2021 Tax Filing Checklist: Getting Your Business Ready

For many small business owners, tax time can feel especially daunting as you tack on readying your taxes to your already long list of everyday responsibilities.

Hours spent tracking down documents and organizing piles of paperwork can take its toll. But a little preparation, a clear and organized system, and a defined tax to-do list will help streamline the process this year, ensuring that it goes as smoothly as possible.

As you’re preparing to file your small business taxes this year, the following 2021 tax filing checklist will help keep you organized and make sure you stay on track.

1. Know which taxes you have to pay, then find your forms

As a small business owner, there are a variety of taxes you might be required to pay in a given year. One of the first steps in tax filing is to familiarize yourself with the various types of taxes and to know which ones you’re responsible for based on your type of business. Taxes you may have to pay depending on your business structure include:

• Income tax. This is based on income generated by a business and is paid on the state and federal level. How you pay will vary on your business type. For example, if you’re a C corporation, you’ll pay income taxes based on the net income of your business. On the federal level, C corporations currently pay a flat 21% rate. If you operate as a sole proprietor or S corporation, though, you report business income on your individual tax return based on your tax bracket. State income tax for businesses varies by state and even county, so you’ll have to check your local rate.
• Estimated taxes. Sole proprietors, partners, or S corporation shareholders likely have to make estimated tax payments if they anticipate owing tax of $1,000 or more when filing their tax return.
• Self-employment tax. This type of tax consists of Social Security and Medicare taxes mostly for people who work for themselves.
• Employment taxes. Also known as payroll taxes, this type of tax includes the Social Security and Medicare taxes that you deduct from employee paychecks. It also includes federal unemployment tax, and you might also have to pay state unemployment taxes if applicable where you live.
• Excise tax. Businesses in industries such as the sale of liquor, cigarettes, or fuel have to pay excise taxes. The IRS has a full list of goods and services that excise taxes apply to.

Form or forms to fill

Once you know what taxes you need to pay, you can find the right form or forms to fill out. Sole proprietors, for example, will have different paperwork to fill out than small business owners who’ve structured their business as a C-corp. The most common forms a small business owner might need during tax filing time include:

• Form 1120 for a C corporation
• Form 1120-S for an S corporation
• Schedule C for sole proprietors
• Form 1065 if you’re in a partnership
• Form 720 to report excise taxes for your business

2. Set up an appointment with your accountant

Schedule a time to talk to your accountant well ahead of your tax return being due. That way, if they identify additional documents that you need to track down, you’re not scrambling to find them before the deadline.

Often, accountants will be able to identify additional deductions you may be able to take, so investing in the services of a professional accountant can be well worth the money spent.

Often, accountants will be able to identify additional deductions you may be able to take, so investing in the services of a professional accountant can be well worth the money spent. Accountants often specialize in certain areas, so as you’re interviewing accountants to help with your tax return, make sure to ask them if they have any niches.

Many accountants prepare a tax organizer to help their clients collect all the information they need for your filing their return. Often, a tax organizer takes into account your past returns. If you have an accountant and they don’t automatically provide a tax organizer, you can ask them to send you one.

3. Tidy up your books

Whether you do your own bookkeeping, or you work with a professional bookkeeper, you’ll want to make sure that your bookkeeping and all of your accounts for the tax year are in order before you start to work on your taxes. Block out time to:

• Review your bookkeeping software to make sure all of your accounts are reconciled
• Check to make sure you’ve paid all invoices for the year, and that there are no invoices that you’ve sent out that are outstanding
• Review your balance sheet to ensure any new asset purchases are accounted for

If you do work with a professional bookkeeper, schedule a time to meet with them before you start working on your taxes to make sure nothing’s been overlooked.

4. Compile all of your documents

Dedicate a good chunk of time to tracking down and organizing all of the documents you’ll need to prepare your return. Many small business owners keep paper copies of key documents organized in a clear file system, but then also scan records in case the originals get lost. Storing records on the Cloud can help to ensure that crucial records won’t be misplaced.

Documents you’ll want to gather before you start working on your tax return include:

• The prior year’s tax return
• Any estimated tax payments you made in 2020
• Your income statement
• Your balance sheet
• Payroll documents
• Asset purchase details
• Bank reconciliations
• Credit card statements
• 1099s, if you’ve received them from your customers

5. Check that you’ve issued all of your 1099s, if needed

If you paid more than $600 last year to any given non-corporate service provider — people who aren’t your employees, like independent contractors — then you have to issue Form 1099-NEC to that provider. The contractor will need to include that information in their own return, so the sooner you can send the forms out, the better.

If you pay for the services with a credit or debit card though, or through PayPal or a similar service, you don’t have to send a 1099. In those cases, the payment processor is the one who has to report the payments by using Form 1099-K.

