The 4 Keys to Avoiding Tax Pain: Essential Tax Planning for Small Business Owners
Tax season: the annual event that turns normally rational small business owners into tightly stretched rubber bands, ready to snap. But fear not, entrepreneurs, for there's a way to navigate this treacherous tax planning terrain without losing your sanity.
How, you ask?
The short and sweet answer is tax planning. I promise you, planning ahead doesn’t require a ton of time and effort; and, if you want to bypass a future high-stress tax event, now is the time to start!
If you follow our four suggestions, you’ll have an easy-breezy time when taxes are due.
The Tax-Planning Mindset for Small Business Owners
Most people have a crappy attitude toward taxes, but the truth of it is, if you’re paying taxes, your business is making money, and that is a good thing.
Suggestion One: Adopt a Success Mindset.
Most tax advice centers around paying as little as possible, and while I’m all in favor of saving on taxes, they’re a reality of being successful in business.
Planning to pay your taxes and doing so with gratitude (because you’re making money!) will reduce your suffering.
Quarterly Taxes Are a Good Thing
Once your business is profitable, you’re expected to make quarterly payments. Shocker! Possibly, if you’re working closely with a professional, you can adjust those amounts throughout the year, but you definitely want to keep up with your quarterly payments. Think of it as your every-three-month visit to the Quarterly Tax Fairy.
Suggestion Two: Visit the Quarterly Tax Fairy.
If you regularly visit the Quarterly Tax Fairy (in other words, stay on top of your tax estimate payments), you’ll accomplish two MASSIVE things:
You’ll save yourself from a whopper of a tax bill come April.
You’ll save yourself from paying a penalty because you didn’t pay enough during the year.
Long story short, the Quarterly Tax Fairy saves you cash and stress!
The Tax Planning Piggy Bank
There’s nothing worse than coming up short on cash when it’s time to pay your taxes because that’s one bill with very little leeway.
Suggestion Three: Fully Fund a Tax Reserve Account
I recommend that every profitable business set-up a business savings account that you use as a tax reserve. Imagine your tax reserve account as a piggy bank. The more you put in, the less you'll have to worry about when the taxman comes knocking. Here’s how to ensure you have enough money set aside so you never have to sweat writing that check.
Understand your tax rate. Look at your most recent annual tax return, what percent of revenue did you pay in taxes?
Open a savings account, name it Tax Reserve, and put that percentage of revenue into the account each month, or week. Consistency is key here. (If you don’t know what percentage to use, Profit First recommends a standard tax reserve of 15% of gross profit to cover all business and personal taxes owed due to business profits/income.)
Maintain your cash flow. If putting these funds into a savings account hurts your cash flow, that means that you’re spending too much on other expenses. Look for opportunities to cut back on expenses so that you can fully fund your tax account.
Build tax payments into all of your projections for your business— your cash flow, profit and loss, and balance sheet will all be affected by taxes.
But wait, there’s a silver lining.
If the amount in your tax account is MORE than you need to pay at the end of the year, those funds are part of your company’s year-end profit and can be a bonus dividend for a savvy owner. This often happens when businesses prepare.
Tax Planning and Financial Records
In addition to reserving the cash needed to pay the tax man, the next way to save your sanity during tax season is to keep clean and orderly records of your income and expenditures throughout the year.
Suggestion Four: Be Organized
If you’re well organized and can easily pull the numbers together, your bookkeeper, tax preparer, or accountant can do her work much more quickly and easily—which will save you time, money, and stress!
However, I know not everyone gets along with numbers, and that’s okay. If these suggestions sound like a whirling dervish, we can help! CFO on Speeddial can provide a painless check-up of your financials and bookkeeping (along with our recommendations on how to plan better for tax season).
Don’t Go It Alone
Tax season doesn’t have to be a horror show. With the right support, you can turn it into just another part of running a successful business. Enter CFO on Speeddial: your secret weapon against tax-time stress. Here’s how we can make your life easier and your tax season smoother:
Financial Decision Support
Thinking of making a big financial move? A Fractional CFO ensures you know the tax implications before you leap. This could be the difference between a good year and a great one. Think of us as your financial GPS, rerouting you around tax pitfalls.
Cash Flow Management
Cash flow is the lifeblood of your business. A Fractional CFO helps you keep the cash flowing smoothly, ensuring you have enough to cover your tax bills without breaking a sweat. No more scrambling for cash when the taxman comes knocking.
Accurate Financial Reporting
Messy books are a tax season nightmare. A Fractional CFO keeps your financial reports neat and tidy, making tax time a breeze. Think of it as having a housekeeper for your finances, but without the dust and sneezing.
Ensuring Compliance
Tax laws change more often than fashion trends. A Fractional CFO keeps up with these changes so you don’t have to. This means fewer headaches and penalties and more time for you to actually run your business.
Just schedule a meeting with one of our Fractional CFOs to get started on your small business tax improvement plan, or check out our FREE Revenue Calculator HERE to find your meaningful numbers today!
By following these four key tax planning suggestions, you can turn tax season from a dreaded ordeal into a minor inconvenience. In the meantime, prepare well and prosper, my friend.