How to Prepare for Filing Your Individual Tax Return

After the ball drops in Times Square, you blink and it’s suddenly tax season. While millions of Americans procrastinate and wait until the last minute to do their taxes, planning and preparing early can help you get through tax season with less stress and less chance for errors. Plus, if you anticipate a refund, the sooner you file, the sooner you get your money back!

Here’s a look at how to prepare for filing your individual tax return, focusing on solo entrepreneurs and small business owners.

Overview of Tax Filing for Individuals and Solopreneurs

If you’re new to tax preparation, here’s a quick overview. Individual income taxes are taxes paid to the government based on how much you earn within a tax year. Individual taxpayers earning income are required to file an annual tax return (IRS Form 1040) each year.

Throughout the tax year, your employer withholds taxes from your paycheck. If you’re an S Corp owner and paid by you S Corp, you’ll pay into your tax bill through your reasonable salary and through quarterly payments to the IRS. 

When you file your tax return, you report all your income and deductions to compute your tax liability. You’re owed a tax refund if your withholdings and estimated tax payments exceed your tax liability. If you withheld less than your liability, you’ll have a balance owed at filing.

The tax deadline is in mid-April every year, though the IRS typically opens the filing season in early February. Tax day typically falls on April 15th each year, however is adjusted if the date falls on holidays or weekends.

If you live in a state with income tax, state tax returns typically follow the same due dates as federal income tax returns. However, it’s best practice to check your states’ due dates and filing requirements, as they may be different from the IRS. If either the state or IRS extends their filing deadline, don’t assume it applies to both.

Key Documents Needed for Filing Taxes

Most tax forms should be available to you by the end of January each year. Here’s a list of common tax forms to look out for if you’re self-employed. Every tax profile is different, and the tax forms you receive may differ greatly than your peers. If you have questions, consulting with a CPA or other tax professional may be helpful.

Key Tax Forms and Documents: Income

Form W-2

Form W-2 lists your income, withholdings, and payroll deductions from an employer. If you have a part-time or full-time job, including employment at your S Corp, you’ll need your W-2 to report your income on your tax return accurately.

Schedule K-1

Schedule K-1 details your share of income as a shareholder from a partnership or S Corp. If you are a self-employed individual operating under an S Corp, the K-1 reports a substantial portion of your income. 

The K-1 is generated through the preparation and filing of the S Corp tax return, so be sure to wait for your business return to be filed before completing your personal tax return.

Profit & Loss Statement

If you are self-employed operating as a sole proprietor or single-member LLC, you report your business activity on your individual tax return. Business activity is reported on Form 1040, Schedule C and requires a summary of the years’ total revenue and your business expenses. 

A profit and loss statement is not issued by any government agency, but rather tracked internally by the business owner. If you’re self-employed, check out this guide about the importance of bookkeeping and how it will prepare you for tax season.

Forms 1099

You’ll find several versions of Form 1099, which is used to report different types of income, including:

• 1099-INT: The 1099-INT form is used by banks and other financial companies to report interest earnings. For example, if you or your business earn interest from a savings account, you would receive a 1099-INT outlining your earnings.
• 1099-B: Investment sales are taxable events. The 1099-B tax form explains your investment sales during the tax year to help you fill in your investment gains and losses.
• 1099-DIV: If you earn dividends from investments, you’ll receive a 1099-DIV form explaining how much you earned and where the dividend distributions came from.
• 1099-NEC: If you do freelance or contract work, or your business does, you’ll receive a 1099-NEC if you earn $600 or more in a calendar year.
• 1099-MISC: If you earn $600 or more in other income that doesn’t fit in with another 1099 form, it’s reported on 1099-MISC.
• 1099-K: Issued to any person or business that received payment transactions from a credit card, debit card, or gift card network or earning more than the $20,000 and more than 200 in transactions

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Common Tax Forms: Deductions and Credits

Credits and deductions contribute to reducing your tax liability. These are the most common tax forms that report deductions and credits:

• Form 1098 – Mortgage Interest: Issued by mortgage lenders, showing the amount of mortgage interest paid, which can be used for itemized deductions. If property taxes are paid through your escrow account, Form 1098 will also show property taxes, which may become a tax deduction
• Form 1098-E – Student Loan Interest: Provided by lenders, detailing the amount of student loan interest paid, which may be deductible
• Form 1098-T – Tuition: Issued by educational institutions, indicating qualified tuition expenses applicable for education credits like the American Opportunity Credit or Lifetime Learning Credit
• Form 1095-A – Health Insurance Marketplace Statement: This form is provided to individuals who enrolled in coverage through the Health Insurance Marketplace. It contains information needed to complete Form 8962 for the Premium Tax Credit

This is not a comprehensive list of tax forms, so it’s important to keep track of your inbox and mailbox for any other tax forms. The IRS imposes deadlines for most tax forms to be issued to taxpayers. The sender is required to furnish both the taxpayer and the IRS copies of these forms to ensure your tax return matches your earnings and allowable deductions. 

