The last quarter of the year is a crucial time for practically any business.

Apart from securing deals and bringing in some revenue before the year ends, many businesses are also getting ready for the upcoming tax season, sketching out plans for the year to come, laying the groundwork for next year’s budget. 

Though it’s important for everyone in your organization to be thinking ahead, there are a handful of common mistakes that can easily undermine your efforts or even put you behind the eight ball. 

Pilot Sales Manager Jake Fohn and JustWorks HR Consultant Moses Balian recently sat down to talk about the annual budgeting and forecasting process, as well as key tax considerations that businesses of all sizes should keep in mind as they close out the year. 

Here are six abbreviated tips from their webinar discussion on what to include in your EOY financial checklist so you can avoid last-minute scrambles and added hassles once the new year begins. 

1. Don’t wait to plan ahead

While there are certainly no dearth of action items that need to be crossed off of your to-do list, the annual budgeting and forecasting process should be a key priority for your business for the fourth quarter of any given year.

“I can’t tell you how many times I’m talking with folks where the budgeting or forecasting prep work for the new year continues to get pushed into the end of the year,” Pilot Sales Manager Jake Fohn said. “When it’s pushed, it’s likely deprioritized. For your business to be successful, you really need a strong plan, and I just can’t emphasize how important I think that is.” 

2. Communicating with your tax preparer is key

During his time at Pilot and as an accountant, Fohn has found that it’s really important for founders to communicate with their tax preparers throughout the year.

Bombarding tax preparers with questions at the end of the year can get overwhelming, especially as tax season kicks into high gear.

“While this is a compliance thing, it’s important to remember that this is a very seasonal business, so once you’ve chosen a tax preparer and start working with them, lead with compassion,” Fohn said. “Just be very mindful that the folks who are doing your taxes are working really hard, and they’re likely doing a lot of it all at once.”

3. Don’t close your books when it’s time to do taxes

It may be tempting to close your books and file taxes for your business at the end of the year, but trying to get both done at the same time can actually be very problematic for you and your taxpayer. For instance, tax preparers will definitely want to know if your business is using cash-basis or accrual accounting, but this question can’t be resolved until you’ve actually closed your books.

“Most folks just think that you can wrap up the year all at once — do 12 months of work by pulling down your bank statements, throwing it into an Excel spreadsheet, and categorizing it,” Fohn said. “That doesn’t work for me.”

Rather than waiting until the very last minute, it’s better to ensure that your books are closed at the end of every month. 

“The most crucial thing that I think you can do is to realize that there's a lot of work that goes into bookkeeping if it is done well,” Fohn said.

Even if you typically close your books by the end of year but haven’t done so just yet for the most recent quarter, it’s definitely better to step up your startup’s bookkeeping and get everything squared away on a more regular basis.  

“If you’re feeling behind today, it’s not going to get better in the future,” Fohn said. “You won’t be more prepared until you really start to prioritize it, put good people in the mix, and spend a lot of time here.”

4. Don’t send your W-2 and 1099 forms out too early

Timing is everything when it comes to sending out W-2 forms to employees and filing a 1099 form for vendors, contractors, and freelancers.

Sending these tax documents out too early can create hassles for you or your human resources team, especially if important changes need to be made and shared with the Internal Revenue Service. You may, for instance, need to make retroactive payment corrections for some employees or reclassify certain payments that were made, such as bonuses that were originally recorded as salary catch-up payments. 

“Don't file too early, because if you do, you'll probably have to send out some W-2Cs, which are W-2 corrections,” JustWorks HR Consultant Moses Balian. “So I would say, shoot for January 20th as your goal post for getting those W-2s out the door.”

This suggested deadline, he said, should also apply to your 1099 forms, which recently underwent a new change. In past years, employers used 1099-MISC forms to report payments made to vendors, freelancers, and independent contractors. The IRS revised the 1099-MISC form in 2020 and instructed businesses to report non-employee compensation on a 1099-NEC form instead.

5. Don’t file 1099 forms for international contractors

In lieu of hiring full-time employees, businesses often hire overseas contractors to reduce costs and nimbly scale effectively over time. 

The good news for employers is that they don’t need to send 1099 forms to international contractors who performed all of their work outside of the country and aren’t U.S. taxpayers. In these cases, contractors will handle the tax filing in their home country. 

“International, independent contractors are a blessing from the skies to small and growing businesses because as long as they are indeed correctly classified as a contractor, it's so simple — they invoice you, you pay them, and there are no tax consequences, generally speaking,” Balian said. 

Since copies of 1099 forms must be filed with the IRS, inadvertently mailing this document to an independent contractor can needlessly complicate the tax filing process. 

“That person probably will not have a Social Security number under which to file (the 1099 form), and it could only create some completely unnecessary back and forth with the IRS, in a worse case scenario,” Balian said. “Nothing bad per se will happen; it just could be a waste of time.”

6. Start developing a clear return-to-office policy or remote work plan

The COVID-19 pandemic has changed the way people think about work and how it can be done.

Temporary stay-at-home orders, along with a collective desire to stop the spread of coronavirus, forced some employers to shutter their physical offices and adopt flexible work-from-home policies. When it became clear that remote work wasn’t going anywhere, some employees moved to states, cities, and communities that were further away from offices. 

Companies that closed their physical offices and allowed employees to work remotely must now confront a series of daunting and occasionally uncomfortable questions that don’t always have clear answers. 

More specifically, businesses must decide when or whether their offices should reopen and if it makes sense to still occupy old locations. Even if offices reopen, businesses must decide whether employees should come in every day or have more flexible options to work remotely.  

Regardless of what you decide to do, it’s important to think through this issue carefully, do your research, collect feedback from employees, create a detailed plan, and communicate it clearly when the time is right. 

“You don't want to have a totally willy-nilly scheme, like, ‘Oh, people who moved during the pandemic get to stay where they are and those who didn't are stuck reporting to the corporate headquarters five days a week.’” Balian said. “It's not very equitable, so start taking a look at solutions, meeting employees in the middle, and gathering some feedback. Ultimately the decision lies with leadership as far as how to move forward with remote work policies.”

While your company may not always be at fault, you should also be prepared to field inquiries and complaints from employees who moved to other states during the pandemic. For instance, let’s say your company is based in San Francisco and you have an employee who lived in the city and worked out of your headquarters there. If the employee decides to permanently move to Denver during the pandemic, they should have been made a remote employee in Colorado. This change would have ensured that their payroll taxes — and the state unemployment premiums that you pay — are for Colorado. 

If the employee updated their home address but you didn’t update that person’s work location, your payroll system will probably assume that the employee is commuting from Denver to San Francisco. Since this person is classified in your payroll system as a California employee, the applicable taxes from that state are also being withheld. In this case, the employee may be told to pay state taxes twice in California and Colorado, if the employee files a non-resident tax return for California and a resident tax return for Colorado. 

Final thoughts

Striking a balance between budgeting, forecasting, and tax preparation priorities at the end of the year can be challenging, but getting some guidance and taking action quickly can make a big difference.

Check out the full webinar discussion on what to include in your EOY financial checklist, and if you ever need a little extra help, contact Pilot’s dedicated team of seasoned bookkeeping and tax professionals to get you back on track.