As an entrepreneur, the responsibility of taxes and other financials falls squarely on your shoulders. This responsibility is one of the aspects of running a business that may not be very enjoyable, but it’s an important factor to your success and it’s something we all must deal with every single year.
To make things a little easier and help you prepare for a smoother tax season, here are five financial moves you should make as an entrepreneur (and you can’t afford to put these things off until April).
1. Make a Tax Checklist. Whether you’re a self-employed entrepreneur, or run an LLC, you’ll have to fill out a Schedule C to be filled with your personal tax return. Here’s a list of all the business expenses you’re eligible to claim in order to reduce your taxable income.
- Car and truck expenses
- Commissions and fees
- Contract labor
- Employee benefits programs
- Insurance (other than health insurance)
- Legal and professional services
- Office expenses
- Pension and profit-sharing plans
- Rent or lease
- Repairs and maint.
- Taxes and licenses
- Travel, meals and entertainment
- Other expenses
Put a check next to the ones you know your business paid out this past year, and put them in the appropriate categories. This will make it SO much easier on you at tax time, when you have the annual meeting with your accountant.
And since you doing this will save a bit of time and headache, you won’t to pay a bookkeeper or tax professional to organize your business transactions for you.
2. Run a Rough Estimate. Before heading into tax season, it’s smart to get an idea of what you’ll owe next April. It’s important to know where you stand, so you’ll have a starting point for planning the rest of your year-end tax moves.
Compare what you expect to owe with what you’ve paid so far. You may owe a bit more than you planned, and will have to set aside more funds to pay it. Or perhaps you’ll owe less than you thought and can put the money to work elsewhere.
Simply type in your information in this online calculator to find out the approximate balance you’ll owe, as well as your effective tax rate. You could also ask your accountant to perform an estimate based on your current financial reports.
3. Increase Retirement Contributions. If you have a Roth IRA, SEP IRA, or other type of retirement account, this is a great time to get an extra tax deduction before the end of the year. Or if you’re already on track to max out those accounts, see what other retirement options you have available to help lower your taxes and increase future savings.
After calculating a rough estimate of what your taxes will look like (see step 2), determine what retirement contributions need to be made, and how to get the maximum value so you aren’t leaving free money on the table. As a small business owner, you might be able to open a SIMPLE IRA or a Solo 401(k).
Finally, don’t forget about Health Savings Accounts. If you qualify, a HSA can be an excellent tool for an entrepreneur who need health insurance coverage, and allows your money to grow tax-free. Your contributions are tax-deductible, so in a way it’s like another retirement supplement that can be used when needed.
4. Plan for Next Year. Are there any major events coming up next year? Are you planning to expand your business, get married, move to a new location, buy new equipment? All of these plans will affect your taxes and financial situation, so take time right now to plan ahead for the coming year.
What will your business and life look like next year? This is a good time to write out your financial goals, as well as plan for future changes. Then once January 1st comes around, you can hit the ground running.
5. Pay Yourself First. Running your own business makes it easy to pay everyone and everything else first, and forget about yourself. But in order to make next year’s tax season a breeze, it’s important to set aside money for taxes, business savings, and even “fun money” for yourself.
Why? Because you don’t want to work hard all year round and have nothing to show for it, or end up with a huge tax bill you can’t pay. Open a separate bank account for estimated tax payments, and set aside at least 15-20% of your earnings from each payment you receive from clients or customers.
This will save you a lot of headache when April 15th rolls around, and you won’t have to scramble wondering how the tax bill is going to get paid.
Use these simple tips and you will be much better equipped to handle tax season and won’t have to fear the unknown.