Why You Should Embrace Paying Taxes

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If you are paying taxes you are making money - HIGH FIVE!

Now just because you are making money and thus pay taxes on that money, doesn’t mean you shouldn’t exercise every tax deduction available to you. So while, yes, you make money, and you need to pay taxes, we will cover a few options on how you can lower that tax bill. But let’s start with what one thing you should not do...

GO ON A SPENDING SPREE AT YEAR END

I’m talking about increasing expenses to report a loss on your business.  The number of times small business owners talk or post on social media about going shopping so they can increase their expenses in order to lower their tax liability at year end...

Makes.Me.Cringe.

Remember when I mentioned financial temptation in the “Why you need a budget” post? This temptation can be at its strongest at year end. Sure that new Apple product would be amazing to own, but do you need it for the vitality of the business?

Further, I’m sure you didn’t start your business so you could report a loss because we can agree the purpose of running a business is to drive and maximize profit?

That’s the goal here at The Wellness Bookkeeper.

Well, maximizing profit comes with paying taxes.

And I’m completely cool with that.

When you decide to make purchases at year end to report a loss, you are essentially spending a dollar (aka your Profit) to save a couple quarters (aka your Tax Liability).

And I want to urge you to work to change that mindset because it’s limiting and crippling and will ruin your business.

Instead,  prepare your business by placing money aside for taxes and in lieu of playing dodgeball with the tax man, let’s shift your focus towards building the healthiest, most profitable business.

You can achieve this by adopting Profit First principles in your business. I will delve deeper into those principles on a later post. If you can’t wait until then, I strongly recommend purchasing the book, “Profit First” by Mike Michalowicz. Here is the link on Amazon.

Now, I promised some tax advice and here are some recommendations:

LIFETIME LEARNING CREDIT:

If you have a thirst for learning and enrolled in any program/course at an IRS “eligible educational institution”, you may be eligible for the Lifetime Learning Credit. Providing a credit for up to $2,000/annually, it can be claimed for any courses taken to improve your job skills. As an added bonus, and at the time of this writing, there is no limit on the number of years you can claim the credit.  Learn more here.

529 PLANS:

529 Plan can be established for your children, which provides a saving opportunity for future education expenses. Now, there is no federal tax credit for contributing to a 529 Plan, however, the growth of these funds are not taxable AND when college comes, and you use those 529 Plan funds to pay for college, you do so without incurring a tax liability. Additionally, 30 States offer full or partial tax deductions for those contributions. Check out the specifics here.

  RETIREMENT:

Earlier this year, I read an article in Forbes that states 34% of entrepreneurs have no retirement savings plan. YIKES! Let’s work together to decrease that percentage. You can save for retirement by establishing a SOLO 401K; SEP IRA; or a SIMPLE IRA. A Solo 401K is an option for you the solo business owner and your spouse. A SEP stands for “Simplified Employee Pension” and allows business owners to contribution to Traditional IRAs for their employees and themselves. Here is the breakdown on SEP Plans.  Lastly a Simple IRA allows employers and employees to contribute to traditional IRAs. Business exercising Simple IRA must employee no more than 100 people. Here is how the IRS breaks down Simple IRAs.

S-CORP Election:

Check out my blog post “Should Your Business Be an LLC or an S Corp”  for more details. But if you are driving profit over $50K and your an LLC, the S Corp could be a great match for you.

If you’re ready to ensure your business’ financial health with The Wellness Bookkeeper, schedule a complimentary consultation or subscribe to the Newsletter!

 

Thanks for reading. Please keep in mind that The Wellness Bookkeeper, LLC and the information contained herein is not intended to be a source of advice with respect to the material presented, and the information and/or documents contained in this website do not constitute legal advice and is not be held liable.

 

Single Member LLC - How Do You Pay Yourself?

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Great news! As a single member LLC, this is so easy to do - simply write yourself a check (or via electronic transfer) and charge it to Owner’s Draw from your business account.

As a single member LLC you are not an employee of the company, but an owner so therefore you do not need to partner with a payroll service and worry about withholdings.

This is because, in the eyes of the IRS, single member LLCs are considered

What exactly is a disregarded entity?

Basically, the IRS considers you, single member LLC owner, a sole proprietor. To explain further, your business’ profit (or loss) flows over to your personal tax return (via a Schedule C). The beauty of this is as you pay yourself you are not worrying about payroll, tax withholdings– you are just withdrawing from the company’s equity. Additionally, when you make periodic owners draws throughout the year, you are essentially taking profit distributions sooner than year end when profit distributions are typically made.  

In the most basic terms, owner’s draws made earlier in the year is an advance payment of expected year-end profits.

What’s important to mention is when you withdraw from the company’s equity, this is captured on your Balance Sheet and will not appear on your Profit and Loss Report.

Why is this important?

Because Profit and Loss is a report that takes your Revenue and minus Expenses.  As an owner, you are drawing from owner’s draw which is an Equity Account (that appears on your Balance Sheet). Therefore, your owner’s draw will not change your Profit and Loss Statement’s Bottom Line. The owner’s draws you make will show as decrease on the Equity on the Balance Sheet, but come year end close out, profits made will increase that capital account (also known as Retained Earnings).

But keep in mind, if you are making owner’s draws, you could impact your Cash Flow.

When I talk with prospective clients, the #1 thing they mention is this, “I’m profitable, but I have no cash.” This statement tells me that they are making owner’s draws and not factoring those draws into their statement of cash flows OR they have high Accounts Receivables (A/R)  and need to follow-up with clients to get the A/R level down and thus improve their cash flow.

But I digress– back to the question: How do you pay yourself?

Again, simply write a check (or electronic transfer) to yourself and post this withdraw to Owner’s Draw.

