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How to End Your Tax Year Right
How to End Your Tax Year Right
Prepping your Finances for 2021
November 2020 * 5 min read

2020 is quickly—finally—coming to a close, which means it’s time to start getting your affairs in order for 2021. Organizing your 2020 business records, re-evaluating your business practices, and preparing for the upcoming tax season can help you set yourself up for success in 2021.

Here are some steps that Found recommends self-employed people take before the end of the year, so you can start the new year stress-free and organized.

Track down all of your business expenses

When you file taxes for 2020, you’ll need to make sure that you have proper documentation for any expense that you want to deduct. This includes the amount and date of each expense, the merchant, the business purpose for the purchase, and a receipt or receipt photo for the purchase. In the unlikely event that you’re ever audited, this is the kind of documentation that the IRS would ask you to present to make sure you’re deducting your expenses appropriately.

If you’ve been tracking all of this information for your business expenses in one place throughout the year (like an expense tracking app, a spreadsheet, or a handwritten ledger), you’re all set! The records that you’ve been keeping would suffice in an audit. Found users - this means you!

If you haven’t been tracking your business expenses—or if you’ve tracked some of them, but not all—then you have some homework to do if you want to deduct those expenses on your 2020 tax return. Here are a few places you can look for a record of any business expenses that you weren’t tracking:

  • Your credit card and bank statements: Your bank or credit card company will have kept track of any purchase that you made throughout the year. Looking back through an itemized list of your purchases can help you find business expenses that you weren’t keeping track of throughout the year. Tip: A lot of bank and credit card apps will only show your transactions from the past 30-90 days. Look for your monthly account statements to see a full history of your purchases!
  • Your work calendar: Sometimes, the hardest part about remembering what you’ve spent on your business is remembering where you were on any given day. Reviewing your appointment book can help you track down any expenses that you may have made while on the go. Got lunch with a client in September? Now you’ll know the date and rough time of when to look for a work-related lunch purchase in your credit card statements.
  • Payment platforms like Venmo, Square, or PayPal: If you’re making any work-related purchases with these platforms, go through your account history to find a record of any purchases that you made that may not be reflected in your bank statements

In addition to a receipt or record of each business expense, you’ll also want to make sure you’ve grouped your expenses into categories. When you file your taxes, you’ll need to enter all of your expenses into your Schedule C; categorizing them ahead of time will make the filing process easier.

Found users: You can categorize your expenses directly from your Found app! You’ll see the option to add an expense category on each of your expense records. For help with choosing a category, check out our article here.

Repeat the same process for your income information

Self-employment often means you’re receiving income from multiple sources, clients, or platforms, instead of from just one job. If you haven’t been keeping track of income throughout the year, now is a good time to start tallying up your payments from your 2020 work.

Any income that you receive in exchange for goods or services is taxable, so you’ll want to make sure you report all of your earnings. Bank statements, payment apps like Venmo and PayPal, work-related platforms like Etsy or Upwork, or gig work platforms like Lyft or Doordash are good places to start. Don’t forget - cash payments are taxable as well, and should be reported on your tax return.

Follow up on any outstanding invoices that still need to be paid

Still waiting on payment from work that you did in 2020? Now’s a good time to follow up with your customers to make sure they’re able to pay before the year is over!

Most self-employed people use the cash method of accounting, which just means that you report your income as it’s paid, not when the work was performed. For example, if you run a cleaning business, and cleaned a house in December of 2020, but weren’t paid for it until January 2021, you’d report that income on your 2021 tax return, not on your 2020 tax return.

Unless you have a business reason for deferring income to the following year, you’ll want to make sure you receive payment for your work before the year ends, so all of your expected income and expenses from 2020 are reported on the same tax return.

Choose a tax filing method

Even if you can’t file your 2020 taxes yet, you can get started with choosing your filing method and gathering the necessary tax information so that the filing process is as painless as possible.

You have a ton of tax filing options available to you, including:

  • Online filing softwares like TurboTax, TaxAct, or H&R Block Online. A lot of these softwares will start offering discounts on their offerings in January 2021, so keep an eye out! There are also some free options, including FreeTaxUSA and the IRS Free File program.
  • Independent tax preparers and CPAs. Pro-tip: The IRS has a registry of credentialed tax return preparers on their website here. You can use that site to find a tax preparer, or to double-check the credentials of someone you’re considering hiring.
  • Tax preparation box offices like H&R Block or Liberty Tax. This is a good option for people who want to work with a tax preparer, but at a reduced price and without having to search for an independent preparer.
  • Free in-person tax filing services. If your income is below a certain threshold, you can qualify for free in-person tax preparation. IRS programs like VITA and TCE offer tax prep sites in every state, and there’s likely a tax prep nonprofit located in your community.
  • Filing by hand - For experienced filers, you also have the option of filling out your tax forms by hand and mailing them in.

With December typically being a slower month for a lot of non-retail businesses, now is also a great time to take a look at your business operations, and make improvements that will help you save time and grow your business in 2021. Here are a few that we recommend:

Re-evaluate your bookkeeping system

If gathering your business expense and income information from 2020 will take you more than a few minutes, it’s a good idea to re-evaluate how you’re keeping track of your business records.

In general, the IRS recommends tracking your income and expenses ”contemporaneously,” which means keeping track of the information as you go. Recording your expenses and income on the same day that they occur will ensure that you don’t accidentally leave anything out of your tax return. Remember—deducting business expenses will lower your tax bill, so losing track of your expenses costs you money at tax time!

Different methods work for different business owners, but we recommend choosing a bookkeeping method that you’re most likely to keep track of daily, at the moment that you spend or receive money—whether that’s a spreadsheet, a bookkeeping app, or a handwritten ledger. Found bank accounts are a great way to make sure your business expenses and income are recorded and categorized as they happen, without you ever needing to do review your purchases to pick out which expenses were for work.

Update your website

If you typically have more down time during December while customers are busy celebrating the holidays, that’s a great time to revisit your website (or other promotional sites, like Etsy or Instagram) to make sure they describe and promote your business as well as possible. Some details that we recommend updating or adding to your website, if you haven’t already:

  • Positive customer quotes, reviews, and other testimonials
  • Photos and details of completed projects that you’re proud of
  • Upcoming events that you’re attending or hosting
  • Price changes, discounts, or deals that potential customers should know about

Perform a time audit and eliminate unnecessary tasks

Now that you have a little more hindsight on how your business performed in 2020, you can look back at your business operations and find improvement areas. Notice that you were spending several hours per week on creating and sending invoices to your clients? It might be time to invest in a software that offers invoicing.

You may also consider signing up for a time-tracking app that will help you keep track of how much time you’re spending on certain tasks. At Found, we use Harvest to keep track of how much time we’re spending on various projects.

Summary

When you start 2021, you’ll want to be as organized and ready to take on the new year as possible. To help future you hit the ground running in 2021, be sure to use the rest of this year to:

  • Gather all of your business records from 2020, and store them in one place (like a bookkeeping app, or a spreadsheet) to make tax filing easier
  • Take stock of where you’re spending your time, and make adjustments as needed—or invest in softwares that can help you save time!
  • Re-evaluate your bookkeeping system to make sure you’re tracking all of your business transactions as quickly and efficiently as possible. Found is a great free option to keep your business records organized and IRS-ready!

Questions about bookkeeping, preparing to file taxes, or how to use Found to your advantage? Feel free to contact our Customer Experience team at help@found.app!

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