Tuesday we shared the first two keys to avoiding an unexpected tax bill. Today, we continue on with the final two steps!
Step 3. Set aside taxes EVERY time you pay yourself
The easiest way to make sure you NEVER get hit with a tax bill that you do not have income for is to set aside taxes any time you pay yourself. This makes you pay yourself based on your CURRENT income, and not a PROJECTION of your income. This is why we have never been surprised with a tax bill and always had the money to pay it. Example: – We get paid $5,000 in total payments for our products and services for the month. – We have $500 in expenses to fulfill those products and services, so we pay the $500 of business expenses directly out of the business account using our debit card. – It’s the end of the month and we decide we want to keep $1,500 in our account for cushion (saving for gear/upcoming expenses, etc), and we now are ready to pay ourselves the remaining $2,000*. – We transfer out the $2,000 into our personal checking account and divvy up the money as follows:
25% ($500) to a separate (non-business) checking account which is solely for holding our taxes
10% ($200) to a separate (non-business) checking account which is solely for holding our tithe (this of course, is how we operate our money, but if you are not a believer and do not tithe, then skip over this line!)
– This leaves a remaining $1,300 that is “free and clear” to pay bills/save, etc, because taxes have already been paid on it. – Now when it comes time to file our quarterly estimated taxes, we simply cut a check for whatever is in our “Taxes” account. Done! Simple as that! We have done this every year and have either owed nothing, had a small return, or owed a small amount. Side note: Getting a tax refund is not the best thing! It may seem like a bonus, but imagine the things you could have done with that money throughout the year (like maybe invest it and having it grow and make you more money, or use it to pay off debt). When you get money back, that means the government got to use your money instead of you using it. You want to owe either nothing or just a small amount. *For those of us with irregular incomes, do make sure that you’re putting money aside for the months where you know you won’t be having much income coming in. Make sure you’re always looking ahead so you don’t find yourself wishing you hadn’t bought that lens the previous month because you need to pay your mortgage this month.
Visit this post to watch the video on how to plan your finances around an irregular income.
Step 4. Hire a professional business tax accountant
You always want to be SURE that you are doing what is legal, right and smart in your business. Hiring a professional that you can trust is extremely important. The last thing you EVER want is the IRS knocking on your door. They can literally take money out of your bank account or put a lean on your house if they choose to. You don’t want to mess with them. Now, depending on your income level, 25% may be too little, but until you are netting a good chunk of change, you don’t need to set aside more (always discuss this with your tax professional).
How to find the right tax guy
1. Dave Ramsey ELP’s (Endorsed Local Providers) For years we have recommended this service to help you find someone who is trustworthy, and our tax guy (David Sensing) is a Ramsey ELP from Tax Alternatives in Nashville. They are the best if you live here in town!
2. NinetyNine Beans This company is owned by a good friend of ours Jason Aten who has been creating content and helping photographers start out right for many years. He is a brilliant business mind and this company is really cool because it is all about what you need as a shooter. Do you have a crazy tax story that you want to share? Let us know about it in the comments below, or feel free to ask any questions or make any comments you like!
(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).