What does it take to run a business successfully? That is the question we’re answering in this series of articles on business organization—all the legal and financial nitty-gritty that needs doing beyond the exciting idea you had when you decided to start a business. One of those big nitty-gritty details is managing the financial accounts and filing tax returns.
Like it or not, owning a business means thinking about taxes on that business. It means keeping close track of your financials, not just so you have a clear sense of revenue and cash flow, but because the government wants to get those tax dollars.
We are not tax specialists or accountants, so you will want to consult with the professionals you trust in those areas. But we wanted to share some basics about how to manage taxes as you run your business.
Managing Your Financials
How do you minimize the tax burden of your business? It starts by keeping good records. When you first start a business, you do a little bit of everything, including playing the role of CFO along with CEO, VP of Sales, etc. You have an understanding of what is coming in and what is going out in terms of the flow of money. As you grow, you will hire people to handle the day-to-day money management.
But, at some point, you are going to want to move from a more basic form of compiled financials to audited financials. That’s right! But why would you want to submit to an audit on purpose? On our podcast, we spoke with tax advisor Ricky DeHamer who suggests having your financials audited. Yep, on purpose. Audited financials are taken very seriously when you go to a bank for financing, and they are an added check against anyone inside your company doing anything fraudulent with your company’s hard-earned revenue.
And while the day-to-day bookkeeping may not be your strength as an entrepreneur, you should be regularly, some say weekly, looking at your financials so you know exactly where things stand at all times.
Filing Your Tax Return and Tax Planning Throughout the Year
So, first and foremost, know where you stand financially. Then you can get a clearer picture of where you stand in terms of your tax liability.
Managing and minimizing your tax burden is not a once-a-year sprint. It is a year-long marathon. That’s why your tax professional should be more of a tax planner, rather than just a tax preparer. This is more than running your data through Turbo Tax. Tax planning is about making decisions ahead of time to minimize tax liability, rather than realizing too late that you are paying taxes that you would not have needed to if you would have structured things differently.
How is your business structured? If you are just starting with a business idea, check out the article I wrote earlier about corporate structure. If you structure as a C corporation, you’ll pay income tax at the corporate rate. If you decide on S Corp status or LLC, the income will be considered as a “pass-through” and taxed as regular income.
According to the IRS, “Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.” So if that is you, plan on making quarterly payments.
There is a lot to manage here as your business grows. Beyond sales taxes, here are a few other areas to be aware of especially as you scale up and consider new hires.
- FICA/Self-Employment – If you have employees, you and your employee are each paying half of the 15.3% for Social Security and Medicare FICA tax. If you are a sole-proprietor or otherwise self-employed, you are paying the full amount.
- Payroll Taxes – Beyond Social Security and Medicare, payroll taxes include federal income tax withholding, and federal and state unemployment taxes. Some companies hire a payroll company to manage the whole process including the taxes.
When it comes to business finances and taxes, it comes down to this: know where you stand and have a plan. None of us love taxes, but if you manage your financials the right way and work with a tax planning professional, you will minimize your personal and business tax burden.