Simple Income Tax Planning for the Small Business

You took the leap. You have turned your dream into a reality. You have officially started your business. Congratulations! This is an exciting time, but it can also be a scary time. The Small Business Association states that about 30% of businesses fail in the first year. So how do you avoid becoming part of this statistic? How do you ensure the survival and ultimate success of your business?

If you google the web too long, you will be convinced that you need hours and hours of legal and accounting advice. But if you’re like me when I started my business, then you’re thinking “I have to keep my costs as low as possible.” So, what do you do? The first thing you want to ensure is that you have enough income to cover your expenses. And guess what expense can come as the biggest surprise? If you said taxes, then you are right! The last thing a new business owner wants to see is a huge tax bill at the end of the year. Unfortunately, this happens way too often. The good news is… you don’t have to be surprised at all. You just need to take a couple quick and easy steps to ensure that you aren’t spending down your income tax liability payments.

Just as you should be paying yourself a percentage of profits, you should also be setting aside your tax liability payments. If you don’t already have a separate bank account for your tax payments, you need to set one up NOW. By setting up a separate account you ensure that your tax liability is not spend on other business expenses or through owner withdrawals. When taxes are due, your tax liability payments will be readily available to cover that dreaded expense.

The next question you should have is: “how much do I set aside for taxes? Without looking at your specific financial situation, a good rule of thumb is to transfer 25% of your profits into the tax liability bank account. I also highly recommend that you make quarterly tax deposits beginning with your first year of operations. By paying your federal income tax and state income tax on a quarterly basis, you are reducing the likelihood that your tax payments are used on operating expenses or personal draws. Just think how great you will feel when your tax returns are completed, and you hear “you do not owe any additional taxes”. I know 25% sounds like a big hit when you are just getting started, but you can do this! By not having a tax liability at the end of this year, you are setting up next year to be an even bigger success. Buckle up, work hard, set aside your tax liability and enjoy the ride.

If you found this blog helpful, feel free to leave a comment. Or, if you have specific questions about your business tax situation, just reach out. We are here to help. Here’s to a successful year and many, many more to come!