Small Business Tax Prep (it’s never too late or too early!)

Although tax season is officially over, I’ve found that for many people, questions about small business tax prep (among other financial queries) are just beginning. Unsurprisingly, writing that check to the IRS provokes 1 of 2 reactions. You 1. Hide, not wanting to know more. Or 2. Resolve: I will gain better financial command and be proactive about small business tax prep for next year.

Let’s face it: taxes feel overwhelming and unclear. It almost seems as if “normal” people aren’t supposed to understand. And also, let’s be real: money’s emotional. It feels like a big bully is telling you “Pay me lots of money, but you never know exactly how much nor where it’s going.” And while I wouldn’t say that I enjoy paying taxes, I take the responsibility seriously. To me, taxes are the membership fee to partake in my community.

This all feels more doable when you understand the basics and have a proactive plan. So today, I wanted to share 5 Q&As to help your small business tax prep – whether you need to catch up on 2023 or get yourself organized for 2024. It’s never too late – or too early!

1. I owe back taxes from prior years. It feels overwhelming and confusing. What do I do?

The unknown is always scarier than the known. If you owe taxes from past years but don’t know how much, start working with an accountant right now, and get the information. The longer you wait, the more it will pile up, both financially and emotionally.

Once a professional (not your aunt, who dabbles in taxes on the side) runs the analysis and tells you how much you owe, the total number may feel overwhelming. You’re allowed to feel that way… and you need to take action. No more hiding.

Look into the IRS’s payment plans. They’re very manageable with downright decent interest rates. Once you have the information clearly and cleanly, work with your accountant to make a plan. You’ll feel better. I promise.

2. What’s the tax rate on small businesses? In other words: how much should I save?

If you’re forecasting and budgeting for your business finances, bravo! This is a huge deal, and I hope that you’re proud. So when you’re looking at the year ahead, how do you know how much to save?

If your business is growing, your taxes won’t be the same as last year. But also, you shouldn’t let your accountant plug in arbitrary growth numbers (this could cause cashflow issues).

So here’s the simple answer. And I have to warn you: it seems too simple, but my gosh, it’s wild how well it works. We like to follow the Profit First model, which means: budget 15-20% of real revenue for taxes. If you’re new to this, I’d start with 20%, and then you can adjust downward over time. I’d always rather have someone save too much than too little.

As a reminder: Real revenue = revenue – cost of goods sold – subcontractors

I’m not going to get into the PF mechanics today, but if you’re intrigued and are in need of a simple cashflow management process, I highly, highly (highly!) suggest that you read Profit First.

3. Can I really deduct everything my accountant says I can?

You know me. We tend to do things a little bit, ehm… differently. If I’m around when you say “It’s a deduction!” you’re going to get a giant eyeroll. Don’t get me wrong: if you have an opportunity to get a deduction, sure, take it. But this is not a reason to buy something. After all, the money you “save” from most tax credits are pennies compared to the money you spent on the thing. So seize the opportunity, but justifying a purchase “because I can deduct it” is a little lazy.

But let me dive a little deeper: whether or not you should deduct everything you can depends on your personal and business goals.

Here’s what I mean: if you consider yourself a freelancer, contractor, or solopreneur who plans to stay that way, deduct away.

But if you’re a solopreneur or small business with a few employees, and you want to grow with dreams of selling your business (even if there’s the slightest possibility…), start acting that way now.

That means: embrace your larger business CEO Mindset. Here’s the litmus test I hold myself to personally: would it be okay if one of my colleagues spent our company’s money on this lunch, trip, car lease, etc? If the answer is no, I don’t count it as a business expense.

The more things you expense, the lower the value of your business.

4. What are quarterly payments?

If you are self-employed and will owe >$1,000 in taxes, you must pay quarterly tax payments. This means that you’re paying ~25% of what you estimate your total tax bill for the year to be, each quarter (January 15th, April 15th, Jun 15th, and Sept 15th). Have your accountant prepare your estimate; but you can use the back of napkin math above to approximate how much it’ll be and proactively save.

For example, if you estimate that your 2024 real revenue will be $500K, we’ll call your annual tax estimate $75,000 (15% of $500K). Plan to pay $18,750 for each of your quarterly estimated payments. To set yourself up for success, move this amount to another bank account each month. In this example, you’ll put aside $6,250 per month.

5. Can I separate business and personal taxes?

Especially for solopreneurs – but for many small businesses – personal and business finances swirl together, and it takes a sound system to keep them separated. Even if you have a streamlined system to pay yourself a salary and handle personal and business finances separately, chances are: you’ll have 1 tax return in the eyes of the IRS.

And while this is unavoidable if you’re an owner who’s not paid as a W2 employee (and chances are, you’re not), you can ask your accountant to break out which taxes are your company’s and which are your personal. You’ll still have only 1 tax return, but it’s possible to calculate the math of which is which.

We do this in our home, as I don’t want Ellevated Outcomes paying the taxes on unrelated income streams in my home (like our Airbnb); and likewise, I don’t want Dave to pay our business taxes. This math is beyond my personal paygrade, but it shouldn’t be beyond your accountant’s. I just wanted to let you know: it is possible to do, and you can ask for this preparation.

Conclusion

Circling back to the opening paragraph, I know that for many, small business tax prep isn’t the most inspiring topic. BUT working your way through these problems is actually hitting new business milestones. To reiterate, here are 3 to celebrate:

1. Owing taxes. This may feel like a head scratcher, but think about it. You owe taxes only when you make a profit. Milestone!
2. Paying off back taxes. You’ve paid off a debt. Celebrate!
3. Saving and making quarterly payments. Quarterly estimates signal a sophisticated business owner. A small business CEO who does this is on top of their business, proactive, and attuned to money and cashflow.

Lastly, I have to end with my standard caveat when we’re talking about subjects like this: we at Ellevated Outcomes are not accountants, nor lawyers (well, Cara Jackson is a lawyer 🙂 but she’s not giving official legal advice at Ellevated Outcomes).

We are small business advisors – an outsourced strategy department. So we are advising you through your business’s wider, bigger, and future-looking lens. So we want to work with you and your specialty advisors (your bookkeeper, tax accountant, and financial planner) to arrive at the right holistic solution that makes sense for you, your business, and your individualized goals.