Note that some credits, like the Child Tax Credit or credits for solar or electric vehicles, don’t require a specific form. Instead, basic information, like childcare costs or a vehicle VIN number and purchase date, are added to your tax return to calculate the allowed credit amount.

How to Organize and Prepare Tax-Related Documents

So you don’t lose or forget about a form, it’s critical to stay organized as your tax forms arrive. Savvy tax filers use physical and digital folders, to sort and store forms or receipts they may need for taxes.

Whether you receive all your tax documents electronically, in the mail or a combination of both, consider making a checklist of all forms you expect so you can keep track as you gather tax forms and documents.

Tips for Maximizing Deductions and Minimizing Tax Liability

The ultimate goal for any taxpayer is to minimize the tax bill. When it comes to filing your individual return, understanding the difference between standard and itemized deductions is crucial for minimizing tax liability. 

The standard deduction is a set amount based on filing status. It’s optimal for taxpayers who do not have enough allowable deductions to exceed the standard deduction amount, and it’s much simpler than itemized deductions. 

On the contrary, itemized deductions are a predetermined list of certain expenses that can be totalled and deducted as an alternative to the standard deduction. If you have expenses such as mortgage interest, property tax, substantial medical expenses or charitable contributions, the sum of such deductions may create a more advantageous deduction.

The IRS allows you to optimize between the standard deduction and itemized deductions each year for your filing status. If it’ll reduce your tax liability, it’s advantageous to go the extra steps to maintain those documents to report in your tax return.

E-File vs. Paper Tax Filing

The best way to file your taxes is electronically. In fact, more tax authorities are requiring e-file over paper filing. While you can send in a paper tax return by mail, it comes with its own risks. Submitting a paper-filed return can result in delays, risk of mail or identity theft, and overall slower processing times, delaying refunds due.

When you e-file, your return will be transmitted to the IRS and state tax authorities electronically, at the time you press “submit”. It’s the fastest and most secure way to submit your tax return. Opting for direct deposit to your bank account is also safer and faster than requesting a check for your tax refund.

Not enough time to get it right? Consider a tax extension

A tax extension allows taxpayers additional time to file their income tax returns beyond the standard filing deadline. Any taxpayer can file a 6-month extension for any reason to grant more time to finalize the details of their tax return. An extension can be advantageous if more time is needed to gather necessary documentation, resolve complex tax situations, or need time to consult a tax professional to ensure accuracy. Here are some common instances when an extension will make sense:

• You are an owner in a pass-through entity, like a partnership or S Corp. If the business tax return is not complete by the individual tax deadline, you will need to file an extension. Pass-through businesses generate a key tax form, Schedule K-1, which must be included in the shareholders individual tax return.
• You are on vacation during the tax deadline and are comfortable delaying your refund
• You had a complex transaction, like the sale of an investment property, that requires more detail before finalizing your return
• Brokerage or investment firms, like RobinHood, Coinbase or Fidelity, have not yet issued your 1099 for your investment activities 

While an extension grants extra time to file, it does not extend the time to pay any taxes owed. Estimating your tax liability so you can submit an extension payment by the original tax deadline is crucial to avoid penalties. Follow this guide to understanding taxable income and determining an extension payment. 

The extension payment works similarly to quarterly estimates: you project your taxable income, apply your income tax rate and determine an estimated tax liability. Then, deduct withholdings and estimated tax payments to reveal either an overpayment or balance due.

Bottom Line on Preparing Your Tax Return

“But, in this world…nothing is certain except death and taxes.” Ben Franklin’s famous quote still rings true today, but preparing and filing your individual tax return doesn’t have to be all that bad.

Being proactive to reduce your tax bill during the tax year and staying organized as you receive your tax documents will help you anticipate the results of tax season. Refund, owe or break-even, don’t let tax season own your time or energyConsult a tax professional and continue through Collective’s blogs and YouTube channel to help you feel prepared to tackle tax season.