (paying income taxes) is to reduce the headache and chaos often involved with unprepared taxpayers. A little bit of change in habit and preparation can mean a lot come springtime. Coming into April with a clear head and clean documents is more likely to prevent errors and audits down the road.
Disclaimer:
The information provided here should not be considered as legal, financial, or tax advice. Tax laws and regulations are subject to change, and individual circumstances can vary widely. When dealing with legal or financial matters, it’s always advisable to consult with a qualified attorney, accountant, or tax professional who can provide guidance tailored to your specific situation and the most up-to-date information on relevant laws and regulations.