This week on our Small Business Tax Savings Podcast we had a special guest on, Chris Hanna. He shares his story of entering the entrepreneurial journey and shares tips he has learned along the way.
Your taxes don’t have to be scary or complicated.
As a new entrepreneur or business owner, that’s exactly what they can feel like. And the more money you make, the worse that feeling gets. When you were an employee, all you had to do was file your taxes at the end of the year (and that was complicated enough). Now that you’re on your own, you have to take care of everything yourself and it can be scary not knowing where to begin.
By avoiding these three costly and common mistakes, you can simplify your taxes and set yourself up for massive success.
Mistake #1: Ignoring Your Taxes Until They’re Due the Following Year
What’s worse than getting slapped with a big tax bill at the end of the year? Realizing that it’s way bigger than you ever thought it could be.
It’s happened to every UFC fighter I’ve ever worked with. They earn a few big paychecks, spend the money, and then wait until their accountant (if they even have one) sends them a tax bill the following year. At that point, they’re shocked at how much they owe, have to fight again to cover the bill, and are then behind on their current year’s taxes. Not to mention, the US is a pay-as-you-go system, meaning that your taxes are actually due when your income is earned. So by waiting a full year, you’re already late and will likely incur penalties and fees.
It’s an easy trap to fall into for any new entrepreneur. When you’re an employee, your company withholds taxes for you and pays half of your payroll taxes. When you’re an entrepreneur, not only do you have to pay all of your taxes on your own, but you also have to pay both sides of the payroll tax!
So by ignoring your taxes, not only will you owe money, but you’ll probably owe way more than you thought you would.
INSTEAD: Proactively set aside a percentage of your income every time you receive money.
Setting aside 30% of everything you earn is a great starting point. You might owe more and you might owe less, but you’ll be in a much better place than you would have been if you hadn’t set anything aside.
Pro Tip! Open a new savings account and name it “Taxes” so that when you move money into the account, it remains completely separate and distinct from everything else.
Check out our previous article, What Are Estimated Taxes and How Do I Pay Them?
Mistake #2: Neglecting Your Bigger Financial Picture
Proactively setting aside tax money won’t be enough if you’re neglecting your bigger financial picture.
Why? Because you can easily dip into your tax savings if you’re poorly managing all of your other money. When rent is due but you’ve blown through hundreds or even thousands on fun purchases, how do you think you’re going to pay for it? What if your car breaks down but you never properly funded an emergency fund? Where do you think the money to repair your car is going to come from? Answer: your tax savings account.
As an entrepreneur, tax prep works in tandem with all of your other finances, not in isolation.
INSTEAD: Clearly list out your financial foundation.
On a sheet of paper or a spreadsheet, list out your:
- Assets – the value of each one
- Liabilities – the outstanding balance, minimum monthly payment, and interest rate
- Expenses – in three categories: Fixed/Recurring, Needs, and Wants
- Income – how much you’re making and how often
- Goals – what you’re working towards
When you can see your finances with a birds eye view, you’ll be in a much better position to set aside your taxes and keep them there until they’re due.
Pro Tip! Review your financial foundation once a month to make sure everything is up to date.
Mistake #3: Treating Your Taxes Like a Chore
You’ll miss out on the best tax strategies, savings, and deductions if you always look at your taxes as something to dread and avoid- only ever leaving the task to your CPA.
INSTEAD: Treat your taxes like a game to be excited about.
The reality is that the vast majority of the tax code is written to reward and incentivize various activities like creating jobs, investing, and growing our economy. Once you make it your personal business to uncover those activities, you and your tax advisor will get creative together and you’ll change your whole tax game.
Pro Tip! Find a great tax advisor (like Mike Jesowshek and the Tax Minimization Program) and plan your tax strategy with him at the beginning of the year. There’s little a CPA can do for you if you only chat once at the end of each year when it’s time to submit your tax return.
Learn more about Chris Hanna, Financial Coach here!