A photographer we know paid her tax bill a few years back and had saved just enough to do so that year. At the beginning of the next year, her “tax adviser” said she should plan on paying the same amount again, which she did trusting that he was giving her good advice. She has a huge increase in business and profits that year and actually tripled her income! Her “tax guy’s” advice she got almost ruined her business. Because she only saved the same amount that she did the previous year, she now owed thousands of dollars she didn’t have and spent the next year trying to clean up that mess. We NEVER want something like that to happen to you.
(Disclaimer: This post is about simply covering your butt when it comes to taxes, it is NOT about HOW and WHEN you should pay yourself, cashflow, projections or irregular income scheduling which we cover in other posts. We are not certified financial advisers. All information found on here is for informational, educational or entertainment purposes only and should not be constructed as personal financial advice. Please consult with your own CPA to determine what is best for your own business).
The IRS stated in 2009 that about 8.2 million people owed the IRS 83 billion dollars that year. Pretty much the worst thing that can happen at the end of your year is to realize that you owe the IRS a big bill, and you don’t have the cash! Since we began running our own business back in 2007, we have never been hit with a tax bill that we didn’t have the money to pay. Why? Because we got good advice on how to pay our taxes and are passing it on to you today. It is really easy to make sure that this never happens to you, and we want to share with you the first part in there are 3 keys to follow to keep you out of trouble with Uncle Sam.
Step 1. Separate Business & Personal
The biggest mistake you can make is having personal and business money in the same account. Even if you are a wiz with Excel and have everything line-itemed out, you still have a mess on your hands if you ever get audited. You want a clear distinction between these two worlds at all times, and having them separate will make your life sooo much simpler.
Step 2. Get a business checking account.
Opening a business checking account with your bank is easy to do and the first step in getting all your business finances streamlined.
Get a debit card for the business too. We use this when we travel to rent cars, purchase gear online and use it for ALL purchases with the business. Now, we do prefer cash for our personal monthly budget because that keeps us from overspending, but for business, cash is hard to track and that is why we don’t use it for that. We want a paper trail of every transaction the business has had.
Debt tip: Don’t get a business credit card. Unless you are extremely good at ALWAYS paying the bill at the end of the month, then you are just asking for trouble. 76% of all credit cards do not get paid off at the end of the month and then you owe more money for whatever you bought. The business also fluctuates each month, so you can’t project exactly what you will make, so if you spend more than that, your credit card just got you in deep water.
(Note: this is our opinion about credit cards, so take it or leave it. But, running a debt free business has given us tremendous freedom! The less risk you have, the better).
You may be asking yourself, how do these two steps help me plan appropriately for tax season? No worries, we’re getting there! It’s all about baby steps! Come back next Thursday for the final two steps!