But, what about my tax liability?

Another great question.

So as we clarified above, you, single member LLC, are not a W-2 employee.

Instead, your tax withholdings are made via tax installment payments (typically this is done quarterly) to the IRS (federal) and your home state (in my case, it would be NY).

To file a quarterly estimated payment with the IRS, use Form 1040-ES. Here is the link: https://www.irs.gov/pub/irs-pdf/f1040es.pdf

To file a quarterly estimate payment with New York State, use Form IT-2105. Payments can be made online, but here is the link to a voucher form: https://www.tax.ny.gov/pdf/current_forms/it/it2105_fill_in.pdf

How much do I save?

I recommend to my clients with under $250K in annual revenue to set aside approximately 15% of their owner’s draw to cover their tax liability. I further recommend that they open a separate account so in between installment payments they have money saved to cover their tax liability.

Thanks for reading. Please keep in mind that The Wellness Bookkeeper, LLC and the information contained herein is not intended to be a source of advice with respect to the material presented, and the information and/or documents contained in this website do not constitute legal advice and is not be held liable.

Why You Need A Budget

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Maybe you’ve heard rags-to-riches business stories — a small candle company gets started in someone’s garage and becomes a six-figure success, or an app idea transforms technology (and a bank account!) overnight. Not every entrepreneur will experience that amazing mix of luck and hard work, but that doesn’t mean you can’t grow wealth in your business. It all begins with a budget. Here’s why you need a budget for your small business and how sticking to it can skyrocket your bottom line.

What is a budget?

Budgeting is a proposed income and spending plan for your business. And you know what they say: a failure to plan is a plan to fail. A budget places boundaries around your business and prevents financial mishaps. Without budgets, business owners run the risk of making uninformed decisions that could lead to mountains of credit card debt, loans you can barely pay interest on, and worst of all, discounting your products and services for a quick sale.

A budget serves as the compass for your business and its activities. For example, if you have income budgeted for one-on-one clients during August, but you are launching a group coaching offering, you are heading in the wrong direction and need to course correct. You may amend your budget to anticipate income from the appropriate product/service or reset and focus on building one-on-one client work as you previously outlined in your budget.

A budget is a great accountability partner, helping guide and shape your business growth.  

How should I budget for a small business?

Budgets should fit the cycle of your business. If you are a seasonal business, like a wedding photographer in New York, NY, your budgeted income in January, February and March is likely very different from your income in August, September, October. Conversely, your budgeted expenses are most likely not the same and should be modified accordingly.

I believe that every dollar earned in your business should be assigned a specific job. Here’s a few jobs you can assign your money:

  • Your salary: You should pay yourself each time you make a sale. By not paying yourself, you may be building resentment toward your business.

  • Your profit: I believe you should take quarterly profit disbursements.

  • Operating expenses: Based on the revenue in your business, expenses should be a certain percentage of your overall revenue.
  • Taxes: Yes, you should be putting money aside in an account for Uncle Sam. I recommend 15 percent of each sale should go into savings for tax time.

  • Cash reserves: I recommend building three months of expenses in this cash reserve. This can also be the place that you save money for those bigger investments, like salary for a new hire or a new website.

How to stick to your budget

We all face financial temptation, and it’s a big hurdle for any hustler. When faced with temptation, we’re more likely to create unrealistic budgets that are not aligned with the reality of our business’ current sales — both actual and projected.  

Some business owners believe they need to invest in high tickets items, thinking their sales will grow exponentially as a result. Think Field of Dreams – if you build it, they will come! But your business is not a movie starring Kevin Costner – it’s your livelihood. And if you have employees, it’s their livelihoods, too. Building budgets not based in reality and baked with temptation is known as silver bullet budgeting. You should never use silver bullet budgeting.

If you find yourself building a silver bullet budget or you have created a sound budget and are tempted to purchase something that is not already in your budget, call your bookkeeper. Don’t have a bookkeeper? Call your most financially responsible friend and share your desired high ticketed new budget item. Share all the details – what it would cost, how long it will take to create/implement, and what you know. Crunch the hard core numbers, and show the ROI on the high ticketed budget item.  

I’m willing to bet a few things:

  1. They will not give you a green light at the end of the conversation, for no other reason than the fact that they know that you are emotionally attached. Sound business decisions should never be solely made with emotion.

  2. If you can’t outline the ROI or how you will modify your operating expenses to absorb the cost of this high ticketed item – they will ask you to take some time to determine ROI and modification of budget and increased sales growth resulting. (P.S. Your bookkeeper could run those numbers for you.)

  3. They may outline why it may not be a sound investment and talk you out of it.

If your bookkeeper and friend can’t talk you out of it, hit ‘pause’ and do not commit for 72 hours. If you can’t seem to shake the idea of what this high-ticket investment will provide your business,  I want you to go back to your budget and begin considering areas where you can make operating expense cuts. Under no circumstances can you cut your paycheck, your profit or your taxes – these areas are totally off the table.  

The bottom line

Creating a budget that fits your current business is the only way to go. You can still invest in your business to initiate growth, but a solid budget will help you understand where to best put those investment dollars to maximize your profits and hard work.  

 

Thanks for reading. Please keep in mind that The Wellness Bookkeeper, LLC and the information contained herein is not intended to be a source of advice with respect to the material presented, and the information and/or documents contained in this website do not constitute legal advice and is not be held liable.

Should Your Business Be an LLC or an S Corp?

Congratulations! You’ve decided to start your own business. Whether you’re expanding a side hustle into a full-time gig or growing your team of employees, it’s wise to legally protect your business and your assets. But choosing a legal entity, or legal structure, for your business does more than CYA — it can save you money through tax breaks and exemptions. Here’s how to decide if your business should be an LLC or an S Corp.