The last thing you want to think about is taxes, am I right? But like it or not, taxes are a part of life. If you’re a normal American, you might be able to get by only doing them once a year. But as a small business owner, you’re doing them not once but up to five times a year. And unfortunately that little truth alone will scare many would-be-business owners into not going into business.
DO NOT LET TAXES SCARE YOU. I’m going to help you take the fear out of taxes. Once you remove the fear, it’ll just be another easy peasy regular task that you do because you’re a responsible business owner. Ready? Let’s do this.
#1 TAXES ARE 60% ORGANIZATION
Even if you hire a tax professional, you still have to provide him or her with your records. They don’t want a box of receipts. If you hand them a box of receipts, they will die a little on the inside and then charge you through the nose for failing to do your own bookkeeping. Taxes are 80% organization, and perhaps that’s the scariest bit about taxes. Most people are not organized in terms of their papers, bills, money, or records. If organizing doesn’t come naturally to you, you’re not alone. The good news is that you can teach yourself to be more organized! Get in the habit now while your business is small and easier to manage.
Hopefully you’re in the habit of looking at your numbers every month, but if you’re not I have a suggestion for you. As part of my list of five things you need to do before you quit your day job I talked about how as a business owner you need to be on top of not only your business finances but also your personal finances. Get in the habit of reviewing your income, your expenses, and setting money aside for bigger expenses and taxes. Looking at your bank account balance and saying “that should be good” and closing the tab, is not budgeting. I’m a big proponent of budgeting. I am convinced that creating a written budget is key to feeling in control and at peace with your finances.
I use a software called YNAB (You Need A Budget) for my personal budget and business budget. It’s not meant for a business, but since it’s highly customizable, you can create it to do whatever you want it to do. You also can have as many budgets as you want under one subscription -- so for the same price I can have a household budget and a business budget. (Side note: those should absolutely be separate, along with separate checking accounts, savings accounts, and credit cards!) YNAB makes my business budgeting a breeze! And they have a great report feature that allows me to quickly show my expenses come tax time. Sign up here to get a free month of YNAB.
What should you be keeping track of throughout the year?
Your total sales numbers from all your income streams
Your sales numbers broken up by state (to see where you owe taxes)
Your total expenses (broken out into deductible categories - YNAB can help with this!)
Your mileage report
You don’t want to wait to gather all these things once a year, trust me. I’ve learned the hard way that trying to put together a whole year of business mileage or expenses in one afternoon is a killjoy. And I’m all about keeping business FUN, remember?! It’s better to do these tasks on a monthly and quarterly basis. I created my monthly and quarterly business checklist to help me remember what bookkeeping tasks I should do on a regular basis. You can download a free copy in my Freebie library.
#2 TAXES ARE 30% KNOWING YOUR STUFF
There are two main tax categories you should know as a business owner: sales tax and self-employment tax.
Sales tax is for any goods or services that are taxable in your state. If you’re a lucky duck who lives in Oregon, well, you’re probably not reading this section anyway. Sales taxes have to be reported to your state government. In my home state of Minnesota, all this is handled on the Department of Revenue page found through the Secretary of State website. Sales taxes are due every quarter. As you collect sales taxes from customers, put them aside in their own budget category or separate bank account and don’t touch them until tax time. It’s not YOUR money, it’s the government’s money. So don’t spend it!
What about out of state sales tax?
The rules for this are changing a lot these days. Right now unless you have a physical presence in another state, you generally won’t have to collect or report sales tax unless you’re making over 100 transactions or $100,000 sales in that state. This is a general rule of thumb, you’ll definitely want to check out the details and stay informed about this as things change.
Self-employment tax is the “extra” tax that you have to pay to the federal government for social services (social security and medical). This is not income tax. Traditionally employees pay half and employers pay half. Since you’re both parties, you have to pay both. A good general rule of thumb is to save 30% of your revenue for taxes. These are due quarterly as well.
Note: once people hear that they have to pay 30% of their revenue to the government, they use that as an excuse assuming that business is no longer profitable and no longer worthy of pursuit. But don’t let the fear of “losing” 30% keep you from going into business. Scenario: you sell a product for $100. Your cost (or expenses) are $45. Your “profit” is $55. Taxes take 30% ($16.50), you keep $38.50. It’s true that you’re not making $100. But if you hadn’t done the sale in the first place, you wouldn’t have the $38.50. Would you rather have $0 or $38.50? I’ll take the money.
As far as anything else you don’t know, google it. Seriously. Whether it’s a term you’re not familiar with, or a tax form you need, google it. If you don’t know how to find an answer in today’s day and age, I’m sorry but you probably won’t make it in business. You’ve got to be scrappy and find answers for yourself.
#3 TAXES ARE 10% DOING THE WORK
Once you’re organized, doing the actual filing is easy peasy. That’s why I call this part only 10% of the work. Most everything is available online to file, which makes things absolutely ridiculously easy. Google is your friend. Find the forms you need and fill them out. And since you already have all your numbers organized, this should take you no time at all.
If you prefer, you can hire a tax professional. They’ll ask you for the same numbers that the forms ask for, and since you have that information available, it’ll be pretty easy to give them that info. A tax professional should also catch any big accounting errors and might have additional insight into deductions you might have missed.
Alternatively you can use tax software. We’ve used Credit Karma Tax the past few years because it’s 100% free. We have had good success with using it. But ultimately the choice is yours.
That’s it! Did my advice frighten you or help you? Remember that I’m just a fellow small business owner, not a tax professional or legal consultant. Even though I’m not exactly “qualified” to talk about taxes, I still like to talk about the hard things because they’re a very real part of business. The more we can talk about them and understand them, the less scary they have to be. Did my advice frighten you or help you?
Hey! I'm Christine, I'm an entrepreneur and small business owner who has learned by trial and error. I write helpful articles that help you take your next steps in business. Occasionally I like to mix things up and dash in a bit of lifestyle topics. Thanks for being here!