Conventional wisdom is that you should have up to 12 months of living expenses put away before you start your own business, although the figure depends on a few factors.More >>
Many small businesses dread it, but your end-of-year reconciliation doesn't need to hurt -- as long as you stay organized.
You'll need to get your paperwork together and schedule an appointment with your accountant, who can lead you through some of the financial intricacies. In general, think of this as a time to make sure all your ducks are in a row. Some elements of year-end reconciliation include:
Employee Wages and Taxes. Each quarter, you should have sent the federal government a Form 941-SS, which summarized your employees' wages and withholding. At the end of the year, you will need to send the Social Security Administration a W-2 form showing how much each employee was paid, and how much was withheld. Also, you'll need to send in form W-3, which is a summary of all the W-2 forms. Furthermore, if your state has an income tax, you must send in an annual reconciliation along with copies of the W-2s; you may also have to send in proof that you're covered for workers compensation. Make sure that the information you're sending to the Social Security Administration, the Internal Revenue Service, and the state are consistent because these organizations frequently share information with each other.
Income, Expenses, and Taxes. Now is the time to try and get your business the lowest possible tax rate for the upcoming year. Remember, any extra expenses you can take this quarter will offset your income and lower your taxes next year. There are some ways the system can help. For example, bonuses paid to employees by mid-March of next year can be taken as expenses this year -- this is an easy way to shift some expenses. You may also take tax deductions for contributions to employee retirement accounts, non-collectible bad debt, and many capital expenditures.
Preparing for Next Year. Of course, this can all be much easier if you think ahead all year through, so the best time to begin next year's reconciliation is right after you've finished this year's reconciliation. Think how prepared you'll be come next fall!
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