So you just filed your taxes and you owe. A lot. Or maybe you ended up owing a little, but the tax process itself was a disorganized nightmare. As a small business owner who does not have an accounting degree, or a business degree for that matter, everything is self-taught. Learned on the job. Trial and error, success and failure. Often times the learning process is long and expensive. And the survival of your sanity and your business is at stake. In past years the stress from the beginning of the year until I got the email back from my accountant informing me of my tax outcome has debilitated me. Literally causing me to feel like a failure who should never leave the house again, lest I spend a dollar. If I remember correctly, this is the seventh year that I have filed taxes as a self-employed person. The third year I’ve filed for my actual brick and mortar business location: Two Beauties Skincare & Makeup Artistry. And it’s the first year I’ve felt like I’m somewhat “on track” to be set up for success in the future. Basically, I’ve failed enough for so long that now that I’m doing mostly well, it feels amazing. But it’s been a long, arduous process.
Here are my tips for small business owners looking to make tax season run as smoothly as possible. I hope these can help someone to make less of the mistakes I’ve made.
Tip #1: Hire an accountant.
I will not stress this enough. I am not an expert; you may not be an expert either. Hire someone who is. Do not do your taxes yourself; do not have an inexperienced friend or family member do them – do not go to the cheapest option you found online. Ask your small-business-owning friends and successful business owners you admire who they trust, meet up with a couple of their recommendations to see if they’re professional, and hire the accountant who feels right to you. I promise you it will be worth the money. Do this even if you think you’re “too small” and don’t make enough money to require this level of service. Because as you grow, you will need them.
A good accountant will know how to maximize your savings, will be up to date and educated on the current tax laws, and will be able to help answer any complicated questions you have. But the best part about having an accountant that you trust is that you can rely on them (to an extent) to do what’s right for you and your business. They will be able to help set you up for future successes by accurately projecting the direction you’re going in to help you plan.
Tip #2: Do a mid-year tax appointment.
As a small business, your accountant will most likely set you up to pay estimated quarterly tax payments instead of one huge lump sum at tax time. These payments are based off of what you made the year prior. They help you to stay organized and minimize the financial blow later on.
What I’ve found is that each year, if my income is increasing over the year prior (which it should be) it’s hard to estimate exactly how much to pay in order to not owe in April. My accountant suggested doing a tax appointment in July to assess the trajectory of my business, my income and expenses, and use that information to adjust what I pay the rest of that year. This means that your quarterly payments may increase, but that way I can go into tax season knowing I’m on track to owe as little as possible. And being informed and organized will help you to feel less stressed, especially during your first couple of years when you have almost no idea how much money you’re going to make.
Tip #3: Have a system for tracking expenses.
Having a great accountant is only half of the equation. As a small business owner, it is most likely going to be your responsibility to keep track of many of your expenses in order to relay that information to them. Every penny counts. Seriously.
Over the years I have compiled a list of all the categories I need to track throughout the year to maximize my savings, and although I’m still not perfect about filing every receipt and bill as soon as I get it, I do try to make sure I stay as caught up as possible. Obviously some things are easy to track through online banking, like your monthly utility bills, but other things are more sporadic. This means having a filing cabinet, box with labels, or file in your computer for every little thing from shop furniture, to makeup kit supplies, to car maintenance, to advertising and office supplies. I track all my retail invoices through Quickbooks. Every little bit counts, and should be recorded. If you’re unsure of all the different categories you should be tracking, your accountant should be able to work with you to help give you an idea of where to start. That way when you give them all of your expense information, everything is organized and ready to go. The mountain of receipts will hopefully be minimal.
Tip #4: Have a clear, organized system to record transactions and all money coming in.
You cannot grow your business without being aware of what money is coming in and what money is going out. I am shocked at the number of business people I talk to who have no idea what their numbers are. Being informed is powerful – it gives you the knowledge you need to prepare for the future, but also to see where your areas of growth and opportunity lie.
Before I opened my business I had my tech guy (I like to have a professional help me with everything. This is a great way to network and support local businesses, but also a great way to avert disaster and save time by delegating tasks you do not specialize in.) set up Quickbooks Business on my work computer so that I could track everything coming in. It took me several days to enter each and every makeup and skincare service, every add on, and then every retail item into my system. Hundreds of items. But it has been worth every minute of time put it. I ring every customer through upon checkout – for products AND services rendered, every single time they come in. I run my little studio like a retail store would run, even if someone just comes in for an eyebrow wax. I ring it through the computer when they pay me.
Quickbooks automatically generates all the reports you need so that at tax time I can see the breakdown – what service income I made and what retail income I made. I can tell you exactly how many facials I did last year, what percentage of my business and income they make up – I can break that down into specific type, and the customers who got them. I can tell you how many tinted sunscreens I sold, when, and to whom. I can compare months, customers, years, products, product lines, etcetera. I know how every dollar that comes into my shop is being made, how it compares to previous years, and it matches exactly with my bank deposits that I do weekly, and my automatically deposited credit card transactions made daily.
I cannot emphasize this point enough – it takes two seconds to check a customer out, and five minutes to balance your computer, credit card machine, and cash drawer at the end of the night. Doing this every day will save you from spending countless hours trying to calculate what you made at the end of the year before tax time. And it will give you the knowledge you need to grow your business.
Tip #5: Pull your sales reports weekly and save money accordingly.
I have a worksheet I put together that I do every Tuesday before I start a new work week on Wednesday morning. I pull the numbers from the previous seven days (using the reports that are generated by sticking to my advice in tip #4), make a few calculations, and save that amount in my tax bank account. I do not touch this money unless it is an absolute emergency, but save it to make all my tax payments out of. If I do have to spend money out of my tax account, I make sure to know the exact amount and pay it back promptly.
*Having separate bank accounts for your business is not something I plan to include in this blog, but do it.
Basically, my weekly tax worksheet shows what my service income is and what my retail sale income is. I save 25% of my total income and also make sure to save the sales tax that I collect on every retail sale.
This may seem like a lot of time and money – and it is. You don’t have an employer subsidizing the amount of taxes you pay. You pay them all. But if you’re doing this weekly, or even monthly (although I would highly suggest weekly) you can steadily save what you need to so that when those quarterly payments and sales tax payments come due, you have the money neatly stashed away with probably a little to spare. Don’t wait until months have gone by to pull those reports and start saving for taxes. If you do it consistently it will become habit, and reduce a tremendous amount of stress.
I hope that these tips can help you to start implementing your own business systems. The key is to HAVE systems. Put in the work up front so that you can benefit from the long-term results. It will be difficult and time consuming, but it will be worth the work. Not being organized with your money, and not knowing how each dollar comes in and out will cause a level of confusion and ignorance that can only lead to stress and failure. The only way to tackle these hugely demanding projects is to accept when you’ve failed, learn your lesson, and improve. I went to a bad accountant in the beginning; I’ve owed thousands and thousands of dollars, I’ve been depressed, buried in debt and have spent countless hours sifting through piles of bills and receipts. I decided that instead of living this way, I was going to work harder to figure it out. And although I’m still learning, and I’m definitely not an expert, these tools have helped me tremendously.