by Janelle Holden
They say there are two things you can’t avoid in life: Death and Taxes.
After my call with my accountant this weekend I think I might prefer death.
Yes, my accountant called me on Sunday to deliver the heart-stopping news that my taxes were much higher than I expected them to be. Which, she assured me, when you look at it, is a great thing because it means you made a lot of money last year!
Silver linings be damned.
In case you can’t tell, I’m actually laughing while I type this. I enjoy black humor.
Fortunately, it’s all going to be okay, but I wish I would have done a few things differently, which is why I’m writing this blog post, so that you do not do as I did, and instead you do as I wish I would have done and saved yourself some big time $$$.
You see, what I did is put off talking to my accountant early last year about my business structure. Well, we had talked about it in January, but the paperwork didn’t get filed for the LLC that I was going to create with a business partner, which is a good thing because that relationship ended up not working out for that particular business.
And after our breakup I fell headlong into making money instead of protecting my money, and simply decided to go for it as a sole proprietor because, I reasoned, I didn’t want the hassle of setting up a corporation and doing the accounting separately, etc. Whoops!
This meant that I paid self employment tax and was in a much higher tax bracket than if I had set up a business and started paying myself payroll and taking distributions. Sure, I enjoyed having the luxury of commingling funds (they had a good time together) but ultimately, it cost me a lot of money in the end for my funds to have an intimate affair and it’s really no way to do business.
So, here’s what I would have done, and what I have done this year that I recommend you do too if you truly want to make your living as a coach, consultant, or online entrepreneur. Was that a confusing sentence? Oh well, I’ll try and outline the basics for you here.
- Hire an accountant or an attorney to officially set up your business structure (ASAP): Based on what you expect to earn and your individual tax situation they can advise the right business structure for you and your needs. My new business is an LLC taxed as an S-Corp so that we can do payroll and take distributions but avoid the headache of taking minutes at every meeting. This means that I will pay more in accounting fees (yes, my accountant is happy) but pay a lot less in taxes over time. Yay!
- Take your time and shop for the right business bank for you: You need a business bank account and ways to take funds and pay people easily online. At some point, PayPal won’t cut it anymore. Don’t commingle your business and personal funds. That’s a no-no for a lot of reasons. It opens you up to getting sued personally and it makes it a nightmare come tax time to figure everything out. Setting up a business bank account is also not something you should just do with the first bank on the corner. You can end up paying a lot of fees with the wrong bank so do your research. I still sometimes wave a middle finger at the bank that ripped me off for years (not that it was their fault – I set up the account there, but man there were a lot of hidden fees). I’m going a different route this time, more on that tomorrow.
- Keep up with your bookkeeping: I recommend making an appointment with your accountant and bookkeeper at the beginning of each month to look over the past month’s P&L statements, Balance Sheet, and Estimated Cash Flow. You could do this yourself (I don’t recommend it) but setting a meeting with someone else who knows what they are doing will make you stop avoiding looking at your numbers. You gotta know your numbers, otherwise there could be some not-so-fun surprises around the corner, and you need to know what you’re shooting for. By the way, here’s a bonus tip, if this inspires anxiety in you (which it does for me), make sure and bribe yourself to do it by offering some special treat afterwards (spa day anyone?)
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