If you’re like many business owners, taxes aren’t on your list of favorite things to do. You have to close your books from the previous year, send 1099s, gather all your tax information, and then stare down the calendar wondering when you’ll have time to do your taxes.
Sound familiar? No one said taxes were fun but I, for one, am always anxious to get mine done as soon as possible. Why’s that? Because I use the Profit First system and I have all the cash I need (and more!) saved to pay my taxes.
And if I can get those taxes paid, the remaining cash can go to me, the owner, as a profit distribution, or I can invest it back in my business.
For those of you in the fitness and wellness industry, business might be hopping right now as clients reach out and dedicated themselves to wellness this year. Or maybe you’ve hit a slow patch and you’re scrambling to get more people in the door. Where can you possibly find the time to work on taxes?
Let’s explore the idea that taxes aren’t the time-suck they’re made out to be and, with the right preparation and support, you get them done in just a few short hours (or less). And if you make a date with yourself to work on these things on a regular basis, you’ll be in a really good spot all year long.
Framing Taxes Differently
What is the first thought that pops into your head when you hear the word taxes? Panic? Dread? Fear? One of the best ways to overcome these emotions is to be prepared. Here at Fit For Profit, we have a checklist to take away the panic, dread, and fear and replace it with empowerment by offering you the steps you need to take to be prepared for taxes.
It helps to plan well ahead of tax time, so we recommend keeping this list handy year-round. In fact, some of the things on the list should be part of a new hire or contractor onboarding so it’s already done. You can do some of the other tasks on the list on a regular basis throughout the year. Why not set up a Money Monday routine or a date to review and reconcile your books once a month? This would make taxes so much easier and less overwhelming.
Some highlights from our checklist (though we recommend you download the whole list above):
- Have your books up-to-date before you sit down to do your taxes. This means reconciling your accounts too.
- Write off invoices that are no longer collectible.
- Prepare a fixed assets register, calculate depreciation, and make book adjustments as needed.
- Download your bank statements and payroll reports.
- Set up a time with your accountant to go over your year-end numbers and to get on their schedule to do your taxes.
How can you take advantage of this list?
- Highlight everything you have already done. It’s nice to strike things off the list right away to help you feel a sense of accomplishment.
- Schedule in anything you need to complete on your own. Sometimes it’s a matter of gathering the information and putting it in one place.
- Reach out to us if you need help or have questions. We know it can be overwhelming if you’re not feeling prepared!
Managing Taxes Without a Bookkeeper
We know that tax time isn’t your favorite time of the year. In the Profit First community, we love it because we’re already prepared and we’re ready to take what’s left in our Taxes account as profit.
As a business owner, you have the responsibility (and privilege) of filing your taxes with the federal government and at the state level. At the same time, tax time has a really bad reputation because it takes time away from business and life.
But we’d like to encourage you to shift your thinking around taxes. Paying taxes means that you’ve earned profit in your business. And while it might be painful to let go of those precious dollars, with Profit First you could be incredibly prepared too!
When money is tight, it’s common to want to hold onto it and avoid paying for help in your business. After all, you already have to pay your taxes. Paying someone to do your taxes feels hard. But having help with bookkeeping and taxes is actually one of the best financial decisions you can make (and we’re not just saying that because that’s what we do).
Let’s take a look at what doing your taxes looks like without a bookkeeper. These are must-do activities if you’re going to do your taxes right:
- Reconcile your books. If you haven’t been doing this monthly, you’ll have a whole year of transactions to take care of.
- Review any unpaid invoices in accounts receivable and get aggressive about collecting them. Having revenue from last year carry into the new year isn’t ideal.
- Ensure you have your employees’ and vendors’ correct addresses and prep both W-2s and 1099s for them, before the end of January.
- Prepare a fixed assets register, calculate depreciation, and make book adjustments as needed.
- Perform account analysis on all other balance sheet accounts to make sure all balances are correct and current.
- Match all transactions with their corresponding documents–receipts, bills, packing slips, etc.–to make sure you have the paper trail you need.
- Download bank statements and store them in a safe place.
- Download payroll reports and store them in a safe place.
- THEN get to work on your tax documents!
This is a truly abbreviated version of our 31-point checklist for the end of the year. So much more goes into ensuring your books are up-to-date and that you’re following the letter of the (tax) law.
Download the checklist and keep it handy throughout the year.
Reducing Your Tax Liability
You’ve done all the things and that tax bill isn’t quite what you expected. It’s a whole lot more!
When you work with a qualified tax professional, they can help you reduce your tax liability legally and stress-free. Because not every “tax deduction” is beneficial to you or a legitimate deduction, it makes sense to work with someone whose job it is to know what you can deduct or not.
So, how can we reduce taxes without reducing net profit?
