3 simple steps to prevent a high tax bill from eating your profit

Let’s face it. Nobody really LIKES paying taxes, especially business owners and entrepreneurs. In all my years in the financial space, I have yet to meet the business owner who is really enthusiastic about tax time!

But sometimes, a business tax bill is more than just a nuisance.

Sometimes, you get an unexpectedly high tax bill that brings a shock to the system and a hit to your bank account.

This is especially discouraging when you’ve actually had a profitable year, but end up losing a huge chunk of that profit to a tax bill that you didn’t expect.

I see this ALL the time as a fractional CFO and wealth coach, and it really makes me feel sad. Because honestly, it doesn’t need to be this way.

But how does this happen, and what can you as an entrepreneur do to make this business tax thing less stressful and more manageable?

First, let’s look at why things can get out of hand fast when it comes to taxes.

Most of us started out in life as W2 employees. And when you work for someone else, your taxes probably didn’t cross your mind at all until the end of the year.

Back then, your employer was the one responsible for withholding. At the end of the year, you collected your W2, along with any other relevant documents (like interest or investment income statements), filed your 1040, got a refund (if you were lucky), and that was the end of it for another year.

But when you become an entrepreneur, just like that, you are entirely responsible for your finances. That includes your taxes.

Most of us don’t go into business thinking about taxes. We’re focused on bringing in money, getting the Cash Flow going, and making a profit. That’s totally understandable.

But what often happens next? Here’s what I see happening all the time…

Typically, new entrepreneurs get out there, they make money, then put it in a business account. Then, they take owners draws for all their personal expenses. And sometimes, those draws end up exceeding their business income.

At this point they realize they’re making enough money to show a profit, but not enough to cover their personal bills. THEN, because they are technically showing a profit, there’s a tax bill. Sometimes a a shockingly high one, too.

So there you are, with a net profit but unable to pay your own bills and feeling broke. AND on top of that you owe a ton of money in taxes.

Nothing is more discouraging than that. It can be enough to make you wonder if this business thing is worth it at all, and seriously consider going back to that W2 job…

But there IS a way to break the cycle, so you feel more focused, confident, wealthy, and able to manage your both your Cash Flow AND your tax bill.

It starts with a mindset shift that helps you start seeing your money in a new way.

Instead of thinking about taxes once a year, start training yourself to think about it throughout the year. The key is to incorporate taxes into your cash management plan and your business plan.

Moving into this new way of thinking can be challenging to anyone at first, especially if you’re not used to managing your cash flow (like many of us!). But the best way to do this is actually quite simple, and here it is:

Start setting aside money for taxes throughout the year, and start planning to pay quarterly estimated taxes in your business. Let’s talk about why, and how to make that happen right here.

Now, you may or may not be familiar with estimated taxes, but they’re actually pretty simple.

It’s basically nothing more than dividing your tax payments throughout the year. If you’re wondering about whether you should start making estimated tax payments, here’s a quick checklist to break down who is required to make them:

• You’re self-employed
• Your income includes money other than a salary (like interest dividends or early retirement withdrawals)
• You have a wage income (i.e you get a W2 annually) and had a tax liability the prior year
• You sold investments that had a profit
• You received disability or unemployment income

Now, if any of these apply to you, and you estimate that you might owe $1000 or more in taxes, it’s a good time to start planning for estimated taxes.

(I go over all the details about who has to pay them and how to make the actual payments right here. So if you’re not familiar with the process itself, be sure to check out this post!)

Now, here’s how planning for and paying estimated taxes can not only slash your stress but also help you manage your cash flow with a lot more ease.

It might not make sense that putting aside money for a bill can boost cash flow. How can setting aside money actually save you money, when you’re taking away money? It’s a legitimate question.

But what we’re really doing here is reimagining your Cash Flow. We’re preparing you to handle whatever comes your way, from surprise expenses to tax bills.

This process not only helps you prepare, but it also helps you get confident about cash flow management. It’s teaches you how to take responsibility for your money, by compartmentalizing it. It makes your money more manageable, and it also helps you recognize the long-term plan behind each compartment of your money.

Like I always say, your money needs a job, and this process ensures that you’re allocating parts of your money for the jobs they were intended. 🙂

Here’s a simple 3-step plan to use estimated tax payments as a cash management tool:

Step 1: Create a dedicated savings account for taxes.

Start by having both a business checking account, then create a separate savings account in which you’ll regularly set aside money for taxes.

Step 2: Set aside a percentage of your income each month for taxes.

I recommend starting at 15% of your net income. Transfer 15% of your net income each month into your savings account, and consider it “no-touch” money for now.

Step 3: Use that designated money to pay your quarterly estimated taxes.

When you get your quarterly estimated tax notice (usually a voucher from your CPA, if you’re working with one), pay it out of that savings account.

It’s actually that simple!

Now, here’s why this really makes a difference with your stress level and your Cash Flow.

First, you’re taking monthly action instead of quarterly action, which makes the process much more manageable.

Second, you’re moving that money into a savings account that accrues interest.

Third, when you get the quarterly tax bill, it doesn’t have to come out of your operating budget. You’ve already got cash set aside for that very purpose.

AND, if you end up putting aside more money than you needed, that’s bonus money for you. You can take it as a draw, reinvest it into your business, pretty much anything you want!

Incorporating estimated taxes into your business plan can benefit your business in multiple ways. It can support you in your Cash Flow, your confidence, organization, and mindset. It’s a way to position your business day to day, month to month, and quarter to quarter, so you can be ready for anything that comes your way, and without feeling like it’s taking anything away.

Put these 3 steps to work for you, and start incorporating this powerful process into your monthly checklist. Then let it help you set the solid financial foundation for your business!

Now, once again, get all the details you need about Estimated Taxes themselves right HERE. Then, if you have any further questions about this process, leave me a comment below.

Can’t wait to hear how this 3 step plan works for you!

AND, until next time…

Love, light, and MONEY, Honey…

Kaylee

P.S. When it comes to managing your money and cash flow, it can be VERY helpful to understand your money relationship. How do you really relate to money, how do you manage your money in the real world, and what can that teach you?

Find out here with my powerful quiz, and discover your Money Management Personality!