Learn 5 basics of paying business taxesAug 07, 2020
One of the biggest reasons why people feel nervous about going out on their own is because they don’t fully understand how to manage their taxes. They’ve heard scary stories and they don’t know where to turn for help or information. The US tax laws are incredibly complex, and it’s easy to feel overwhelmed.
This is one of those areas that we really want to help provide clarity on - not just taxes, but your entire business financial situation. We want you to feel informed, empowered, and educated on how this all works together. We want to help you figure out who to talk to, what questions to ask, and how to truly understand your financial picture.
We had the absolute pleasure of talking to Kirstin Smith - Enrolled Agent and Owner of Balanced Tax Solutions. She has been doing taxes for two decades, and has assisted many companies with bookkeeping and the handling of business entity requirements. She is also a single mom of two young adults and she balanced employment, freelance work, and parenting for many years. She specializes in taxes for freelancers, small businesses, and solopreneurs, and we were lucky enough to pick her brain for your benefit!
So, listen to the episode on the Kenza Pod, or check out what we talked about below. Enjoy!
#1: Find an Expert for Advice
A lot of us drive a car, but don't know how to do an oil change; we invest in experts to do this for us. The same logic goes for your business! Don't be afraid to put $300 aside to pay someone to help you understand your options.
You may be scared to see a price tag of $200-300 for an hour of an expert's time. But keep in mind that this will not only give you peace of mind and help you understand what you need to know about taxes, but it can literally save you thousands of dollars in fines, late payment fees, and interest down the road.
A great place to start finding these folks is your local small business development center. These resources can help you get into the specifics of starting a business, and may be able to help you (sometimes for free!) with everything from financial setup to business launch. And don't be afraid to ask around to your friends and network for a personal reference.
#2: Learn About Penalties and Taxes Specific to Your State
Penalties can come if you don't pay or register for something in time, and certain states, cities and counties may have taxes specific to that locale or to your business that you will need to plan for. Don't learn about this for the first time when the bill comes due!
Again, your local small business development center is a great place to start to learn about your area and business, and a tax expert can help you understand which info applies to you.
#3: Know Your Net Profit
Monthly or quarterly, you need to set yourself up to know what your net profit is. Knowing your net profit is going to help you understand how much you owe in taxes, and how well your business is doing (among other things).
Kirstin also recommends that you review where you’re at financially with your tax expert quarterly to help you prepare for tax time.
How should you keep track of your net profit?
If Quickbooks Online scares you, don’t do it. There are others to choose from (like Freshbooks or Honeybook) that help you do all of this and more.
There are many options, but the most important part is that you find what works for you. Sit down weekly, and make a habit of tracking where you’re at. Kirstin highly recommends having one bank account and one credit card for your business, so when you sit down to update your net profit tracking, you simply have two statements to tally up. If you listened to Episode #3 of the Kenza Pod, you know how important it is to separate your personal and business money.
Kirstin reminds us that by December or January at the latest, you need to be figuring out what your net profit is so that you're prepared for tax season. Keep in mind that January is a set-up month for all tax preparers, so this is a great time to ask questions and figure out what kinds of deductions you can count on.
Aim to have your numbers done and dusted by February, and start gathering all of your documents for your tax person. This is a great reason to only have one bank account and credit card for your business, so that you don’t have to organize all those receipts! You’ll want to keep these receipts, but for goodness sake, don’t send them in a shoebox to your tax person. Kirstin literally has 400 tax returns on her desk during tax season... she ain't got time for your box of receipts!
Always remember: If you owe tax, it’s due by April 15th. If you extend your taxes, it extends your filing only; not your payment.
#4: Have Intentions for Your Money
Knowing where you are putting your money is going is just as important as knowing how much money is going in and out of your business.
Keeping track of how much money you want to put aside for taxes, business expenses, savings, etc. is crucial to the success of your business. Setting aside funds also creates your reserves, which creates peace of mind. And peace of mind = confidence!
Your tax expert can help guide your decisions, so you aren’t sucker-punched at tax time or when other fees come due. Experts can not only help you know how much of your money to allocate, but can also assist you in setting up these systems for your business.
#5: Regularly Set Money Aside for Taxes
A good rule of thumb is to set aside 33% of your net profit right away. Don't spend that money, it's not yours. Don't think you'll save it up and pay it later. Simply set it aside right. away.
The IRS wants you to pay into estimated taxes quarterly. This is your responsibility, even if you have a tax person. However, your tax person can help you know what these payments will be, and Kirstin even sends email reminders for her clients when it’s time, and supplies them with the info on how and where to make payments.
Your owed taxes may be different if you’re married, have kids, after you’ve factored in deductions, etc., but you want to be diligent so you aren’t left with a giant bill come tax day in Spring.
Remember, You Got This
The moral of the story is to find an expert, ask questions, educate yourself. Stay organized. Know the deadlines. You are smart, you can figure this out. We believe in you!
Links from the show: