How to Project Taxes Accurately

Projecting your tax liability can be very tricky.

First, the tax law is constantly changing, which can cause your tax liability to change, even if all other factors remain the same.

Also, the final tax bill that business owners receive often includes income from sources outside of the business, as well as deductions, credits, and penalties outside of the business.

And to complicate it further, let’s just say there’s a reason the IRS calls them “quarterly ESTIMATED taxes.” You can’t know your tax liability until you close your books at year’s end.

So how do we estimate, or project, how much a business’s taxes will be?

Proactive Tax Planning

The best and most accurate way to project your tax liability is to have tax planning sessions throughout the year with a tax professional.

Tax pros keep up with the constant tax law changes and can include business and non-business factors to provide very (but not completely) accurate projections throughout the year. A tax pro can also proactively look for tax savings opportunities to make sure you’re keeping your taxes as low as possible.

The IRS Method

First, the IRS doesn’t project your tax liability; it suggests you pay your estimated taxes for the present year, based on the tax liability of the previous year. So, if last year’s tax liability was $4000, the IRS wants you to pay $1000 in quarterly installments throughout the year.

This method (for paying estimated taxes) is better than nothing, but if you have a drastic increase in income, you could still end up with a very high tax bill using this method alone.

Profit First Method

The Profit First cash flow management system doesn’t project your tax liability either (which is very complex). But what it does really well is to make sure that you always have enough in reserves for whatever tax bills come your way.

The Profit First system works off of percentages, so you’ll have a lot of money in reserves if you did well, and not so much if you had a bad year. Either way, you’ll have enough in reserves based on the performance of your business. And you don’t have to be a tax nerd to get it right.

At Fit For Profit, we can help you with implementing Profit First into your business so you can feel secure that you’ll have enough saved for taxes. Fill out this form and book a call to get started.

Seven Questions to Ask When You’re Hiring a Bookkeeper

Do you need help managing your growing business? Or are you just tired of staring at QuickBooks? Regardless of your motivation, finding a bookkeeper is a significant first step toward freeing up your time and streamlining your financials.

But finding the perfect bookkeeper for your business? Easier said than done.

With your business’s financial health relying on your decision, we’ve gathered what we think are seven of the most important questions for you to ask when hiring a bookkeeper. Asking the right questions up front can be the difference between going the right direction or veering your business off course.

Here are seven questions that will help you decide if a bookkeeper is right for you:

What should I expect regarding the project scope?

Chances are you know exactly what you need your new bookkeeper to help with, but most bookkeepers offer a wide variety of services. Even though in your mind what you need might go without saying, it’s vital to talk through your needs before agreeing to work with each other.

Creating clarity around business needs and setting clear expectations will ensure a smooth-running partnership.

You might want your bookkeeper to send 1099’s to your contractors or take care of your allocations, but without a comprehensive (and agreed upon) scope upfront, you might be asking for something that your new bookkeeper is not prepared to give. At the same time, you may need something that you hadn’t considered yet!

How many other businesses do you serve in my industry or at my income level?

Will your new bookkeeper understand the specific needs of your business or industry?

Regardless of previous work history, ask if they have experience with businesses similar to yours. Asking about who they have kept books for in the past allows you to ensure that they have an understanding of your unique business needs—and enables you to anticipate potential obstacles in your work relationship.
Finding out more about their background will help create a more seamless experience for you and them.

What are your professional qualifications?

The right bookkeeper for your business doesn’t necessarily mean they have to have an MBA in Accounting, but they need to have training and awareness of accounting principles.

The reality is there are no certifications necessary to become a bookkeeper, which is why asking about professional credentials and qualifications is so important! Don’t assume the depth of experience. Just ask.

Of course, we believe so strongly in using Profit First bookkeeping principles that we’re Advanced Certified Profit First Professionals. If you want to use Profit First, we recommend finding a certified pro!

How do you communicate with clients?

You’re busy. That’s one of the reasons you need a bookkeeper. The last thing you want is to hire a bookkeeper who will monopolize your time with ineffective (or excessive) communication that frustrates you and pulls attention away from growing your business.

Ask your bookkeeper-to-be how they typically communicate with their clients and why they have decided that is the most effective communication form.

You are looking for a candidate who is effective while being concise and respectful of your time and communication preferences.

How will you keep my account information secure?

This is a big one! You are sharing sensitive information with your bookkeeper. You need to know they have a plan for your safety. For our clients, we use a secure portal called SmartVault to transmit information.

Your information’s safety is critically important to us, and any bookkeeper worth their salt will feel the same.

Will I be billed based on hours?

Bookkeepers may charge on an hourly basis or at a fixed retainer rate. We prefer to work from a fixed rate for a few reasons.

We want you to be in control of your finances. Part of working from a fixed rate ensures that there are no surprises on your end. You know what’s coming, and you can prepare accordingly.

If you have a unique project you’d like addressed, we will scope the project ahead of time and adjust our rate from there. We want to help you create financial stability in your business in every way.

Will you have access to our bank accounts?

Different bookkeepers work differently. At Fit For Profit, we don’t perform any financial transactions on your behalf because we don’t ever want there to be a question in your mind about any transactions.

Some bookkeepers feel differently and will perform your allocations for you. We feel that this takes ownership of your numbers away from you—which is the opposite of how Profit First should feel.

Fit For Profit is all about making your finances work for you. We use a third-party app to retrieve your statements for us and we do everything we can to make it easy on you.

The right bookkeeper should be passionate, knowledgeable, and aligned with your needs and vision. Take the time to ask questions and explore before deciding on who will be best for your business. We know you’re busy, but finding your dream bookkeeper will take a little time.

If you have any questions or are still feeling unsure, give us a call. We’re always happy to help.

Don’t be Eligible for the Next Stimulus

As I write this, the latest round of COVID-19 related stimulus checks are starting to hit bank accounts. People and businesses are hurting, and some relief is welcome.

My purpose here is not to debate the merits, the methods, or the size and scope of the bill that allows for these payments.

My purpose today is to start you down a path where your business is so solid, and your finances are in such incredible order, that next time you won’t be eligible for checks like these. To have a business that is resilient and able to weather the inevitable storms that come our way. A business that is able to generate the kind of cash flow that allows you to pay yourself and your team generously, pay your taxes on a quarterly basis, and build a “core capitalization” account that makes sure you have cash on hand when “stuff” happens.

It can be done, it has been done, and you can do it too.

At Fit For Profit, we contribute to building your business like this in two primary ways.

First is world-class bookkeeping. You have got to keep your books in order if you want to maximize the benefits of owning a business. Tax law favors the intentional and prepared. If every time April 15 rolls around you are running around like a headless chicken, stop it. Trying to get a business line of credit without good books? Yeah, good luck with that. Did you struggle to put together the paperwork for EIDL and PPP over the last year? A good set of books could have saved you a lot of hassle. And do you really want to do the books yourself? You could. There’s a lot of things you could do. But should you?

The second way we help you build a resilient business is through implementing the Profit First Cash Management system. Having your books in order is one thing. But having a system that puts every dollar to work in the right place at the right time takes your business to the next level.

When it comes to making strategic business decisions related to cash flow, cracking open QuickBooks doesn’t cut it. It’s a lagging indicator – it tells you what has already happened. At Fit For Profit, we guide you in implementing a system that allows you to see in real-time what is happening, and provide a logical way for forecasting what will happen. All while helping you create a more valuable business, for you, your team, and your clients.

Most of us have some mindset work to do when it comes to money. If you are getting a stimulus check, have you thought about how you are going to put it to best use? What will give you the most bang for the buck? Think invest, not spend. Some may think it’s a lot of money, and some not very much at all. But either way, it’s more than you had yesterday. How you use it can say a lot about how you view money.

Look, you can’t change what has already happened. If you are in a hole, put down the shovel and stop digging. Truth be told, I used to be horrible with money. Truly terrible. Debt out my ears, owed 5 figures to the IRS, the whole thing. There is a way out if you are willing to do the work.

And next time?

Personally, I’d rather there never be a “next time” for pandemics, or business shutdowns, or stimulus checks. But if there is, what are you doing now to be better prepared? To be “not eligible”? Building a better business means building a better future for you and those you care about.

We can help you make it happen.

Why Profit First Works…Really

If you’re like most people, you have a healthy dose of procrastination in you. You have a project you need to finish, maybe something you don’t want to do, and you put off getting it done until the very last minute.

