Tax Planning 101
If you are like most business owners, tax season is a time of suspense. You might be asking “What is my tax bill going to be? I know I made more money, but I felt like I spent more too…” Doing nothing to plan for taxes can be costly, so there are a few things you can do to make tax season less brutal.
Save For Taxes Year ‘Round
Remember life as an employee? Sure it wasn’t pleasant having taxes taken out of your paycheck, but the sting isn’t as bad because you never saw that money in the first place. As a business owner, you have the money, but you should remember that some of your income belongs to Uncle Sam. Waiting until April to pay your tax bill all at once is a bad idea. In not only puts a strain on your cash flow, but you might not be able to pay it all at once.
Instead, keep about 15% of your gross earnings aside. Put it in a high-yield savings or money market account so you’re not tempted to use it as freely as a checking account, plus you’ll make a little extra money. Then, when April comes around you can pay without breaking a sweat.
You also might be required to pay estimated tax payments. These shouldn’t be ignored, and your best effort needs to go into making sure those get paid.
Make Any Large Purchases Before Year-End
If you have a large amount of cash at the end of the year, or you have been mulling a large purchase for your business, it would be a good idea to make the purchase before the end of the year. Anything you do up until midnight, December 31st will be applicable for the whole year. Pay some regular vendors in advance, purchase any equipment needed, inventory or office supplies.
One of the most effective cornerstones of tax planning is retirement contributions. Whether it is setting up a company 401(k) or a SEP IRA, putting money aside into your retirement account will have a large effect on your tax bill, and is one of the very few methods which allow you to deduct a payment that didn’t go to anyone else, just an account with your name on it. There are contribution limits each year, but every bit you can put away helps. For example, if you were the only owner of an LLC, and you socked $16,000 away in a SEP IRA, and you were in the 25% tax bracket, you would save $4,000 on this year’s tax bill. Great savings for putting money into one of your future retirement lifelines!