Opening summary

The year‑end close is where small mistakes become big problems. For sole proprietors and single‑member LLCs (disregarded entities by default), a focused checklist reduces audit risk, prevents underpayment penalties, and helps you keep more of what you earned. In my practice working with hundreds of clients, owners who run a disciplined year‑end process avoid surprises and often identify missed deductions that justify the time spent.

Quick checklist (high priority items)

  • Reconcile bank and credit card accounts: clear uncleared items and verify deposits. (Timing: by year‑end.)
  • Compile and confirm income records: 1099‑NEC/1099‑K, merchant statements, and cash receipts.
  • Finalize expense categories: materially classify expenses for Schedule C or your applicable return.
  • Review payroll and employment tax filings: W‑2s, Forms 941/940, state reports.
  • Check independent contractor payments: prepare and issue 1099‑NEC for nonemployee payees when applicable.
  • Estimate tax liability and adjust withholding/estimated payments to avoid underpayment penalties.
  • Inventory and depreciation: count year‑end inventory and record asset purchases for depreciation or Section 179.
  • Document home office, vehicle, and travel logs: back up deductions with contemporaneous records.
  • Retirement contributions: determine eligibility and funding deadlines for SEP‑IRA, SIMPLE, or solo 401(k).
  • Sales and excise tax: confirm state/local returns and filing status.

Detailed steps and why they matter

1) Reconcile income and verify 1099s

Confirm gross receipts from all sources and reconcile platform reports (e.g., gig platforms, merchant processors). Compare your books to 1099‑NEC, 1099‑K, and bank deposits — mismatches often show unrecorded income. See Schedule C guidance for reporting business income and expenses (file Schedule C on FinHelp).

2) Finalize deductible expenses

Organize receipts, categorize recurring costs (rent, supplies, subcontractors), and separate personal from business items. For home office claims, choose simplified vs. regular method and retain measurement and expense records (home office deduction guide). The IRS requires documentation to support deductions (IRS: deductions and recordkeeping).

3) Self‑employment tax and estimated payments

Calculate self‑employment tax (Social Security and Medicare) and federal income tax owed on projected taxable income. If you’re underwithholding, either increase withholding on W‑2 wages or make an additional estimated tax payment to avoid penalties. Use IRS guidance on estimated taxes for the self‑employed (see estimated tax resources: Estimated Tax Payments for the Self‑Employed).

4) Retirement plan and health deductions

Deciding to fund a SEP‑IRA or solo 401(k) before filing can materially reduce taxable income. Verify deadlines for employer retirement plan contributions — some plans allow contributions up to the business tax filing deadline. Also document health insurance premiums if you plan to claim the self‑employed health insurance deduction.

5) Assets, depreciation, and Section 179

Record year‑end purchases of equipment or software and evaluate whether immediate expensing (Section 179) or bonus depreciation provides a better tax outcome. Keep purchase invoices and business use documentation.

6) Payroll, contractors, and reporting

Make sure W‑2s and 1099s are accurate and filed on time. Misreporting contractor payments is a common audit trigger. Check state reporting requirements; many states require separate filings for unemployment and withholding taxes.

Common year‑end mistakes to avoid

  • Mixing personal and business expenses without clear records.
  • Failing to keep contemporaneous mileage or home office logs.
  • Waiting until tax season to correct bookkeeping errors.
  • Missing 1099‑NEC/1099‑K reconciliations.

Practical tips from practice

  • Run a trial Schedule C and Schedule SE before year‑end to estimate tax and identify missing entries.
  • Use accounting software to tag receipts, run profit‑and‑loss by month, and produce mileage logs.
  • If you have variable income, use safe‑harbor rules to estimate payments and avoid penalties (IRS: estimated tax safe harbors).

When to consult a pro

If you have complex asset purchases, significant changes in revenue, payroll questions, or multi‑state sales, consult a CPA or enrolled agent before year‑end. In my experience, a one‑hour year‑end planning session often uncovers opportunities that cover the cost of professional advice.

Next steps (30/60/90 day plan)

  • 30 days: Reconcile accounts, gather receipts and 1099s, run preliminary tax projections.
  • 60 days: Decide on retirement contributions, finalize asset treatment (Section 179 vs. depreciation), and prepare payroll/1099 filings.
  • 90 days: Confirm state filings, fund retirement accounts if applicable, and schedule a tax preparer review.

Internal resources

Authoritative sources and further reading

Professional disclaimer

This article is educational and general in nature and does not constitute individualized tax advice. Rules change and individual circumstances vary; consult a licensed tax professional before making tax elections or filing decisions.