As entrepreneurs, we wear multiple hats in our business—we are the visionary, technician, and manager—all rolled into one. Although we might be playing many roles, our key responsibility is to make sure our business has a solid financial foundation. And an important part of that foundation, that is often overlooked, is getting a handle on our business taxes.
As a financial planner, I work with many small business owners who have questions and concerns about their taxes. From listening to their stories and trying to help them, I’ve learned some of the key challenges facing businesses today. Here are my five tips for entrepreneurs as we enter tax season.
1. Hire a tax professional
When you start a business, you will likely have to take on multiple expenses, and make decisions about whether to invest in a product or service right away—or wait until your business is more established. One expense you don’t want to skimp on is hiring a tax professional. A common mistake is waiting until tax season to hire someone. There is a difference between professionals who just prepare your taxes, and those who actively engage in conversation with you throughout the year. I recommend hiring a tax professional who will be your collaborator. Among other services, tax professionals can help you determine what form of corporation best matches your business expenses and answer questions each quarter.
2. Don’t mix personal and business expenses
Start your business off on the right track by opening a business checking and savings account so that you can keep your personal and business expenses separate. This will save you time at the end of the year when you organize and report your expenses. Most importantly, you will be prepared for the worst-case scenario. If a client sues, and your personal and business assets are commingled, your personal assets could become attached to the lawsuit.
3. Keep good records
Most entrepreneurs do not know which expenses are tax deductible and which aren’t, which is why it’s important to keep meticulous records of all expenses throughout the year. During your tax preparation, your tax professional may ask you questions that could uncover new areas where you can save on taxes specifically available for your type of business.
4. Save to a retirement account
Many entrepreneurs leverage their business expenses as the primary method of lowering their taxable income, sometimes to the extent that they show almost no income for the year. If you are among those spending frivolously at year-end, consider opening and investing in a retirement account instead. The best retirement account for your business will depend on the structure of your company and number of employees. The goal is to save money while also reducing your taxable income.
5. Set aside money for taxes
There are not many guarantees in life, but paying taxes is one of them. Make sure to keep up with quarterly tax payments, and be prepared to pay anything that you might have missed in April. A good guideline to follow: put 25 cents of every dollar you earn into a savings account. You won’t be caught off guard by additional taxes, and any money left over accrues in a savings account.
