New business owners often treat their tax bill as a surprise. For many, up until that point taxes are like a mythical medieval dragon; they simply don’t exist. Then suddenly, like Hydra out of the sky, there’s a massive tax bill that eats up personal savings or an emergency fund - leaving you wishing that merely complaining about taxes was tax-deductible.
As a small business owner myself, I understand the possibilities and risks that make “going out on your own” an alluring lifestyle. I love working with fellow entrepreneurs and small business owners. It’s a joy to help support kindred spirits and help empower them on their journeys. They bring growth and innovation to their communities. They are fun, smart, and scrappy.
So as a small business owner who is also a financial advisor, it would be remiss of me not to share the biggest mistake many of our fellow kindreds make in a topic that’s as sexy as a can of Spam for the new entrepreneur: TAXES.
Shifting Your Mindset as a New Business Owner
One of the biggest tax mistakes a new business owner can make is simply neglecting to even think about taxes. And therefore, not proactively putting money aside into a separate savings account.
The U.S. is a pay as you go system, so technically taxes are due when earned. When you are on a salary income, there's money taken out of every single paycheck because your employer is paying those taxes on your behalf.
But for entrepreneurs and small business owners, you are the employer.
If you are just getting in the side-hustle game, it's a mindset shift to understand that the income you are making is all pretax.
You may have the habits and mindset of an employee. You may think it's automatically after-tax dollars you're receiving when you start bringing in cash. Many entrepreneurs start out their working careers as W-2 employees. So, this can really be a problem.
Be Well Prepared for Your First Tax Bill
A new entrepreneur may get that first tax bill and suddenly it’s, “Crap, I didn't realize I needed to be saving for taxes!”. The problem can then compound because they're always “catching up” on that first year in business. Every year it seems like the tax bills snowball because they can never get caught up from that first year of being in business.
So how do you avoid this type of mistake (and avoid trying to claim your dog as a dependent)?
The tax game is played from whenever you first start making money.
As you earn money, create distinct accounts for business taxes, profit, and re-investing in the business. March or April can be too late for proactive tax strategies for first time, highly profitable, business owners.
Develop Good Financial Habits
What is the best habit you can create this year to stay on top of your taxes?
Pay attention to your money. It’s sort of a vague saying, but as a business owner myself, I've come to understand it differently now.
When you can see your entire financial situation with a bird's eye view, you realize taxes are just a part of it.
Have a Clear Picture of Your Financial Standing
The bigger picture includes a complete list of your assets and your liabilities, including ALL the details on them as well as your fixed and recurring expenses
But the data is not the only part. The journey to true wealth as an entrepreneur lies in also understanding: what are you working towards? Do you have clear numbers that you're trying to reach? Is it a lifestyle that you're aspiring to? What is “enough”, anyway?
Having a big picture understanding of your overall financial goals will make setting aside those taxes a lot easier.
Find a Financial Partner Who Really Gets You
You probably could figure out taxes in an isolated way on your own, but I think the better way to do it is taking a holistic approach with a partner you trust.
Plus, it’s more fun and less stressful than procrastinating until the last nanosecond to think about your taxes. Taxes are a product of your success! Sometimes the only thing that hurts a business owner more than paying income taxes is not having to pay income taxes.
Live a wealthy life, my friends.