Did you tax bill catch you off guard?
If you’re in your first few years of business and you also managed to have an awesome year. And by awesome year I mean, managed to show a profit. Then chances are once your accountant finally gets back to you your prognosis will feel less than desirable, which will also happen to feel near fatal. You owe money, (cue the palpitations and cold sweats).
You’ve got “tax bill” there is no cure. You may experience brief periods of remission. The odds that you will experience “tax bill” again is nearly 100%. I am so sorry for such terrible news. Now, how are you planning on paying my fee?
Guess what, you’re not alone.
Let me tell you about my first year in business, (as a Massage Therapist). I was young naive and a business owner. I was super organized but I knew nothing about accounting, taxation, or finances. I brought my accordion file sometime early in January, (such a keener) to the accountant that I had selected. Met briefly with one of the staff members and then waited for the call. I was not prepared for what happened next. I received the most unpleasant surprise EVER. I owed. Not only did I owe, I owed over $5,000. This was a lot of money to me. I was completely gobsmacked. How could this have happened?
Well love, here is the play by play:
- I chose the first person that was recommended to me without actually meeting them.
- The firm did not understand my business. This meant they questioned all of my expenses with an overzealous level of scrutiny. As a result they removed several of my legitimate business expenses from my return.
- I was self-employed. There was no boss taking regular deductions from my paycheck. There was nothing to refund because I had not paid any income tax throughout the year.
Here is what I learned from my experience:
- Not all accountants are created equal. While it is important to get referrals, it is more important to interview your accountant to make sure you are a good fit. You want to be sure that the person who will be handling you file actually understands the nature of your business.
- Accounting software may be intimidating at first but is worth its weight in gold when used to full capacity. I’m talking real return on investment here.
- It is super awesome to be your own boss most of the time but there are some things that I had taken for granted as an employee. Namely, payroll withholding taxes.
Here’s the scoop
I wasn’t paying more taxes. In all actuality I was paying much less. The difference was that because I didn’t have that regular deduction coming off of my “weekly pay” I didn’t have any amount that was put in the government’s forced savings plan. Aren’t they cheeky? We all love getting a fat cheque back from the man, but what most of us fail to realize is that what is being returned is YOUR MONEY. It’s not theirs. Or let me put it to you another way, with a positive spin. When you are self-employed you have the opportunity to set aside all of the income tax you owe into an interest earning savings account until it comes due at tax time. As opposed to sitting in government coffers (interest free) until your taxes are filed.
So what should I do?
I’m glad you asked. You need to set up an account that allows you to grow your savings tax free while you set aside the money that would have automatically been deducted had you actually worked for someone other than your lovely self. Next you set aside between 15 to 30% of you net income. It may seem like a lot and I get that but here’s the thing. If you end up over saving then you have in effect created a sweet return. There is just one caveat; you will need to create a system so that you know what your monthly net income is. So stay tuned because that is what I am here to help you with.
Now tell me, what is your tax time horror story?
Image with thanks to 401(K) 2012