6. Tally up your expenses and your deductions

While it’s a good idea to keep your business and personal expenses separate — with a dedicated business credit card and checking account — throughout the year you may have charged a business expense on your personal credit card or accidentally used your personal Venmo for a work item you had to buy.

Dedicate a few hours to looking over your personal expenses for the year — including your personal credit card statements, Venmo, and PayPal — to make sure you’re not missing any business expenses that you need to add to your 2021 tax returns.

Dedicate a few hours to looking over your personal expenses for the year — including your personal credit card statements, Venmo, and PayPal — to make sure you’re not missing any business expenses that you need to add to your 2021 tax returns.

If you’re a small business owner that runs your business from your home, you’ll be able to take a home office deduction with your taxes if the space you’re using gets “regular and exclusive use” and is the “principal place of your business.”

The IRS has both a simplified method and a regular method for completing home office deductions. Which method you use depends on your particular situation. The IRS provides details on both methods. Other deductions for small business owners and sole proprietors include: office expenses like printer paper or toner, professional conferences and continuing education, car expenses and mileage, and internet and cell expenses.

Also, think about other deductions you might be able to make. Did your business contribute to a charity last year? If so, find those receipts so you can incorporate them into your return.

7. Don’t forget to deduct the estimated taxes you paid

You don’t want to overpay your taxes and then be in a position where you’re left waiting to receive an especially hefty refund from the government. To avoid that, tally all of the estimated tax payments that you’ve made across the course of the year and make sure to have that amount handy so you can include it on your return.

One quick way to keep track of the estimated quarterly tax payments you’ve made in 2021 — if you pay online — is to save a PDF of the payment confirmation in a designated folder on your computer. Then you easily tally the total for the year.

8. Ask for an extension if you need one, and do it early

Sometimes for small business owners, circumstances arise where you just can’t file your taxes on time and you need an extension. That’s fine, but you need to request the extension ahead of time. What’s more, while an extension does grant you extra time to file your return, you will still have to pay the taxes that you owe by the original deadline. If you don’t, you risk having to pay penalties and back taxes. Most small businesses have to file and pay their taxes on either March 15 or April 15 each year.

9. Think about any COVID-related tax credits

Take the time to look into what COVID-related breaks you might qualify for, and then discuss these potential tax breaks with your accountant.

Small businesses are eligible for a number of tax breaks for 2020 due to COVID-19. Take the time to look into what COVID-related breaks you might qualify for, and then discuss these potential tax breaks with your accountant. These breaks could include:

• The Employee Retention Tax Credit, which was put in place to help businesses impacted by the pandemic keep employees on the payroll. Qualifying organizations had to be fully or partially closed due to a government-mandated shutdown, or had to have experienced a decline in gross receipts more than 50% for any quarter as compared with the same quarter in 2019. Businesses are eligible for a tax credit equal to 50% of qualifying wages, up to $10,000 per employee, for wages paid from March 13, 2020, through January 1, 2021 under the ERTC.
• Businesses are also able to claim a tax credit of 100% of the cost of any sick and family leave salaries, plus qualified healthcare plan expenses and the employer’s share of Federal Insurance Contributions Act (FICA) taxes for any sick leave expense incurred under the Families First Coronavirus Response Act (FFCRA), providing the leave qualified under the FFCRA.
• Another tax break in place just because of COVID-19 includes a temporary allowance of full deduction for business meals, instead of the usual 50%, as long as the expense is for food or beverages that come from a restaurant.

PPP loans

If your business received a Paycheck Protection Program loan, you’ll also need to understand the tax implications of having received those funds. Money you received in the form of a PPP loan that was forgiven by the government is not considered taxable income for 2020.

PPP money that was not forgiven by the government, on the other hand, is considered to be taxable income. What’s more, if you paid for any expenses with forgiven PPP money, those expenses can’t be considered as business expenses that could bring down your amount of taxable income. The IRS did rule that expenses associated with seeking PPP forgiveness can be deducted.

10. Plan for how you’ll pay, and think ahead to next year

Make sure you have a solid plan in place for how to pay what you owe in a way that will avoid cash flow disruptions. Once your return is done for the year and your taxes have been filed, then you can think about what you might want to change for the following year’s taxes to make the process easier and more streamlined.

Talk with your accountant to see if, for example, for your type of business, paying quarterly taxes instead might make more sense. You should also consider now how to get the most out of your deductions when you do your taxes next year. If you have equipment that needs an upgrade, for example, consider making that purchase before the end of the year.

For small business owners, tax season can be a tense time of year as you try to juggle completing your returns with your usual duties, and especially this year given the added considerations and changes in operations for many businesses due to COVID-19. Careful planning and good guidance will help you get your business ready and your return filed on time without missing any key steps.