Every successful entrepreneur is likely to have experienced that first surprisingly large (gasp) tax bill. The reality of having a really good year is that you were too busy working your butt off to think about socking away more money for taxes.
And if it’s your first year earning in a new tax bracket, you might even get the double whammy of being asked to contribute additional quarterly payments to the federal government and the state. It’s like paying double the taxes for your first year.
You’ll also be up against the growth paradox: when you are growing, your cash flow hasn’t quite caught up to your income. Oftentimes, you’re waiting on invoices or moving money between accounts just to make sure all the bills are covered each month. Or are they?
If you’re like most of my clients, at first you go through all the emotions:
• This can’t be right; I missed a payment somewhere
• There’s no way I can pay this much right now…or ever
• The IRS is going to shut me down, or throw me in jail
Then you face reality a bit; you have a lot more options than you realize. There are millions of small business owners just like you that got a five figure bill and they aren’t rotting in a jail cell either. With a little creative wiggling, you’ll get through this and be more prepared for next year.
A General Guide for High-Income Earning
There are a few options available. The first is to request a payment plan from the IRS. You may pay small penalties for paying in installments, but they are usually just a small percentage of the total that you owe.
In some cases, you may want to find another accountant who will keep you up to date on how you should handle your bookkeeping. As you continue to grow your business, this will be even more crucial, especially with a bigger team to support you.
What’s most important at this point is to make sure that you are caught up for
the current year’s taxes. Do this as quickly and efficiently as you can to avoid raising more red flags.
To avoid the issue next year you’ll want to make estimated tax payments. As a general rule, 90% of last year’s taxes are due for quarterly estimated taxes.
If it’s your first year in business you are not required to make estimated
payments. If you pay just what’s required this year, but it’s still way low for your
increased income, adjust your quarterly payments to spread out the increased taxes throughout the year.
Believe me on one general point: it will be easier to pay in pieces with estimated quarterly tax payments than eating the whole bill in one bite on April 15. You’ll also avoid the stress and anxiety of coming up with a five-figure check on the spot.