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How to Save for Taxes as an Entrepreneur
A question I get asked all the time by my new financial coaching clients and other coaches and entrepreneurs is: How do I know what to save for taxes?
After being a financial coach for over 3+ years, I can tell you that in order to figure this out, you need to know:
- Exactly where you are sitting so far for the year
- What have you made in gross income
- Net income (gross income minus expenses)
Your taxes will be determined on your net income (plus other factors such as any other income you have coming in, your spouse or partner, etc) and it can typically range from 15-30% of your net income that you will want to set aside for taxes.
If you are brand new in your business and it’s the only income you have coming in and your business expenses are more than your business income, you might not have to pay taxes because you’re not profitable yet. It depends on the specifics of your situation, but that might be the case for you.
Once you start making more and your business gross income is more than your expenses, be prepared to pay more in taxes. Depending on how far you are into your entrepreneurship journey and where you are at for income & expenses, you may have to pay quarterly estimates versus just filing at the end of the year. I recommend for all entrepreneurs and coaches to work with an accountant on the tax part of things and I help with creating a solid financial foundation, helping you with cash flow to make sure you are actually setting money aside for taxes and with the cash flow management aspects of your finances.
Do you struggle with having money set aside for taxes and not spending it or using it in your business or to get you by in your personal life?!?
Here’s a tip for you!
First, make sure you have a separate savings account to save for taxes if you are self-employed.
Then, title it something that reminds you that it’s NOT your money!
You could call it:
- The Government’s Money
- Not My Money
- Taxes Because I’m Profitable
- Government Holding Account
Or you could even name it something a little witty.
Taking the extra step to name your biz taxes account something, other than just a number or Business Taxes, helps your brain subconsciously to remind it that you reallyyyyy don’t want to tap into this money. This money belongs to the government and you’re just holding it for them.
If you have done this and you need even more help, you can have this separate savings account at a different bank so it is even less convenient to transfer from it. And when you log in to your normal accounts online, you aren’t seeing this money, so subconsciously, it’s not available to you.
Out of sight, out of mind. It actually works well in this case!
How to Avoid Getting “HIT” with a Big Tax Bill
This is something that I commonly see as a financial coach when entrepreneurs are in the first few years of their business, so I want to share with you how to NOT have this happen to you!
So my tough love is going to come out now, no one is ever “hit” with a tax bill. There are so many indications along the way, but if you’re not organized, if you’re not looking at your numbers and your books, then you might not see it, but the signs are there months and months in advance.
How to Avoid a Big Tax Bill:
- Be up to date on your books on a WEEKLY basis (monthly at the least)
- Get an accountant early AND actually check in with that accountant.
I honestly don’t think that the end of the month is often enough to be reviewing your business financials because so much can happen within one month.
As soon as your net income in your business becomes positive, start setting money aside in a separate savings account for taxes. It’s really important that this money actually gets transferred out of your checking account into a separate account of its own.
Then, when you start to become more profitable, make sure you are meeting with your accountant more than just once a year to file your taxes, but twice a year or even quarterly, to have them check and see if what you’re setting aside is still enough or if you need to increase what you’re setting aside. Doing it this way, it gives you way more months to come up with that extra money if you do need to increase what you’ve been setting aside for taxes, versus finding out at the end of the year, after the fact. And when you find out from the government that you owe money in taxes, they want their money right away, if not, you are paying interest on that money you owe, which could have all been avoided to begin with.
Most people who are “hit with a big tax bill,” it’s actually very avoidable and preventable, you just have to make it a priority to be setting money aside as you go along and then checking in with your accountant as your income increases.
Other Content You May Find Helpful:
- 10 Ways to Live Cheap in Your First Year of Entrepreneurship
- How to Have a Successful Business – Focus on Your Personal Finances
- Why a Bookkeeper Won’t Solve Your Money Problems
- How to Cover Yourself Legally with an Online Business
And if you have experienced this in the past, I’m not shaming you or judging you, I’ve worked with lots of clients who were on a payment plan for owed taxes to the CRA and IRA. I’m sharing this because it’s the stuff other people don’t talk about, that needs to be talked about before becoming an entrepreneur. If this has been you in the past, you need to forgive yourself and move on. You learned a very valuable lesson from it, and you don’t have to keep carrying any negative emotions or negative feelings because of it. Okay?
The Secret to Reducing Your Tax Bill, That You’re Missing Out On!
One of the big things I see about coaches who are not working with someone on figuring out the behind the scenes of their business finances (such as a financial coach like myself), is that you are missing a lot of things that are business deductions.
When it comes to paying for coaches and courses, those ones you know to be claiming as business expenses.
But when it comes to the “other” business deductions, those are the ones that I often see coaches missing.
- Printer paper, ink
- Cards, postage (if mailing clients, sending cards, etc)
- Books that are related to helping you bring in more income
- If you work from home and have an actual office you work in (a percentage of this)
- A percentage of your internet and cell phone bill
- Business mileage
If you are not writing this information down and tracking it each month, you are missing out on potentially thousands of dollars of deductions each year, which would reduce what you owe in taxes and increase what you are KEEPING, either for yourself personally or to invest back into your business.
This is one of the things that I help my clients get set up with, is going through all of the potential deductions they would have and getting them caught up on tracking them!
You Know You’ll Owe in Taxes But You Haven’t Saved Yet
So you know you have made more this year in income in your business than you’ve had in expenses and you’ll be paying income taxes next year. But you haven’t saved anything so far and it feels overwhelming.
Don’t worry, I’ve got you!
I’m going to share with you exactly how I help my financial coaching clients who come to me in this predicament.
The first step I have my financial coaching clients do is to open up a separate savings account that they ONLY put money in to save for paying self-employment taxes.
What I do with my clients is first of all, figure out approximately what they should have set aside.
- We do this by first making sure their income & all expenses are updated for the year and we are looking at the most current numbers.
- Then, based on their NET income (income – expenses), we multiply that number by a percentage (typically 15-35% depending on where they live [American or Canadian], etc) and come up with an amount for approximately what they should have saved thus far.
Now depending on how high your net income is and what you have coming into your business currently, what you should have saved for taxes may feel a little daunting.
Don’t allow that number to scare you! Use that number to empower you.
Now that you know it, you can use that as fuel to increase your income the rest of the year and until tax time.
Instead of trying to figure out how you can fully catch up on what you owe in taxes so far this year, take that number and break it down into the number of months that are left in the year or until tax time. Then divide it by 4 to find out what you would need to be transferring each week (or transfer once every 2-weeks or once a month depending on the cash flow in your business), to catch up on what’s already happened this year.
And then when you have more revenue come in, transfer bigger amounts to your tax savings accounts.
It doesn’t have to feel overwhelming, scary or something to be feared of!
I help my financial coaching clients to feel EMPOWERED about paying taxes and saving for them on a regular basis.
Because if you are going to be owing money in taxes, that means your business income was less than your expenses and th
is is something to be CELEBRATED!!!!
Are you currently saving for taxes? If you’re not, did this help to make it feel less overwhelming and easier to begin doing?!?
Comment below if you’re feeling more empowered about setting money aside and saving for taxes now that I walked you through this!
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