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The weekend before April 15th, I heard from #smallbiz friends who had rough tax experiences. One had been beat up by her accountant, and the other was given the answer that she owed a lot in taxes, much more than expected. Both experiences are scary, and I've experienced them both. One friend emerged empowered, and the other friend was emotionally sinking, wanting to throw in the towel.
Taxes and Legal can make growing a business very difficult, because they tie the business owner's hands with restrictions. And a business owner is usually a dreamer, so restrictions don't fit in well to this scenario. So let's discuss scenarios that can be depressing, and then let's face them head on because that's the best way to squash them.
"YOUR INCOME WAS AT THE POVERTY LEVEL THIS YEAR"
That was a comforting answer that a banker gave to me when I was a single girl living in New York City. I'd had roommates for years, and was in my first single apartment in my first year of business. Hey, I had income! I was paying the rent! And even getting monthly pedicures! I guess poverty looks pretty good from here!
This was in the days before the housing bubble burst, and brokers were giving away mortgages. You could state your income (ie, just make it up) and saddle yourself with a $400K mortage. Yippie! In New York, owning an apartment can be ideal because the value of it no doubt will increase. It's like buying a stock, but with more hassle and headaches. ;) I'd been talking to a banker for a few weeks about a property, and when we finally got serious, and he filled out whatever it was that he needed to fill out, he called me shocked, with that lovely obvservation: "Your income was at the poverty level this year." Thanks.
So yeah that hurt my ego a bit, but it showed me a few things:
- Banks look at money, not trades. I don't barter for things anyway, but this gave me a new reason to tell people - you need the expense, and I need the income in our books.
- Fine, I'll just double my income to say that I doubled my income. And I did the following year.
- Fine, I'll just triple my income. And when I'd done that, it was the first year I was married and filed jointly, and we busted through an income bracket but weren't expecting to do that, so we owed a bunch in taxes. My W2 husband was quite bummed at not getting his usual generous federal return that year. :)
"AFTER TAXES, I ONLY MADE ENOUGH TO COVER DAYCARE EXPENSES"
This is usually a woman's problem. And it's really not a problem, although women tend to see it as a problem and a sign that they should not be working. I disagree with my whole heart that this is a problem. This is an accomplishment. And perhaps a sign that you should increase your prices. Here is why daycare or other forms of childcare is great:
- Working is important for people. Self-esteem can be connected to working, doing what you love, accomplishing something, and bringing in money! Financial writer Farnoosh Torabi covers this in her book "When She Makes More" by way of addressing dads who leave the work force to be Mr. Mom. She also contributed an article about it to Daily Worth.
- Daycare can be great for your child's development. When I pulled my kids out of daycare for budgetary reasons last summer, I saw the value our daycare had in the everyday lives of my kids. I was entertaining them with activities at home, but when they reenacted what they did at school (ie Ruby would play teacher), I realized that our investment in daycare had been like private school.
WHEN TO THROW IN THE TOWEL
This is not an easy answer for an entrepreneur to face. You've started out facing a challenge, and it's in your DNA to master the challenge and profit from it. Of course this answer is relative to each individual, so there is no definitive answer. But before you throw in the towel, ask yourself these questions:
- Can I fix the problem for next year?
- Does what I'm doing bring me joy?
- Is what I'm doing paying the bills? If not, what can I do this year to change that?
HEALTHY HABITS I'VE LEARNED TO KEEP
Over the years, I've learned to keep healthy financial habits, so that come tax time, it's as easy as sending my accountant a few files and my hubby's W2s.
- Make Quarterly Estimates. I did this prior to having kids. The kids sucked all my money away, so I keep every penny now and cross my fingers that my husband's W2 work will make up for taxes that my business owes. This is a really bad plan. First of all, it's just a really bad plan. But second of all, the federal and state governments do have real people working there, and they do consider these details when you need them to cut you a break, like overturn a penalty for not filing a form that you didn't know about (ahem...yup, a $1900 fine for not filing a piece of paper and paying the yearly $25 SCorp fee thingy). When I begged for the penalty to be erased, the woman on the phone asked me: "You used to be so good. You made estimates and filed on time. What happened?" Luckily, my daughter was with me, and was being fussy. The "fussy baby effect" kicked in, and the woman took pity and reversed the penalty. But still.
- Don't file late. For the reason I said above, and also for reasons like too many things kick into gear that you don't think about. If you file an extension, but don't pay estimated money with that extension, then you are fined with interest on the money you didn't pay. I know - how can you know how much you owe if you haven't done your taxes yet? Just don't file late.
- Hire a bookkeeper. If you are really bad at keeping your own books, or you just don't want to learn QuickBooks, then please hire a bookkeeper. Come tax time, your taxes will be almost there in a neat little bow. For Tin Shingle, we hire a bookkeeper. Things are always neat and tidy. I'm in constant communication and make no assumptions. For Katie James, however, which covers consulting, advertising, product sales, things like that, I keep the books. When my first child was born, I got waaaaay behind. Two years behind. My PayPal transactions were not entered in. I had to pay someone $800 to do it for me when I finally admitted that I couldn't do it and that tax filings were too late. I now keep my books up to date each month.
YOU CAN DO THIS!
You really can. It's all about systems and accountability. If you run a business, and your husband also runs another business, have healthy conversations with each other about the inner workings of your businesses. You want to know that estimates are being made, that transactions are being logged, things like that. It's anal, but you know what? It's freedom.