Tax Preparation Checklist for 2021

Learning how to do your own taxes can seem daunting, even if it is pretty straightforward. You just need to know the exact steps to take!

As someone who prepped and filed taxes for small business owners for over a decade, I’ve worked out a simple process for tax season.

It’s something that will save you time, headache, and money. What is it exactly?

It’s a simple guide that’s easy enough for you to understand so you don’t have to dump everything on your CPA’s desk.

How to Prepare for Filing Taxes

Here are the step you should follow to properly prepare your taxes every year.

  1. Create a new file or folder
  2. Use a tax checklist
  3. Verify your bookkeeping
  4. Prepare all financial reports
  5. Make an appointment to file
  6. Understand identity theft risks

Step 1: Create a new file or folder

One of the most important things about doing your taxes is to be organized so you don’t get overwhelmed.

When you start pulling out tons of receipts, printing off statements, and comparing different expense transactions, it can make you want to pull your hair out (or is that just me?!).

The first thing to do is find a brand new file folder. (Check out these nicely colored ones from Amazon — pretty colors make the process more fun!).

Now start collecting everything you receive from your accountant and clients, in preparation for going through it later. This includes any 1099s, tax statements from investment accounts, receipts, and copies of statements.

Label the file whatever you want. But make it something simple enough to easily reference it if you need to pull a copy of a receipt or statement for verification.

I always create an actual file folder and label it as “2018 – Business Taxes”. (I put the year first so it makes it easy to see all my past years’ taxes at a glance.)

However, if you want to save space and streamline your paperwork process, you can create a digital file or folder in your computer.

Don’t try to organize everything right now!

We’ll be doing that in a later step. Right now you just want to gather up everything related to doing your taxes and dump it into the new folder — either by scanning it in, saving it to your computer, or throwing it into your physical file folder.

Step 2: Use a tax checklist

When I first launched my online business, in June 2011, I created a simple tax checklist to make sure I didn’t forget anything come tax time.

As my community of friends and readers grew, more and more people asked if I had some sort of checklist for freelance taxes. So I sent them a copy of the one I used.

As a Careful Cents reader, you can get access to my free Simplified Tax Toolkit which includes an updated version of the tax checklist I use myself every tax season.

After creating a new file or folder to gather all your tax documents, you’ll want to grab this tax checklist to make sure you don’t forget anything.

If you’re a sole-proprietor, here are the basics of what you need every tax season:

  • Income documents (W2s, 1099s, PayPal receipts, etc)
  • Expense receipts and transactions (from reports like Profit & Loss)
  • Investment account statements (from IRAs or accounts like Betterment)
  • Receipts for business purchases (like a new computer, or office equipment)
  • Mortgage statement (Form 1098)
  • Medical and health insurance documents and receipts
  • Tuition or higher education statement for classes you took (Form 1098-T)

Don’t forget to make notes as you go. If you’re waiting on a 1099 from a client, list out which one so you can remind them. Or if you know you need to check on “X” expense for new office equipment you bought, then write that down.

You can always follow through with your notes and to-dos on the checklist, but you’re not doing that right now.

Just write it down and get it out of your head. Then come back to it in a later step.

Step 3: Verify your bookkeeping info

The first two steps for how to do your own taxes are relatively simple, and can be done over the course of a few weeks as you continue receiving tax documents in the mail.

These next few steps, however, are a bit more time consuming so you’ll want to set aside a chunk of time to complete this when you can dedicate brain-space to it.

Log into your bookkeeping software

Next, depending on what type of bookkeeping or accounting program you use, log into those accounts.

If you’re like me, you probably have several different programs — one that relates to personal bank accounts and expenses, and another that organizes your business accounts and expenses. 