Let’s say it’s your taxes. Maybe you’re not as organized with your paperwork as you need to be and you’re putting off digging for receipts and 1099s. You know you need to get this to your accountant by April 1 if you’re going to avoid filing an extension. So in the wee hours of March 31, you’re frantically searching your files–both physical and digital–to gather what you need.

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Revenue Streams or Trickles?

There is a lot of thought/opinion/advice when it comes to diversification and creating different revenue streams within a particular business model. The “don’t put your eggs all in one basket” theory. And it sounds good. If one “stream” starts to dry up, another one will help mitigate total disaster.

Here’s the rub. Too often in a business, I see “multiple streams of income” become “throw a bunch of stuff on the wall and hope some of it sticks”.

When it comes right down to it, how many Revenue Streams does it take to have a great business?

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When Your Accountant Doesn’t Use Profit First

Accountants can sometimes get hung up on the principles of Profit First. They balk at the idea of taking profit first because they operate under the antiquated system of set a budget and stick with it.

Sure, it’s important to have a budget, but it doesn’t need to look like what accountants learned in accounting school. (Trust me, I know. I’m a trained accountant and Profit First bookkeeper.)

Here’s the thing though: Your accountant doesn’t actually have to be on board with you using Profit First. Because your accountant doesn’t actually balance your books for you and they aren’t creating your profit and loss statement or balance sheet–that’s your bookkeeper’s job.

Sometimes one person fills both these roles, but that’s not always ideal. (Though that’s a story for another blog post.)

Your accountant, on the other hand, is preparing your taxes based on what your bookkeeper provides. It shouldn’t matter to the accountant how you get there.

accountant profit first

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Steady Salary Amid Uneven Revenues

I started my business as a tax preparer before I started serving as a Profit First Professional. One of the major issues of my business was the uneven revenue throughout the year.

From January to April, revenues were strong, so I paid myself a lot–and frequently. But after April 15th, revenues would drop dramatically. I’d be able to pay myself from the excess throughout the summer. But fall and winter months, I was barely able to pay myself anything from the business, if at all.

Here’s how Profit First allowed me to pay myself a steady salary throughout the year WITHOUT having to earn extra revenue:

Set-Up

The Profit First system required that we set up our 5 core accounts, and allocate predetermined percentages to each account. The core accounts are income, profit, owner’s pay, taxes, and operating expenses. Here, we’re going to focus on owner’s compensation because you deserve to be paid for the work you’re doing!

Lifestyle Lock

It’s important to establish a lifestyle lock amount, the amount you need to maintain the lifestyle you want to live. It’s what you will pay yourself each month, consistently.

The lifestyle lock puts a limit on how much you will take from your owner’s compensation account, no matter how much money is in there, to support your lifestyle. My lifestyle lock number was $3,500 a month. So, during tax season, even though my owner’s compensation accounts easily had more than $10,000 in there, I’d only pay myself my lifestyle lock number ($3,500).

Slow Months

Revenue would still come after tax season, but much slower. But because I only paid myself the lifestyle lock number, I was able to pay myself consistently throughout the year from the owner’s compensation account, well into the fall.

The post-tax-season revenue, although much slower, would make sure that money was still being allocated to my owner’s compensation account. And there was extra revenue built up there from tax season to make up for that lower revenue. The end result was being able to now pay myself year-round, as well as greater confidence in my business’s finances, and a much happier wife (true story).

No-Revenue Months

Every year, especially since implementing Profit First, I have at least one month where I do not generate revenue. Using the lifestyle lock helped (and still helps) me to take a month off, but still be able to pay myself in full. This is huge because typically when solopreneurs stop producing revenue, the impact on the salary is normally felt immediately. The lifestyle lock helped me to break the month-to-month, check-to-check cycle.

Conclusion

Profit First works and paying yourself with your own lifestyle lock works wonders for any business owner who experiences high seasonality with their income. It offers peace of mind for yourself and your loved ones and takes the stress out of the question, “Where’s my next paycheck coming from?”

If you’d like to learn more about how to even out your salary or take-home pay using the Profit First cash flow management system, we’d love to see how we can help you. Schedule an appointment, and we’ll talk about it!

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