Your Business and Taxes
Posted on | July 30, 2009 | No Comments
Success or failure of a business requires good recordkeeping and tax planning. Taxes can take 25% or more of your business income, so dealing with them is essential. Consider adding a tax professional to your team of advisers.
I know this is not a subject most of you like to talk or even hear about. You probably believe that you pay way too much in taxes; you don’t like to talk about them and generally put off doing your taxes until the last possible moment. Have I got it about right?
Think about it. You’ve been working hard, marketing extensively and networking through Biznik. The referrals are starting to come in now and your business is growing. With a little more effort, you could move to the next level. At least that’s the plan.
Let me ask you a simple, but very important question. Do you know what your net income is for your business as of today? Your income is way up; but what about your expenses? What about those taxes you owe on that increased income? What is your cash situation? What bills are due in the next few months?
Will you have enough cash to pay them?
Let’s talk about a few vital things that can mean the difference between success and failure in your business.
First and foremost, you need to keep track of your income and expenses on a regular basis. You need to know from month to month how your business is doing and whether or not you have sufficient cash flow to run your day-to-day operations. You can sometimes get away with poor recordkeeping when your business is small; however, as your business grows it becomes increasingly more important to keep good records. If you can’t or won’t do that yourself, there are lots of good bookkeepers and accountants out there who will do it for you for a reasonable fee.
Second, one of the biggest expenses your business has, if not the biggest, is taxes. How you deal with those taxes can mean the difference between success and failure. Some of the more significant taxes are: city, county, state (B&O and sales tax in Washington State), and federal. Federal taxes include income, self-employment and payroll taxes. Depending on the business entity you chose, your filing status, your taxable income and other factors, your total taxes can vary significantly; anywhere from 25% to 40% or more of your net business income. Is this worth paying attention to? You betcha!
In your business, you must know what taxes you owe and to which government entity. As you earn income you must estimate what those taxes are going to be and make plans to deal with them. I have seen far too many small business owners, making great money in their business; spend that money without thinking about the eventual impact of taxes and other deferred expenses.
Taxes can be insidious. Most tax forms are not required to be filed until early the following year. Without knowing the full impact of those taxes it is easy to spend your hard earned money in the current year and not have enough left over to pay your taxes when they are due.
Alright, so I’ve identified a problem or two; what should you do?
- Keep good records and make projections about how your business is going to do in the next few months to a year. Update that projection as the year progresses. Once again, if you can’t do this, hire someone.
- Know the taxes you and your business are required to pay. For example many businesses file on a Schedule C (sole proprietors and single member LLC’s) or file on a separate tax return (1065, 1120S), but the income/loss from the business passes through to their personal return on a Schedule K-1. To fully understand the impact of taxes, you must project what the Schedule C or pass-through income will be and know the effect on taxes on your personal tax return. For most types of business entities, your personal tax return is also where you pay Social Security and Medicare taxes on that net business income.
- The best way for most business owners to deal with taxes is to pay estimated taxes. These are paid on Form 1040-ES and are due quarterly on April 15th, June 15th, September 15th and the following January 15th.
- When you receive money in your business, set aside a percentage (25% – 40%) for taxes. Your projections will tell you how much. Put this money in a separate bank account so that you will not be tempted to spend it on something else and keep it there until you need to pay your estimated taxes.
- Don’t get on the wrong side of the IRS. That can happen quickly by not filing on time or not paying what you owe. What to do if you get on the wrong side of the IRS is the subject of another article.
Recordkeeping and Tax planning are critical if you want a successful business. In addition, selecting the right business entity (also the subject of another article) can make a difference in the amount of taxes you pay, so while doing your own taxes can be “penny wise”, you may be “pound foolish” by not engaging a tax professional to advise you on your business and your taxes. I would be glad to give you advice on how best to use a tax professional on your advisory team.
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