Five reasons business owners fail at tax planning and how you can avoid being one of them
Tax planning is a growing problem for small businesses.
Fortunately, however, business owners don’t have to suffer from the stresses and strains of tax planning once they know how to prepare themselves in advance.
That’s what you’ll learn about in this blog.
Specifically, you’ll learn why it’s essential to start tax planning now. That tax planning is not as arduous, tedious, or as dull as you may think.
You’ll also discover three easy methods savvy business owners put in place to pay their taxes in time. And I give you five easy steps to start tax planning right now.
So, without further ado, let’s jump in with a discussion on…
The first reason why business owners fail in tax planning
Put simply, they find it confusing, complicated, and so avoid doing it till the last minute. Or even worse, try to complete it themselves in a hurry, which is a big mistake.
If you’re a new business owner, then the first thing to do is seek professional advice. Filing a tax return is a complicated business – not one to be tackled by yourself.
The complex codes alone can leave you in a cold sweat. Not to mention the different rules for the various business entities can make your head spin. So be kind to yourself, seek out a CPA or contact us now; we can help you find one.
The second reason business owners fail in tax planning
Is that they would rather do anything else than deal with their taxes. It’s all so complicated and can be frightening if submitted incorrectly. In error, they may pay too little tax or too much and find themselves paying a hefty fee to put things right.
The good news is, with a little education and support from a professional tax adviser, tax planning can be an enjoyable experience.
The third reason business owners fail to put a tax planning strategy in place
Is because they do not know there is such a thing. Maybe these business owners have been ill-informed or are too busy with the myriad of business demands on their plates. That tax planning sits all on its lonesome woefully low on their ‘to do’ list, if at all. They may feel there are far more exciting things to do than put a tax plan in place. I get it. I run a business too.
But if there is one thing business owners need to know, tax planning does not need to be as arduous or is as tedious as they may think.
I understand it’s a pain and something you’d prefer to avoid, like going to the dentist twice a year. Still, with a little planning and meticulous record-keeping throughout the year, tax time will not be as daunting as it may first appear.
If you decide to make it a habit to plan your taxes ahead of time, you will be ahead of the curve, something most businesses cannot boast.
Imagine the control you would have over your finances and the money you will save. Imagine how good that would feel.
The fourth reason business owners fail to put a tax plan in place
They may not have gotten into the habit of putting aside 30% of their income ahead of time.
John Hewitt, the founder of Liberty Tax Service, says,
‘The total amount you should set aside to cover both federal and state taxes should be around 30% to 40% of your business income.’
The 30% rule is quite a broad subject and not one that can be fully discussed here. As always, seek advice from a professional who can guide you in these matters.
To give you an idea, though, here are three methods savvy super organized business owners put in place to pay their taxes in time.
Method #1: Quarterly Method
If they have not been in business long or are filing taxes for the first time, they use the per-payment method.
Here is how it works.
- They set up business savings account solely for tax payment purposes.
- As soon as they are paid, they put 30% of their income into their ‘tax payment’ savings account. From this account, they pay their quarterly tax bill.
Method #2: Monthly Method
If this is the first year their business has turned a profit, then the monthly method is what they put in to place.
Here is how it works.
- They calculate their average monthly income from the first of the year until the present point.
- Then they divide it by those months, e.g., January through July. The total is their average income over the last seven months.
- Then they calculate 30% of their average monthly income.
- It’s this amount that they place in their ‘tax payment’ savings account every month.
Method #3: Yearly Method
Suppose they have filed a tax return for their business the previous year and don’t expect their business income to increase or decrease dramatically in the coming year. In that case, the yearly method is what they chose going forward.
Here is how it works.
- They take last year’s total business income and divide it by four.
- They calculate 30% of the quarter amount.
- Then plan to save that amount in their ‘tax payment’ savings account every month.
Budgeting 30% of your business income is only part of the solution. In an ideal world, paying as little taxes as possible is the ideal. Tax planning is the answer.
The fifth reason business owners fail at tax planning
They don’t know which tax form they need to complete because they are not aware of which tax bracket their business belongs.
Many of my clients come to me and find they are in the wrong tax bracket – from no fault of their own.
To avoid this, savvy business owners seek advice from a CPA who can help them set up their business in the right tax bracket for their business entity.
To check you are in the right tax bracket, contact us now, we can look into this for you.
Why is tax planning so important?
Here are five reasons in no particular order:
- All financial decisions have a tax impact.
- It allows you to make changes in spending if you need to and ensures all data is complete and accurate.
- You avoid costly fees when you get it done right before tax time.
- It improves the probability of meeting your financial goals.
- Could affect your retirement if not planned early enough.
So, please take my advice, know your business entity, check your tax bracket, and put aside 30% of your income.
Here are more reasons why tax planning now is a good move
- Reduce your income,
- Boost your pension fund,
- Increase deductions, and can
- Take advantage of tax credits.
The real secret to tax planning is keeping good records, recording all transactions as soon as they happen, or at the end of each business day. And storing all tax-related documents in a separate tax file where you can access them quickly and easily.
The worst way to go about doing tax planning is to leave it until the last minute or tax planning by oneself.
Another good way to reduce stress is to gain personal knowledge about tax filing and small business taxes. In this way, you will feel confident and avoid unnecessary headaches come tax season.
Never underestimate the power of tax planning to help you make wise money choices now and way into the future.
If you plan your taxes ahead of time, then you will enjoy the financial benefits later. Want to know how? Contact us here.
Ready to start tax planning now?
Here are five easy steps you can take.
- Get your Cash Flow Statement ready
- Ensure your Balance Sheet is in order
- Print out your Income statement (profit and loss statement)
- Know your tax bracket. And then,
- Contact your CPA.
Congratulations! You just learned that tax planning is not as arduous as it first may appear. And by putting simple healthy financial habits in to place, tax season will go a lot smoother.
Heck, you may even save some money!
To that end, let’s quickly recap what you learned:
- You learned that completing a tax return by yourself is not such a good idea.
- You found out how to set aside 30% of your income.
- Plus, you discovered that planning your taxes ahead of time is the smartest move you can ever make for your financial future.
If you haven’t already done so, contact us now. We can help you get your paperwork ready, quickly and easily. And once that’s done go contact your CPA and start tax planning with confidence.
Then give yourself an enormous pat on the back because you’re now on your way to making tax planning a part of your business routine for financial success.