How do I know I'm paying what I owe for taxes?

What keeps you up at night? For most small business owners, it’s taxes. There are many pulls on an owner’s time and attention, but I would venture to guess that income taxes is one of the biggies that need to be better understood by most. Lack of understanding naturally creates anxiety and fear about this critical aspect of owning your own business.

One of our primary goals here at Patrick Accounting is to help you understand and manage this pain point and to help ensure you don’t run into any nasty surprises when you file your annual tax returns. No one wants to be blindsided by an unexpected balance due, and it’s not a good idea to overpay either.

Here are some ways we can work together to be sure those nasty tax surprises don’t derail your business’s success.

Make sure your books are up-to-date

Communication with your accounting team and responding to requests for accounting information helps our team ensure your books are accurate and reflect the true picture of how your business is performing for tax planning. We are often careful to ensure everything is correct for year-end, but making this an ongoing habit gives you the best and most helpful information for making business decisions and projecting your tax picture for the year. We send most of our information requests through the portal, so be sure you are staying on top of any pending messages or to-do’s.

Keep your accountant informed of any changes

Changes in your business structure, including changes in ownership percentages, are very important for your accountant to know when they assess where you are on the tax front. Tell them about any significant expected changes in your revenue stream or big expenses you anticipate incurring before year-end for your business.

For flow-through entities such as partnerships, S-corporations, and sole proprietorships (95% of our clients!), this also includes changes in your other items of income/deductions that are also reported on your personal tax return. We don’t know what we don’t know, so we run our tax projections assuming all that “other” stuff is the same as the prior year. If you had an additional $100,000 of income from a retirement plan withdrawal, with no taxes withheld, that would make our uninformed projections unusable. Communication is key!

Stay Ahead in determining your estimated tax liability

Regularly looking at your estimated tax owed can put you ahead in the estimated tax payment game. If you know your tax liability earlier around June of the year before the return is due the following April, it will allow you to plan and budget for quarterly estimated tax payments more efficiently. Your payments are due on specific dates throughout the year, such as April 15, June 15, September 15 of the current year and January 15 of the following year. Filing on time means your accountant will have the accurate information they need to base those estimates on for the first payment, which is April 15^th. If you know your business is going to go through a significant change, it is best to communicate that with your accountant as well so the quarterly payments can be adjusted. Otherwise, you may end up owing a LOT more than you anticipated the following year. In short, the more you stay ahead, the better you will avoid surprises.

Be realistic

One of the unfortunate side-effects of having a profitable business is income taxes. At Patrick Accounting, we do what we can to advise our clients on how to manage the available ways to reduce taxes, but there is no magic fix to eliminate taxes from the picture if you are making money. You, with our help, can control how you manage your tax payments to give you an advantage when those tax bills come due. It feels a lot better to have a few dollars available to apply to the following year, instead of having to write a big check at tax time. For higher income years, knowing how much to set aside for the tax bill and what to expect gives you much-needed peace of mind.

Keep this Rule of Thumb in mind

To estimate how much you should be putting aside for taxes yourself, there is a rule of thumb that might be helpful. For most taxpayers, you can assume that you will be paying 25%-30% of your net income in income taxes. In a very simplified example, if the only income reported on your personal tax return comes from your business, look for the year-to-date Net Income reported on your business’s monthly financial statements (less any non-taxable items such as PPP forgiveness and plus any non-deductible expenses such as 50% of meals and penalties paid). Multiply this net taxable income number by 30%, and this will give you an idea of what the tax on that net income will be.

There are MANY items that can affect this calculation, so use this rule of thumb carefully, but it often proves to be correct. That is why it is a rule of thumb!

Special tax tips for growing businesses

Times of growth or expansion often come with questions and uncertainty about changes in your tax picture. My number one word of advice is to communicate often with your accountant during this time! Additionally, use the “rule of thumb” mentioned above to keep a handle on how much tax you are incurring and set that amount of cash aside each month. Having additional cash on hand to meet the tax burden will be invaluable when it comes time to make those payments.

Don’t ignore your taxes

The worst way you can deal with the unpleasant reality of paying taxes is to ignore the subject. It has a way of rearing its ugly head when you least need that, so the best thing to do it is to be proactive. We are always happy to help answer questions, run projections for you or just let you bounce things off of us. This is one nasty surprise that can be managed and planned for, so you can save those sleepless nights for other issues.

Looking to learn more? Check out our article about how to stay on top of Employment Taxes.

If you’re already a client of Patrick Accounting and have additional questions about your tax obligations, join me at my monthly office hours or give our office a call to set up a time to talk.