I know it is July and most of us in the Northeast are either on vacation or navigating camps and other changes of schedule for the summer. Finances, especially if you have feelings around them, are probably the last thing you want to think about. But if you don’t plan for things like taxes during the year, then there is not a lot you can do to change the outcome after the year is over.
You cannot save if you don’t plan.
While there are some tax strategies you can use to reduce what you owe after the year ends (such retirement funding), most of the strategies need to be put in place earlier to take advantage of savings. If you have the whole year to maximize, that is best, but there are still options to put in place even midyear.
Assuming a percentage is not always accurate.
I’ve heard people give the advice that if you are self-employed, you should just put away 30% of what you make in revenue in another account for taxes. While this is a good idea so you have the money for taxes when they come due, it doesn’t look at the whole financial picture and it likely will be too much. It is good that you’d have extra cash leftover after paying those taxes, but it is also possible you could have earned more money in interest or investments off that money or used it to buy equipment or make improvements on your business space.
Tax estimates look at the whole picture.
Most households are not made up of only one person working for themselves in their business. Taxes are paid on the profits of the business plus other income, such as W2s, dividends, real estate income, etc. To come up with the most accurate tax percentage for the household, you want to look at all income less deductions, such as the standard one or child tax credits. Even if you have an SCorp that files a separate return, that income still flows through your personal tax return and must be accounted for.
Reasons you should act sooner rather than later:
Avoid penalties.
The IRS and the state will charge an interest penalty on any amounts owed over $1,000 when you file your personal return. The IRS rate right now is 8% and it compounds over the months outstanding of the amount owed. On $1,000, it may be a minimum of $80 owed, but could be much higher depending on the amount of time the tax is outstanding.
Peace of Mind.
People have a lot of fear and anxiety over finances and taxes. If you are unaware of your tax rates or what you think you may owe throughout the year, you may be worrying about whether you are doing it right or if the IRS is going to throw you in jail. It is better to have a sense of what your tax burden is rather than worrying about it.
Better management of cash flows.
While no one wants to really pay quarterly, it does even out your cash flows by paying throughout the year rather than in one lump sum when you file. It gives you a good sense of what you need to come up with for payments each quarter and plan appropriately.
CPN Accounting is now offering quarterly reviews where we will look over your numbers, plan for your business year, and discuss any tax implications.
Book a call if you want to learn more about how we can help your business!