There is a saying that you have probably heard. It goes like this, “Nothing is certain but death and taxes.” My favorite version adds in, “And we’re not sure about death”, which goes to emphasize exactly how certain taxes are in business. Not paying or allowing for taxes is one of the most certain ways to fail, and fail big, when it comes to being a self-employed entrepreneur.
Here are some simple tips to avoid common tax pitfalls. Now, these are simple tips, so don’t expect insider information. But like they say, sometimes it’s the simple things that get you in trouble.
Simple Tax Tips for the Self-Employed Entrepreneur
Pay the Taxes First
This is the most important rule to follow when it comes to being an entrepreneur. You MUST pay your taxes first. Most self-employed people will be using the accrual method of handling their finances, which means you handle your finances as the money comes in from your business, whether it is consulting, a web site, or you are exploring how to start a clothing business.
The best rule to follow here is to pay your taxes as you get the money. Try to build and maintain the mindset that just because the check is made out to you, it’s not all your money. As soon as the check clears, take a percentage out for taxes. In IRS terms, this is for your Estimated Taxes.
You will find that having a separate account dedicated to tax funds is the best way to manage your taxes. This makes it clear as to which money is not yours. Sure, you can try to manage a single account by using a spreadsheet and writing tax entries but having the funds mixed in with your other mone makes it all too easy to tap into it between income. Avoid this temptation by having a dedicated place for the taxes.
Pay The Correct Percentage Up Front
With luck, you may have an understanding as to what percentage of your money you need to set aside for your taxes. You want to make sure that you have all of your taxes covered. The last thing you want is to have a big tax bill when it comes to that time again.
But by the same token, you don’t want to overpay the IRS and wait for the money to come back in a refund. You probably have a need for that cash you worked hard to earn and giving Uncle Sam an interest-free loan for a year just isn’t in your best interest (pun intended). You need that money to work for you this year.
If you are just starting out, consider an average sum to withhold. Now, situations vary widely and I have no idea as to your circumstances. But if nothing else, consider taking 18% off the top and putting it into your tax account. Time and experience, along with a tax season or two, will allow you to fine-tune that percentage to an optimal value for you.
Pay Your Quarterlies on Time
Now that you have that tax money collected, be sure to send it to Uncle Sam before you are tempted to use it for another purpose. Currently, you are required to pay your quarterlies, as the name suggests, four times a year. The IRS will certainly take your check, or you can hop online and pay them directly from your tax account.
Nothing feels better than getting that money out to the IRS, and as an entrepreneur, it should leave you with a little less worry. Just note that the payment dates for quarterlies fall in June for the second payment, not July as you would expect. You can find out more on the IRS website.
Collecting and paying taxes on time is the best way to stay out of trouble with the IRS. They have many tools to make sure that they get their part, so go ahead and give it to them up front. The last thing you want is tax problems, and instead, focus that energy on growing your business. In today’s financial environment, that is the best way to make the system work for you.