Like most entrepreneurs, I was working a full time job while getting my own company off the ground. I was earning enough money to maintain my lifestyle as well as expand my business. Life was good. Then when tax season came, I hadn’t been hit with owing any taxes. Life was great. But, what I didn’t know then was that the only reason why I didn’t owe anything was because my job had offset my business income.
When I finally made the leap to work for myself exclusively, I owed the government (local and federal) several thousand dollars. Though I was bummed, I had money in a savings account and was able to make the payment. That was a valuable lesson learned, but little did I know that there were many more lessons to go. For the years that followed, revenue was steady and it seemed that I owed the same amount every year. So, I saved money in my bank account and paid when I filed my taxes. I thought I was being a good citizen. WRONG!!
Once I started acquiring new clients and my revenue surged, a stark reality hit. The taxes that I owed were now in the five digits. Which meant that at the end of year, I had significantly put my business in financial jeopardy by not paying taxes quarterly. By not paying quarterly, I was potentially inflating my annual revenue because I was using money that technically had to go to taxes. It was at that point that I made two decisions: (1) that it was vital to pay my taxes quarterly and (2) that it was necessary to invest in my business. When you earn revenue for your business, you should always reinvest a portion of it towards the upkeep of your business. That way you are only taxed on profits made which, if you invest in your business, would be lower but for the right reasons. That investment won’t be eaten up by the IRS. Now, this doesn’t mean spend all your revenue on new equipment because you are required by law to pay taxes. However, the IRS does allow in the upkeep of your business so definitely utilize that privilege.
Establish a bank account when you start your business then make sure to keep vital records and open up a tax account with your local and federal agency. As soon as you start earning revenue from your business, set aside money for savings and to pay your taxes quarterly. In the long run, it will save you the pain and heartache of having to owe significant money. Also, by not paying quarterly, you may put yourself in danger of penalties or not having enough to pay the balance which could mean a tax lien on your business.
Please note that if you overpay your taxes, you will receive a refund. You can go to irs.gov and also speak with a certified public account who can help you calculate what you should pay quarterly.
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