Tax Prep Checklist and Tips for Home Service Businesses

Tax Prep Checklist and Tips for Home Service Businesses

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Posted by EJ Brown

January 14, 2021

How can home service businesses best prepare for taxes and save money? We’ve got some tips for you from our community of experts and a downloadable checklist of everything you need to hand off to your accountant.

Tax Changes Unique to 2020 

The pandemic has led to several short-term tax changes and credits for small businesses. Here’s an overview of the significant ones.  For a detailed list, check out the

U.S. Chamber of Commerce’s resource

.

  • Employee Retention Tax Credit

    : a 50% tax credit for the first $10,000 of compensation, including the employer portion of health benefits, for each eligible employee.

  • Tax credits for paid leave

    : a reimbursement for paid sick leave and FMLA wages under the Families FIrst Coronavirus Response Act.

  • Paycheck Protection Program Loans: Forgiven loans are tax-exempt, but some states may require tax payments. And expenses that were paid using PPP money cannot be written off.

    Learn more here

    .

  • Economic Injury Disaster Loans:

    According to the U.S. Chamber of Commerce, the EIDL “loan option is still available to businesses in need and is not treated differently from any other loan for tax purposes. Cash advances, which do not need to be repaid, are no longer available. The cash advances are

    most likely not taxable

    because they would fall under the “general welfare exception” in tax law, but the IRS has not issued final guidance to confirm this yet.”

Four Business Decisions that Impact Your Taxes

1. Business Entity Selection

Small service businesses can do business as single proprietorships, partnerships, corporations, or s-corps. You can start as one business type and change as your business evolves.

According to

Hal Rosen, a CPA, certified Quickbooks Pro Advisor, and tax planner with Haynie & Company

, having the right entity selection is important to not only reduce your chances of being audited, but it can also save you money on taxes. 

He explains that the likelihood of being audited increases with a company’s revenue and it’s sometimes beneficial to change your business entity type with your increased revenue. For instance, he often encourages his clients that start off as sole proprietors to restructure as a partnership or s-corp once they reach $25,000 in revenue. Both entity types are 10 to 15% less likely to be audited than sole proprietors at that revenue level on up. 

There are also more ways for businesses structured as partnerships or S-corps to save on taxes. Watch the video below for more of Rosen’s advice about which business type is best for you.

2. Accounting Method

There are two main choices for how to maintain your accounting records:

  • Accrual: record transactions when they’re initiated, as opposed to when the payment is charged or received.

  • Cash-basis: record incoming and outgoing funds as they happen.

In a private Facebook group, accountant, QuickBooks expert, and Housecall Pro Certified Partner

James Griner

shared his advice about choosing an accounting method:

“There are pros and cons to both; however, your bigger companies run off of accrual basis and it gives you much better insights as you aren't looking at what is in your bank account. You are also considering what will be coming into your bank account and what will be going out of your bank account. I recommend for people to use accrual as it provides better insights, but you need to understand the tax implications on everything there before making an official decision.” 

Griner recommends discussing this decision with an accountant who can explain and compare the business benefits of both approaches.

Sign up for upcoming QuickBooks webinars now.

3. Employees vs Contractors

You may have chosen to hire

independent contractors or employees

, or a mix of both. These two classifications have different tax implications. For starters, you’ll need to take out federal and state taxes throughout the year for employees, but not for contractors. And,

according to Gusto

, misclassifying an employee as a contractor can lead to expensive fines.

There are also

exempt vs nonexempt classifications

which can make a big difference in both payroll and taxes.

We’ve partnered with Gusto to make managing payroll and employee benefits easier.  At tax time, Gusto will automatically file your payroll taxes for you.

Learn more about our integration.

4. Retirement Plans

There are several comment retirement plan types for both business owners and employees.

Common plans include

IRA-based plans like the Simplified Employee Pension Plan (SEP) and a Simple IRA plan, and 401ks. All plans have different tax benefits and regulations.

For businesses with employees, Rosen recommends that small service businesses start out with either a SEP or Simple IRA plan. “They allow you to do more than a traditional IRA and they’re simple, there’s typically no administrative costs, there’s no annual administration, there’s no tax return to file with them, so for a small business that’s really the way to start.”

If you’re a one-person operation or a larger business, 401(k)s offer more options. Watch the video for more of Rosen’s advice on choosing a retirement plan.

How to Prepare Your Books and Tax Info For Your Accountant

Griner recommends having everything organized and ready to go before handing everything over to an accountant. This includes your profit and loss statements and your receipts. “A lot of times accountants will clean things up … and they will charge you an arm and a leg to do it,” Griner explained in a Housecall Pro webinar. By keeping your books and receipts organized, you can avoid that cleanup fee. Your accountant will only need to verify what’s already there.

Here are just a few things to watch out for:

1. Discrepancies in your jobs and accounting records

Before Griner recommends checking your jobs list and your accounting records for errors, things like canceled jobs that didn’t get closed properly, duplicated payments, unpaid invoices you know were paid. Look for outstanding deposits, overdue accounts, etc.

2. Missing bank or credit accounts in your accounting system

Make sure all of the accounts in which you make purchases or receive payments for your business are in your accounting system and up-to-date (reconciled through the current statement). Use PayPal? An emergency credit card? They should be there. Look for duplicate transactions or checks that haven’t cleared — anything that can mess with your final numbers.

3. Discrepancies between your income and sales

When you review your profit and loss statement, your income should match your sales. This is a good way to know if something is still incorrect in your records. 

4. Discrepancies in payroll expenses

Make sure all cash bonuses have been recorded. Whatever you have paid in employee wages and their taxes should match your W3. (Payroll systems like

Gusto

will create your W3 form for you.)

Free Tax Prep Checklist

To help you organize everything you need to turn over to your accountant, here is a free printable checklist for you:

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