4 Steps to Tackle Tax Time Like a Boss
Self-employment has so many advantages. If you aren’t on top of your financials, one drawback can be TAX TIME! Does thinking about taxes make your heart race? Do you panic when you think about the results of last year’s tax return? Can you feel the stress building as the filing deadline gets closer? Are you still working at paying last year’s bill?
If I’m hitting the nail on the head, know that you are not alone. Many entrepreneurs and self-employed individuals are right there with you. Believe me when I tell you that it doesn’t have to be that way. With a bit of planning throughout the year, you’ll be ready for tax time like a seasoned pro. Let me walk you through some simple steps to prepare for next year.
1—Know your income.
This may sound obvious, but it’s not unusual for me to receive a blank stare when I ask my self-employed clients how much money they made the previous year.
It is natural to focus on what we love and what generates income, but truly knowing your numbers can help you make better decisions. I encourage you to stay on top of your numbers. This doesn’t have to take a lump of hours every month or quarter. With solid systems in place, it can be accomplished in a smaller amount of time. Tracking your numbers more often will not only give you a clear picture of your income, it will also save you time next tax season.
Next level:
If your business is growing and you’re starting to outsource some tasks, it might be time to hire a bookkeeper. This year, I have enlisted someone to keep track of my financials. This may seem crazy, given my line of work. However, doing so allows me to spend more time with my clients, because that is what lights me up.
2—Know your expenses.
Did anyone out there just roll their eyes? You’re probably thinking, of course you need to know your expenses if you’re running a business. Still, many self-employed people don’t stay on top of this important task. The thought of sorting through numbers, spreadsheets and a pile of receipts could be on your to-do list…right after having a root canal.
Waiting until tax time to know how your expenses stack up is like taking a pregnancy test, then waiting nine months to check the result. Finding out if your business was profitable isn’t something you should learn at tax time. You need to know your business’s financial situation on a monthly basis. If you don’t, how are you able to make informed spending decisions?
Next level:
Implement a system that segregates the money you plan to spend on business expenses each month, week, or whatever time period will best support you. If you are tracking after you spend, you can’t go back and undo overspending. Make a clear plan for the amount you want to spend each month and use a separate account for expenditures. This will help you be more intentional with your spending.
3—Calculate your monthly or quarterly net income:
Once you’ve invested some time to accomplish the first two items on this list, the third task will be easy. Calculating your net income is simple math—income minus expenses.
This is the most important number to know. If you’re running a business and don’t know if you are profitable, that’s a problem. If you don’t know your net income, you can’t plan for tax time. Knowing your monthly net income will allow you to make better business decisions and plan for your future.
Next level:
If you’ve been in business for a year or more, look back at your monthly net income for the previous twelve months. Look for patterns of higher and lower months. This information can help you with setting monthly income goals and other business planning.
4—Set money aside for taxes on a regular basis.
Tax time comes at the same time every year. If you weren’t ready for it this year, don’t make the same mistake going forward. Even if you follow the above suggestions, you may still be hit with the stress of owing money at tax time. By saving regularly, you can alleviate this stress and be ready for next year.
If you want to be more prepared, but you’re not ready to dive into all the numbers, there is still hope. Start by reviewing your information from last year. How much did you owe last year? Chances are, next year you will owe the same amount, or possibly more. Take the amount you owed last year and divide it by twelve, then plan to save that amount each month. If your business is growing, increase that amount. This isn’t as accurate as basing your information on actual, current numbers, but it’s a good first step in the right direction.
Next level:
Sit down with an accountant and discuss your anticipated business income and expenses. Get an estimate on what you will owe for the current year. Meeting with your financial professional once each quarter, or when there are significant changes to your tax situation, will help you stay on top of what you will owe.
Knowing your numbers is key to being ready at tax time. Few people find it fun, but it’s a necessary part of running a successful business. Don’t let tax season take years off your life. Invest a little bit of time on a regular basis or hire a bookkeeper, not only to help with taxes, but to gain a better understanding of your business. If you are really ready to get your financial $hit together, sign up for my free email mini course, where I offer you set out even more steps for you to take control of your business finances. Click the button below to get yourself signed up!