  • Personal Capital is what my husband and I use for aggregating ALL of our personal bank accounts, credit cards, and investment accounts. We have separate “fun money” accounts that are not linked to Personal Capital (we still want our independence, yo!). This allows us to see everything at a glance so we can stay on track for building wealth.
  • GoDaddy Bookkeeping is what I use for my business bank accounts, PayPal transactions, and business credit cards. They also have extensive tax and financial reports for estimated taxes and importing into your Schedule C sole-proprietor tax form.
  • FreshBooks is what I use for time tracking, invoicing clients, and organizing projects. They too have excellent reports for Profit & Loss, Balance sheets, and Project statements, all of which you’ll need for filing your taxes.

Categorize all income and expenses

Even if you check-in with your bookkeeping transactions each month, there are probably a few transactions that need to be categorized correctly. Set your filter to only view the dates from January 1st – December 31st of the current tax year.

Then categorize any income and expenses that look out of place, or are uncategorized altogether. GoDaddy Bookkeeping has a feature that makes it easy to see all the uncategorized transactions at a glance when you first log in.

Uncategorized expenses as shown in GoDaddy Bookkeeping software.

Simply click on the uncategorized expenses and organize them into the correct categories.

If you’re not comfortable with this, it’s something your bookkeeping can do (if they aren’t already doing it) or you can ask your accountant to verify the right category.

Verify income and expenses with receipts

This is likely the most time consuming part learning how to do your own taxes. (I liken it to prepping your walls for a new coat of paint.

The bulk of your time is spent filling holes, sanding, taping off areas you don’t want painted, and laying down protective plastic.

The fun thing is doing the actual painting, but your end result is only as good as your prep job.)

You want to go over your entire year of income, expenses, and receipts with a sharp eye. Make sure you account for EVERY single amount of money you made. Then verify that all the deposits add up to the amount that’s reported on 1099s you received.

Here’s how I do it:

Log into your small business accounting system. Since I keep track of all my client work in the same bookkeeping program, I save a TON of time on this step.

  • Click “reports”
  • Click “client reports”
  • View “revenue by client”
  • Verify the year is 2014
  • Select which client to view (in this example it’s Words and Works, LLC)
  • Click “update”
  • Print report

Verify this number is the same figure from box 7 on the Words and Works, LLC 1099-MISC form. If the amount is different, you either recorded a deposit twice, forgot to record a deposit, or your client’s accounting department made an error and needs to be contacted.

1099misc example
Verify the number in box 7 to your deposits for that client.

Don’t file your taxes with an incorrect 1099. Wait until the company corrects the form and issues you a new one.

If you don’t use an accounting program, this step will take a bit more time. But you can simplify it by creating a new spreadsheet and printing off all your bank statements for 2014.

Verify each deposit (either manual or direct deposit) and list it out on a separate line. Then add up all the deposits (click the SUM button to automatically add everything).

Again, make sure this number corresponds to the figure in box 7 of the 1099-MISC form for that client. I’ve had blogging friends who missed out on income due to a bank error or a lost invoice.

Don’t skip this step!

Step 4: Prep all financial reports

Check with your accountant to verify which financial reports they need for the current tax year.

They will likely request a Profit & Loss sheet, Balance sheet, and Expense report, as well as a summary of your Accounts Receivable and Accounts Payable transactions.

The great thing about using FreshBooks, is that you can share your account with a bookkeeper or accountant.

They have their own login information, and can only access certain parts of your FreshBooks account, specifically the reports section.

QuickBooks Self-Employed offers this option too.

What’s the best way to hand over your paperwork to the CPA so they can work through it efficiently?

Since bookkeepers and accountants usually charge a relatively high price per hour, you want to prepare everything ahead of time, to save yourself some money.

On top of that though, it’s important to understand how your personal + business taxes work so you aren’t taken for a ride.

(Al Capone anyone?! They will find you, no matter who’s at fault.)

Anyways, back to the question: my answer and preferred method is to have a list of all the reports your accountant needs and either print them out and mail them, or email them via a secure connection.

If you’re meeting with a CPA in person, it’s best to have your laptop handy since they may want to verify certain figures.

Step 5: Make an appointment to file

Whether it’s calling your tax pro, or filing everything yourself, you need to make an appointment to get your taxes done.

