Prep for tax success in 2022: Ten ways to start planning
Editor's note: The following article was provided by OnPay, the payroll service endorsed by ADA Member Advantage.
As a dentist, your top order of business is to provide patients with happy, healthy smiles. But, you also have a business to run, which means getting finances and taxes right comes with the territory. So as you put the finishing touches on your 2021 tax return, it can also be a perfect time to start prepping for 2022.
Most taxpayers don't need to spend too much time worrying about the IRS, but many dentists tend to be both small business owners and high-wage earners. So, that means you could be more likely to hear from the Internal Revenue Service - than a typical small business owner - because of a problem with your tax return. According to the Wall Street Journal, in 2020, the IRS sent more than 3 million notices just for math errors on forms alone.
So, it can be a good idea to get a handle on tax prep - sooner than later - and you don't have to wait till Uncle Sam comes calling. Here are some tips to make next year's filing a piece of cake.
1. Start organizing now
A little organization can go a long way. By gathering up your documents monthly, you'll avoid an end-of-year dash to get your paperwork together. For example, go through any forms you already filed - such as Form 941 - and check for accuracy. Don't forget to review social security numbers, EIN, or any documents the IRS can use to identify you or your employees. Move all forms, invoices, and receipts to one central location - either online or a filing cabinet - the resource will grow over time and be ready for you come tax time. You will be glad to have everything ready to go!!
2. Industry-specific accounting help for your practice
It is important to remember that tax codes often change, and it's your accountant's job to keep tabs on them. Working with a CPA that understands tax laws related to running a dental practice or information related to COVID-19 pandemic-related financial relief can be ideal since it may affect your taxes. Some of these updates can directly impact you as a business owner and high-wage earner, so you want someone who stays in the know - and there's no shortage of CPA firms that specialize in the dental industry. Also, your tax professional or accountant should keep you up to speed on new or different deductions that could affect how you run your practice.
3. Talk to your tax accountant early and often
Setting aside a few minutes once a quarter to talk with your accountant can help make it easier to reduce the risk of a mistake next April. Regular conversations are also a great way to keep you in the loop on tax law updates and minimize the risk of an IRS audit. During your meetings, record income and expenses in real-time - so you and your tax professional can catch errors early. Also, the more often you speak with your tax advisor, the more it helps them get a better sense of your business needs, which empowers them to offer more proactive, consultative advice. It can provide quite a payoff: small business owners who have a strong relationship with their accountant are 32% more likely to expect a significant increase in revenue over the next year. So, consider how a monthly chat can help make a difference to your practice.
4. Get help with payroll
Professional tax helps you focus on your patients, and expert assistance with your payroll can be just as important. Most companies that offer online payroll services can calculate and remit taxes - accurately and on time - to prevent human error and the headaches associated with them. Also, depending on the service provider, some might be able to lend a hand with tax issues. For instance, our team at OnPay offers customers an error-free guarantee, which means we'll be there to help should you receive a notice from the IRS about problems with payroll taxes.
5. Provide a retirement plan
Offering a retirement plan can go a long way to keep your practice's employees happy and productive. Not only can it help retain talent, when you provide a qualified retirement plan or 401(k), there are some specific employer contributions and administrative fees that can be tax-deductible. In some instances, business owners can be eligible for a $500 per year tax credit - during the first three years of a plan - to help with employee education and plan consultation. As both an owner and employee, you could take advantage of tax-deferred savings of the 401(k) plan as well. Just be sure the program you choose integrates with your current back-office systems or employee payroll deductions.
6. Keep careful track of travel and expenses
Are you traveling to any dental conferences or thinking about enrolling in a continuing education class this year? Sometimes the lines between business and personal expenses can be a little fuzzy, so it pays to make the distinction as straightforward as possible. It has a lot to do with The Tax Cuts and Jobs Act of 2017, which eliminated the ability for many dentists to write off entertainment expenses and reduced the deduction for most business meals by 50%. Now, not separating expenses once or twice is probably not a huge deal, but if it becomes a habit, you could run the risk of reporting taxes inaccurately. It is something to keep in mind as the IRS tends to take a long look at write-offs for these items related to your practice.
7. Document charitable donations
Charitable contributions go a long way to assist your community and occasionally lead to significant tax deductions. Just be sure to keep accurate records of your donations. If one or two seems too large for your income bracket, it could raise a red flag - and the IRS may want a closer look at your books. Don't forget: if you plan to claim non-cash deductions over $500, be sure to file Form 8283 - used for noncash charitable contributions. Also, be careful about classifying charitable donations as personal or business write-offs. There are some limitations and special requirements for different types of business entities.
8. Pay vendors in December
Does your business use the cash method of accounting instead of the accrual method? If so, this tip is for you. The cash method requires calculating your income and expenses based on when the cash goes in and out of your bank account. So, by paying bills in December, even if they are not due until January, you can decrease your taxable income in the current year, which in turn reduces your tax liability.
9. Buy now to save later
If you expect to make large equipment purchases such as X-rays or operating lights early in the new year, it might be a good idea to buy them a little ahead of schedule and take the deduction for your current tax year. Just keep in mind that a deduction isn't exactly an equal return for the money spent. It pays to check with your tax adviser to be sure that spending now will reduce your overall tax burden and not just kick the can down the road.
10. Be prepared for W-2s and 1099s
Throughout the year, you'll withhold payroll taxes and send them along to the IRS (or any state agencies if required.) When January comes around, you'll have a high-priority item at the top of your to-do list: provide your employees with W-2 forms and 1099-NECS so that they can complete their taxes. Don't put this off to the last minute - especially as you'll have enough on your plate when finalizing an entire year's worth of business income and expenses. Set aside time, so you have peace of mind. Also, don't forget many payroll service providers can handle all of this for you.
A few proactive steps throughout the year can go a long way to ensure your practice is ready come tax time. It will free up time to do more of what you enjoy - growing your business and helping patients - and spend less time going back and forthwith your accountant.
And if you are subject to an audit, know that you're not alone. Over 500,000 Americans are in the same boat each year, and things will work out. Start by reviewing this guidance from the IRS to get familiar with common frequently asked questions. Then consult with your accountant to get organized so you'll be calm, collected, and ready to go.
Ready to get planning? We've got a printable 2022 Tax Deadlines for Dentists that will keep you in the know about important tax dates for the year. You can also subscribe to the IRS's calendar to get reminders right to your inbox.
