Three reasons why you should be thinking about year end right now
My daughter recently downloaded an app to her smartphone that counts down the days, hours, minutes, and seconds until Christmas. She likes to remind me that I am running out of time to purchase a suitable selection of gifts from her (large and extensively annotated) wish list. But in my business, I have to keep one eye on the holiday countdown and another eye on the countdown to year end – and beyond that, CPA reviews and tax deadlines for my clients. As with holiday preparations, you can either panic at the last minute, or you can plan ahead for an easier experience. Here are three things you can do now to make life easier for yourself and your accountant when year end rolls around.
It’s all about the numbers
Your 1099 forms don’t have to be sent out for another 9 weeks. So why should you care now? The answer is that there are some simple steps you can take now to make your year end reporting easier. First, make sure your accounting software is up to date with all checks entered. You can’t report a payment you forgot about. Second, review the IRS guidelines for reporting and make sure you have a taxpayer identification number for every person and company that fits the guidelines. You can do this by sending a Form W-9 to your subs and vendors and asking them to complete it and return it to you. You can download a copy of the form from the IRS website and send it by email, or you can use fax or mail if you are more comfortable with those methods. Either way, if you start now, you have plenty of time to collect forms from your subs who don’t like to do paperwork (and you know who they are). Finally, taking the time now to estimate how many forms you need to send out means you can buy or order enough forms to get the job done without that last-minute trip to the office supply store.
Cash is king
Cash in the bank can be the single biggest difference between contractors who fail and contractors who survive. Banks and surety companies are looking at your balance sheet to see how much cash you have on hand. Focus now on the things you need to do to make that cash balance look great at the end of the year. Do you have past due receivables? Start making those phone calls now. Are you behind on sending out bills to your customers? Make sure you bill everything you can legitimately bill BEFORE the end of the year. Again, keeping your accounting software up to date will help with this. You need to make sure all your costs are entered properly and coded to the right job so that you don’t miss something when you generate that invoice. And be careful about letting go of your cash at this time of year. As a general rule, don’t pay any bill in December that is due in January unless you will incur a late fee or finance charge by waiting.
Taxation without preparation
Lots of contractors own “pass-through” companies, like LLCs or S corps, and pay taxes on their company profits on their personal tax returns. If this is you, this is a great time to evaluate your tax situation. Have you paid enough tax throughout the year to avoid an underpayment penalty when you file your tax return? Estimated tax can be complicated, so you might want to seek some guidance from your CPA or other tax professional. But, as a general rule, you will owe an underpayment penalty if you end up owing more than $1,000 and you did not prepay an amount equal to the lesser of (i) 100% of your prior year tax liability (110% for higher income taxpayers) or (ii) 90% of your current year tax liability. So what is your current year tax liability going to be? You can’t even begin to answer that question until you know how much money you are going to make – which brings us back to keeping your accounting software up to date. Have you recorded all the bills you have sent out and all the deposits you have made? Knowing how much money you have made so far, and how much you are likely to make by the end of the year, will make your CPA’s job easier, and maybe even save you some money on April 15.
Making a list and checking it twice
Yes, it seems like everyone wants a piece of your time this time of year. But following through on these simple steps really will save you headaches later. Take a little time to check these tasks off your December to-do list and then relax, knowing you are prepared for year end.