Avoidable Causes Of Small Businesses’ Biggest Tax Problem

hands holding small plant Defining your 10 to 12-hour days as a “grind” is an understatement. Running a small business day in and day out, you can easily forget about your tax responsibilities. At the root of most small business owners’ biggest tax problem is this inattention to taxes.

With income tax due just once per year, and operational issues popping up daily, it’s easy to overlook the impact taxes have on your business. But when you cover your daily expenses and fail to save for your largest tax expenses, you find yourself in quite a bit of trouble. In fact, most business owners fall into this trap at least once.

With 30-40% of your pre-tax income due to the IRS and state, your tax bill may be steep. If you’re not prepared, you could be in a bit of trouble.

Which Small Businesses Usually Suffer This Problem?

Businesses just starting to make money to those earning up to $200,000 are most likely to struggle with paying their tax bills.

Businesses earning more than $200,000 tend to have extra cash, so such a problem is less likely. But growing businesses often invest much of their cash into growth, leaving little money for taxes.

Despite the success of many growing businesses, their owners may be drowning in the fear of coming up short for their hefty tax bills. In fact, some owners actually consider closing successful businesses because they doubt their ability to overcome their tax debt.

Trust us: You’re not failing as a business owner.

You simply need a plan to manage your tax problem.

What Owners Need To Do To Avoid Falling Into This Trap

Even small business owners with tax advisors can suffer from this problem. All the tax planning you could ever ask for won’t help if you don’t have a simple way to set money aside for your taxes.

To succeed and save the money you’ll owe come March – or at the end of the quarter – you need to incorporate quick, simple tax tasks to your daily routine.

Your advisor should help you break your annual and quarterly tax responsibilities down to digestible, daily responsibilities.

One of PADGETT's tax consultants worked with a husband and wife who each owned their own business. They both accumulated three years of income tax debt, and didn’t know a way out.

Their partner created daily and weekly budgets that clearly showed how much they needed to set aside in order to pay their tax debts down. He then gave them daily three-minute tasks to complete to ensure that they were saving enough. As the advisor said, “I can’t tell my clients what to do; I have to show them how.”

Now, the business owners are prepared and confident that they have a successful plan in place.

How To Successfully Save And Climb Out Of Your Tax Debt

Start by opening a tax account that’s separate from the bank account you use for operations. Each day or week, transfer the amount you need to save into this separate account.

Never touch this money; it’s for paying your taxes, and paying your taxes only.

If you don’t have this simple mechanism in place, it’s too easy to spend the cash you will eventually owe.

Consider the small business that couldn’t afford its $20,000 tax bill last year. If the business is likely to owe another $20,000 this year, the owner needs to have a plan and process in place to pay its debts and save up for this year’s tax bill.

A competent business tax advisor understands what the business and its owner can afford to pay each week. Work with your partner to determine how much you must save.

We recommend that you prioritize saving for this year’s taxes first; you don’t want your tax debt grow. Work out a payment plan with the IRS and state to pay your debt down over a number of years. The key is to develop a plan that you can afford right now. In many cases, businesses continue to earn a profit while also paying off their debt.

If you try to pay off your debt too quickly, however, you may spend the cash you need to run your business. Many businesses close because of this mistake.

This strategy gives you time to get caught up on your debt, and reassures you that an end is in sight. While it will take time, it affords you the opportunity to “catch your breath” and maintain your business.

The key to avoiding or recovering from such issues is to build good habits. If you don’t make saving for taxes a part of your routine, you’ll always risk not being able to pay your taxes by your deadlines.

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.