I like to do all of my admin tasks and errands on Fridays. This is when I organize my mail, check my PO box at the post office, deposit checks at the bank, and file away any and all paperwork that’s accumulated throughout the week.

Anyways, if you don’t have a set day of the week to handle admin tasks, then try to block off a Saturday morning for prepping your taxes.

Get it on the books, in your calendar, or in your planner and make a date to get this done.

Don’t procrastinate too long because it will be waaaaay too stressful and expose you to unneeded risk (which we’ll talk about in step 5). The sooner, the better.

Step 6: Understand identity theft risk

The final step in prepping your taxes is to understand your identity theft risk. You don’t want your personal information to get compromised during the tax-filing season.

In order to file a fake tax return, a criminal only needs two pieces of information, your Social Security Number and a date-of-birth. That’s it! They don’t even need a name.

As a solopreneur, you and your business are likely one in the same. I know that’s how it is for me + my biz. When filing my taxes, I use a Schedule C form since I’m self-employed, and attach it to my personal tax return.

I don’t have a lot of business assets, but I do have a good amount of revenue that comes in and out of my bank account each year.

I also do the majority of my work via the internet and with digital tools. Which means I’m at a higher risk of tax fraud!

Not sure if you or your business data is at risk for tax fraud?

If you have a good amount of client work, a lot of business assets, or run your business online, you need to protect yourself.

I had a chance to chat with Paige Hanson, Educational Programs Manager at LifeLock, and she shares a few tips for protecting yourself:

  • Assess your risk factor. Check out this 10-question quiz from LifeLock that assesses identity theft risk factor based on your online habits. Make changes based on their recommendations.
  • File your tax return early. Don’t wait until the last minute to file when you’re running out of time and stressed. That’s when mistakes happen and criminals can take advantage of you most. If you owe taxes, you can still file the return early and then wait to send your payment until the deadline on April 15.
  • Use a secure internet connection to file. Do not use unsecure, publicly available WiFi hotspots. Always send your files to a CPA or bookkeeper via a secure connection. Even better, share a Dropbox file or folder with them and require a password to access the information.
  • Send your return with tracking information and take it directly to the post office. If you mail your reports, do not leave your return in the mailbox for your mail carrier to pick up during the day. Take it to the PO directly and get a tracking number for it.
  • Shred copies of sensitive information you no longer need. Tax returns, bank statements, cancelled checks, and calculation sheets can be shredded after 7 years. The IRS only requires you keep this information handy for that period of time.
  • Vet out a CPA or tax professional. If you plan on hiring someone new to help with your taxes, get recommendations from friends and family. Research a tax preparer thoroughly before handing over personal information.
  • Ask questions. If you don’t understand a tax deduction, or want to know more about a process, always ask. Don’t follow along blindly just because they “know more about taxes than you do”.

Finally, if you’re concerned about your personal or business identity being at risk, call the IRS Identity Protection Specialized Unit at 1-800-908-4490. Take precautions when handling your tax information, and be careful when filing online.

Should You Do Your Own Taxes?

You’ve created a new file, verified your income and expenses, made an appointment, and are sure your financial information is safe. Now it’s time to check taxes off your list!

There are plenty of free online tax programs you can choose for how to do your taxes. But as a self-employed business owner I recommend you working with a tax pro or CPA.

Most of the time, two heads are better than one, and Lori’s job is to stay up-to-date on the tax law changes and how everything affects my personal tax situation. But this post isn’t about filing your taxes, it’s about getting everything prepped, organized and ready for filing.

Remember, you have to look out for your money and personal information, so don’t be afraid to question something on your taxes if it doesn’t add up in your mind.

This post was written with research provided by LifeLock (which means the content is written by me and approved by the sponsor). 
Learning how to do your own taxes isn't easy. But there are some easy tips for how to organize taxes and how to do your own taxes when self-employed. Plus, use my free tax toolkit for business owners!

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