Module 7: Tax Planning
Managing your tax dollars
Just as employees have some of their earnings withheld from each paycheck, business owners may need to withhold some of their profits to pay their taxes. If you can’t pay your taxes on time, you may be liable to fines and penalties.
Quarterly Estimated Payments
If you are filing as a sole proprietor, partnership or S-Corp, or as self-employed, you generally need to make estimated tax payments throughout the year if you think you’ll owe $1,000 in taxes or more at the end of the fiscal year. You will use Form 1040-ES to calculate your estimated taxes and pay them quarterly by:
- April 15
- June 15
- September 15
- January 15
State tax deadlines may be different. The Department of Revenue will determine your filing and payment dates for you.
Setting up a system that works for you
Nothing is worse than ending the year, thinking you’ve made a profit, only to find that you failed to pay your share of taxes on time. Even if you paid the right amount at the end of the year, the federal and state governments could assess fines and penalties for any late payments.
New businesses often make the mistake of using their tax money throughout the year to fund business operations, thinking that they will be able to make it up by the time they file their annual taxes. This is a big mistake, and many small businesses have received an unpleasant notice from the IRS containing a hefty bill for overdue or late taxes. It is far better to overestimate the amount of taxes owed and get a refund than to underestimate and find yourself in a financial hole.
The best strategy is to set aside a percent of your net profit so you can pay quarterly federal tax estimates and any state taxes, including sales tax. Put these funds in a different bank account, one that is separate from your regular bank account. You don’t want to comingle tax withholdings with your available cash for operations.
If you have employees and pay employment taxes, you will want to do the same. There are two sides of employment taxes to cover Social Security and Medicare. There’s the portion you withhold from each employee’s paycheck and the portion you pay as their employer. Again, you will want to keep these taxes separate from your other funds, and you may want to set up a payroll account at your bank to hold these funds until you pay them to the federal government.
Using an accounting system
While you want to be sure you pay your fair share of taxes, you also want to be sure that you don’t pay more than your fair share. Businesses have legitimate deductions they can make, things like rent, utilities, inventory, advertising, travel and more. These can be deducted from your gross revenue, reducing your profits. To be deductible, your business expense must both be ordinary and necessary. An ordinary expense is one that is common and accepted in your line of business. A necessary expense is one that is helpful and appropriate for your business or trade. There are many possibilities here, so you will want to use accounting software, an online accounting site or an accountant to sort out legitimate business expenses for your business to legally reduce your tax obligations. This is not something you want to do on your own or last minute. You want to keep track of all these expenses from the start and review them monthly. This will help you plan cash flow from month to month and plan your taxes and payments.
Thankfully, once you have all these expense categories set up in your accounting system, it’s easy to keep everything in its proper place. Be sure to keep good records as the IRS may ask for them if they have any questions or concerns about your annual tax filings.
An accountant can be a big help
Having access to a good small business accountant will help you analyze and interpret the information you need to run your business effectively. Yes, software can help you record transactions and prepare reports. But it can’t provide you with insights based on years of experience and knowledge. An accountant will also serve as a sounding board for new ideas, such as expanding or new locations. You don’t have to hire an accountant full-time. Many accountants work for multiple businesses, so you can simply put them on retainer. Just be sure that you find one who has a good track record with businesses. An excellent place to start is to ask other business owners in your community who they use.
Besides helping you with your taxes, a business accountant can provide these five essential services:
- Business Consulting: Some accountants have been in business a long time and have seen it all. They can provide you with plenty of sage advice on your business and how to become more efficient and profitable.
- Personal Finances: An accountant can help you set up a retirement plan, advise you on purchasing a home or navigating a change in your personal finances.
- Organizational Advice: The way your business is organized will impact your taxes. An accountant can provide you with options on business structures and perhaps even refer you to an attorney who can provide additional guidance if needed.
- Financing Advice: If you need a loan, an accountant can help you determine what the best option would be and assist in preparing the documents you’ll need to successfully apply for a loan.
- Audit Support: Should your business get audited, your accountant can provide information and clarification to the auditor. Since they are familiar with your records, the process, and the terminology, they will be better equipped to handle this on your behalf.
Module 1: Financial Management takes a more in-depth look at bookkeeping and accounting systems.