Making contributions to your qualified retirement plan (SEP/SIMPLE IRA, Solo 401-K, etc.) through your business can reduce your federal income tax, but it will not reduce your taxable net profit. The cool and unique thing about this deduction is that the IRS allows you to make retirement contributions beyond December 31, up to the filing deadline of your main tax return, in order to maximize your deduction for the previous year.
Health Insurance Premiums
The health insurance premiums paid on behalf of the owner work very similar to retirement plan contributions: They reduce your federal income tax, but not your business’s net profit. Health savings accounts can be used to achieve the same objective. First, make sure you’re eligible for the deduction. For example, if your spouse has health insurance through their employer and they have the option to cover the entire family, you may not be able to claim the deduction through your business.
S Corporation Conversion
If your small business is profitable (especially beyond $50K/yr) and you file taxes on Schedule C, you may benefit from electing to be taxed as an S-Corporation. This strategy will help you to legally reduce self-employment tax. But be careful when adopting this strategy. Electing to be taxed as an S-Corp comes with increased compliance issues, which means more fees. You’ll have a separate tax return to prepare, and you’ll have to run a payroll for yourself (which will require payroll tax returns). This is best done with the help of a tax pro because they can help you make sure all of the extra fees associated with becoming and maintaining an S Corp do not eat up what would have been your tax savings.
Non-Business-Related Deductions and Credits
All business owners will eventually end up filing a Form 1040 (the main tax form for personal taxes), and it includes all of the credits and deductions that aren’t business-related. Make sure you are maximizing all credits and deductions outside of the business. These deductions won’t reduce your net profit at all but the tax savings can be great.
The main thing to remember about the 1040 tax return is that it includes ALL sources of income, as well as all of the available credits and deductions; not just the business stuff. The popular ones are the student interest deduction, charitable contributions, the Child Tax Credit, Earned Income Credit, etc. Reach out to your tax pro to see which credits and deductions you may qualify for.
It is possible to reduce your tax liability, if you know the right actions to take.
Taxes Are Done…But You Can’t Pay the Bill
One of the beautiful things about the Profit First system is always having enough in reserves to pay your taxes. But what happens when tax time rolls around and there’s simply not enough cash to pay all of the taxes?
First of all, we encourage you to start the Profit First system as soon as possible so the next time tax season rolls around, you’ll have the money ready. It’s never too late to start!
Here’s how to get that tax bill paid this year, while you’re waiting for that Tax account to build up for next year.
Get Clear On Your Numbers
First, you need to know:
- How much do you owe in taxes (federal and state), and
- How much you have in reserves
The difference is the short-fall that you have to make up. If it seems insurmountable, don’t worry. Start by using some of the methods to reduce your tax liability in the previous section of this article, then keep reading.
Is there enough in your profit account to make up the difference?
Look to your Profit account after the Tax account is exhausted. If there’s enough here, then use those funds to cover your taxes. The good news is that you won’t have to worry about IRS debt and unnecessary penalties and interest. But the bad news is that your Profit distribution will be short next quarter. That’s okay because one of the functions of the Profit account is to help eliminate debt. And IRS debt is high on the list of debt we want to eradicate, even if it’s preemptively.
Is there not enough money in the Profit account to cover the difference?
If there isn’t enough in both your Profit and Tax accounts to cover the taxes, then you should:
- Pay off as much of your taxes as possible using your Tax and Profit accounts,
- File your taxes, and
- Request to enter into an installment agreement (fancy word for “payment plan”) for the balance owed.
Paying down as much as you can eliminate some of the penalties and interest, especially if done before April 15. The installment agreement will allow you to pay the remaining tax debt over time. You will still need to set aside for the current year’s taxes while paying off last year’s balance.
How to Keep the Tax Debt Away
Once you’ve taken care of your tax obligations for 2020, it’s time to figure out why the Tax and Profit accounts were short on cash so you don’t run into this challenge again. Here are a few places to look:
- Do you need to adjust your Tax allocation percentage a little higher? This will be a recurring issue for you if your Tax percentage is too low.
- Did you spend money from the Tax (and/or Profit) account that wasn’t for its designated purpose? If so, set up and use these no-temptation accounts at different banks if you have to.
- Are you paying too much in taxes? If you are not sure, it may be worth it to consult a tax professional to verify. There may also be tax-planning opportunities to help keep them low.
You may need to adjust your budget to account for the new monthly minimum payments you’ll need to make. You’ll also want to use all of your Tax and Profit funds toward the debt until the balance is $0. But once the tax debt is gone, and you’ve set your Tax allocation percentage to the correct number, you will never have to worry about this issue again.
Let us help you! If you’re a wellness business owner, we’d love to help you get Profit First set up in your business so you don’t have to worry about those big IRS payments again! Fill out this assessment and book a call now!