When the author of this piece reached the milestone of earning a six-figure income from their business, they were ecstatic. However, their excitement quickly turned to shock when they found out they owed the IRS $10,000 in taxes. This surprise tax bill was a result of several mistakes they made as a new business owner. Firstly, they did not file quarterly tax returns, which led to a larger tax bill at the end of the year. Additionally, they had set up their business incorrectly as a single-member LLC, which had implications for their taxes as their income grew. Furthermore, they did not keep up with tracking their business income throughout the year.
To avoid similar tax mistakes, the author recommends freelancers and entrepreneurs to file quarterly tax returns if they expect to owe $1,000 or more at the end of the year. They also suggest setting up the right business structure based on income levels, as using a single-member LLC has limitations once income exceeds $40,000. It is important to track business revenue and expenses regularly to stay on top of financial situations and avoid surprises come tax time. Additionally, contributing to retirement accounts like a SEP IRA can help lower tax liabilities and provide tax benefits.
Another crucial mistake the author made was not meeting with their tax professional throughout the year. By meeting with a CPA regularly, entrepreneurs can identify strategies to minimize tax liability while staying compliant with regulations. This proactive approach can help in preparing for tax season and making informed decisions about the business. The author eventually paid off their $10,000 tax debt by setting up a monthly payment plan with the IRS and creating additional streams of income to put towards the balance. It took them a year to pay off the debt, but the experience taught them valuable lessons about tax management for small businesses.
In conclusion, the key takeaway for entrepreneurs is to understand the basics of taxes in their industry and take proactive steps to manage their tax obligations. This includes filing quarterly tax returns, setting up the right business structure, tracking income and expenses, meeting with a tax professional throughout the year, and exploring retirement contribution options. By staying informed and organized about taxes, entrepreneurs can avoid costly mistakes and ensure smooth financial operations for their business.
