I’ve been an entrepreneur since I started mowing neighborhood lawns in high school. Soon after, my buddy and I launched a full-on landscaping operation with three trucks, a trailer, commercial mowers, and a staff of eight — all before graduation. Eventually, I sold that company to add more entrepreneurial ventures to my repertoire, and by my early 20s, I had earned just shy of a million bucks.
By all accounts, I was a successful, profitable entrepreneur — so why, then, did I end up with a six-figure tax liability?
Like many entrepreneurs, I wasn’t accounting for my self-employed taxes accurately or efficiently, and it cost me. It took me all of five years to wrap my arms around that tax liability. Since then, I’ve learned a whole lot about managing taxes as an entrepreneur.
Buckets Under the Tax Umbrella
For the average Joe, tax time involves a W-2 and a simple form. He might have to deduct a few things, but for the most part, it’s a straightforward process. By contrast, entrepreneurs, solopreneurs, and small business owners have to navigate a more complicated tax system. There are two brackets for people who own and operate a business: LLC or 1099.
If you own a business, you have most likely incorporated in some way. Though you may not have employees, an LLC allows you to take advantage of write-offs and other tax incentives. If you do have employees, this does add some complexity as you also have to send out 1099s, W-2s, etc.
The other bucket is the 1099 contractor. If you’re a salesperson or an independent contractor, you probably fall in this bucket. The 1099 route is not a bad way to go, but you’ll need to be very diligent about tracking your business expenses. If you aren’t, not only will your adjusted gross income be quite high, but your tax bill will be, too.
Navigating Tax Season Like a Pro
Taxes might seem complicated, but if you can get past the intimidating vernacular, you’ll find they aren’t actually hard to manage. Over the years, I’ve learned a few tricks to streamline the process.
1. Save some trees — and some headaches.
Rather than waste time and paper tracking taxes manually throughout the year, invest in digital solutions. There’s a litany of apps and programs that help entrepreneurs and business owners stay on top of their pertinent taxes in real time. Big players like Quicken and TurboTax are great for preparing your physical tax returns. Plus, Quicken and other bookkeeping software will keep you on track with invoices, expenses, and other financial needs.
To really stay on top of things, though, there are also more granular apps. I like BizXpenseTracker to track things like expenses, mileage, and even time. It’s set up to generate legitimate expense reports that will help you (or your accountant) keep track of things throughout the year.
2. Button up your P&L statement.
Entrepreneurs are notorious for full-speed sprinting, big-picture thinking, and hoping the details just kind of sort themselves out. Speed and perspective are great for building a nimble business, but you can’t leave managing details such as expenses and quarterly tax payments up to chance.
Start developing some discipline now by simply reconciling your bank statements every month. Tracking your income and expenses will give you a clean P&L statement so you’ll always know where you really are in terms of income. Treat every day like April 15, and your life will become a heck of a lot easier down the road.
3. Don’t put all your eggs into one expense basket.
Believe me, I know how frustrating categorizing expenses can be. In your mind, if you spend any money on your business, it’s an expense. But it doesn’t actually work that way.
Let’s say you take some clients to dinner, for example. You can only deduct half of that bill under “meals and entertainment.” If you categorize that expense as “miscellaneous,” you could find yourself facing a messy audit and paying an expensive IRS penalty.
Your goal is to make a lot of profit. But during tax season, you also want to make sure you don’t show more profit than you actually had. You can’t lump office supplies, meals, travel, and cell phone bills into one category because they’re different deductions, and doing so will falsely inflate your profit numbers and, in effect, raise your tax bill.
4. Know your write-offs.
When you don’t pay the taxes you owe or don’t report income, that’s tax evasion. It’s illegal. Tax avoidance, on the other hand, is understanding what’s deductible in order to lower your bill. The tax code helps small businesses deduct justified expenses that help grow their organizations. This means entrepreneurs can keep more money in their businesses.
Tax avoidance means you take the deductions you’re legitimately allowed to take. Think tax credits, tax-deferred retirement accounts, and all of the deductions from your (correctly categorized) expenses. The goal isn’t to figure out how to pay as little as possible. It’s to write off as much as possible.
At the beginning of my entrepreneurial journey, I made a lot of mistakes when it came to navigating taxes. But I wouldn’t change that experience for anything. Because of it, I met some awesome people, learned truly helpful lessons, grew as an entrepreneur, and discovered my passion for helping others avoid the same mistakes. Take these four tips into account, and you’ll begin to feel that tax-season headache fading into the background.
Tony Delmercado is the COO at Hawke Media, a passionately curious entrepreneur, and an all-around solid dude. He enjoys building businesses, playing golf, improving his Krav Maga and jiujitsu game, writing, studying business tax loopholes, and eating Mexican food. He spends his weekends at the T&A Bungalow in Chesterfield Square hanging with his wife, Anthea; his son, Onyx; and his dog, Naz.