How Entrepreneurs Can be More Strategic With Their Taxes

Although the approach of spring means warmer weather is on the way, it also means that tax season is here. If you’re an entrepreneur or specifically the founder of a startup, knowing how to navigate some of the complexities of tax season will be useful for you (both now and down the road).

And the sooner you wrap your mind around how critical it is to be meticulous about your approach to filing taxes, the better off you’re apt to be.

Why We Hate Filing Taxes

Apparently, there are some weird people who enjoy filing their taxes, but most of us would rather be doing something else. One study suggests that 30 percent of people dislike doing their taxes, while 26 percent go as far as to say they hate it.

Of the people who fall into these two categories, 31 percent cite complicated paperwork as the primary point of friction, and 24 percent see it as inconvenient and time consuming.

Lack of General Knowledge

There’s also a serious lack of general knowledge about taxes, which means many people feel confused and poorly informed. When people don’t understand taxes, they’re less likely to see the value in filing them.

“Unfamiliarity with tax basics is harmful,” Marjorie E. Kornhauser writes for the Chicago Tribune. “At the individual level, people may pay more than necessary when they don’t know about deductions and credits that can reduce their burden. At the local, state and national levels, lack of tax knowledge hampers the promulgation of rational laws that could help spur the economy and lead to prudent budgets. A tax-literate electorate could demand that politicians provide coherent tax policy options.”

People across every demographic despise filing taxes, understandably, but millennials seem to be especially anxious about them. According to one study of more than 1,600 adults, 80 percent of taxpayers in the 18-to-34 age bracket say they’re fearful about preparing their taxes.

Millennials

For perspective, the average among all age groups was just 69 percent. The biggest fear among millennials is making a mistake on their return.

“In some ways, it makes sense -- Millennials tend to have less experience with a deeply confusing tax code, less cash to seek professional help and less need for the more complicated returns that having children or a mortgage can bring,” personal finance expert Liz Weston says.

Tax season is even worse for millennial entrepreneurs. Most Americans receive W-2s, which cover most of the complications on the income side of things, but entrepreneurs are often in unique situations where they receive 1099s and other documents that employed workers don’t have to handle.

Don't Lose Out Because of Fear

American entrepreneurs enjoy plenty of systems, rules, deductions, and exemptions to help them operate, but many are fairly uneducated about such matters and habitually leave money on the table year after year. If you’re an entrepreneur, you need to make sure you aren’t losing out because of your fears and anxieties.

You need to grab the bull by the horns and be proactive about your tax situation. The more you generate positive traction in this area, the less stressful and complicated it’ll be for you.

Five Tips to Make Filing Taxes Painless

When we say you can make taxes painless, we aren’t talking about being okay with giving away a large chunk of your income. There are plenty of political and economic reasons to support lower income taxes … but that’s a personal issue between you and your elected officials.

Instead, we’re referring to making the process of filing taxes free of the pain you’ve experienced in the past. If you’d like to make this tax season a breeze, here are five helpful techniques.

  1. Have a System for Recording Expenses

Trying to do all of your tax preparation right at the deadline is a sure-fire recipe for disaster. You’re going to have difficulty tracking down everything you need in time, and you’ll just overwhelm yourself.

Want to do your future self a favor? Develop a system for recording expenses so you can stay on top of your accounting throughout the year.

Technology makes recording expenses easy. For example, the Expensify app allows you to take photos of receipts, manually log expenses, and develop expense reports while you’re on the go. If you’re an individual, it’s free; if you use it for your entire team, it’s just $5 per month.

If you drive a lot and want to deduct your mileage, Stride Tax is a pretty sleek app that automates the process and helps you save money that most likely went to Uncle Sam in the past.

  1. Find Ways to Lower Your Taxable Income

Once you have a concrete system in place for recording expenses and organizing tax-related documents, your focus should shift toward strategically lowering your taxable income. There are many different ways to reduce your income through deductions and credits.

The more you learn about this topic, the more you are likely to save. Here are a few of the areas worth exploring:

  • Tax-deferred retirement accounts. Saving for retirement is always smart, but it’s especially useful when you use a tax-deferred account, such as a 401(k) or traditional IRA. “If you're employed and under age 50, you can deduct up to $5,500 to reduce your taxable income; the amount goes up to $6,500 if you're over age 50,” E-file.com explains. “Married couples filing jointly can double these amounts.”
  • Home office. As an entrepreneur, chances are you spend at least a little time working from home. One of the easiest deductions to claim is the home office deduction. There are two methods you can use. The traditional one allows you to deduct your office’s square footage from the overall square footage of the home (as a percentage). The simplified version lets you write off up to 300 square feet at $5 per square foot.
  • Health expenses. If you have a high-deductible health insurance plan, you should be taking advantage of a Health Savings Account (HSA). An HSA essentially allows you to set aside some money -- tax deductible -- that will go to future medical expenses. It’s smart to throw in as much as you possibly can each year (it rolls over, for one thing), since you’re bound to have medical expenses eventually.

This list serves as nothing more than a starting point for lowering your taxable income. Hundreds of other deductions and credits are out there to be employed. Do some due diligence and look for other opportunities to save.

  1. Pay Quarterly Estimated Taxes

New entrepreneurs are often confused about how and when to pay taxes. The tax deadline is the same for everyone, but 1099 contractors and sole proprietors must pay quarterly estimated taxes throughout the year.

“The IRS expects self-employed individuals to pay federal income tax throughout the year, and if you don’t pay estimated taxes each quarter, Uncle Sam can charge you interest and impose nonpayment penalties,” AllBusiness.com explains. “In general, you have to make estimated tax payments if you expect to owe at least $1,000 in taxes.”

If you’re unsure about how to calculate your payment and/or how to make estimated payments, the IRS has a handy guide that addresses these topics. Tax preparation software company TaxSlayer also breaks down the basics in layman’s terms and offers a platform to help the self-employed manage their quarterly estimated taxes themselves.

  1. Try to be as Accurate as Possible

It’s crucial that you try to be as accurate as possible with your quarterly estimated payments. In fact, serious underpayments (and even overpayments) can trigger fines and fees.

“If you used tax software to prepare last year’s return, it’s most likely capable of resurrecting that data to calculate what you’ll owe in the current year,” tax expert William Perez notes. “Some software even has the ability to build in certain scenarios so income or deductions can be adjusted up or down. Using such a planning utility can help make your calculations for estimated payments more accurate.”

Small business accounting technology firm Receipt Bank points out that this is especially smart in light of the IRS’ 2017 Digital Services Report, which includes a recommendation for Congress to build APIs capable of integrating with third-party tax software. 

It’s not smart to overpay with the expectation of getting a big return. Getting a massive tax return only indicates that you’ve given the IRS an interest-free loan. If you take the trouble to arrive at a more accurate figure, you can put that money to work for you throughout the year.

  1. Actually Learn What You’re Doing

It’s one thing to Google a question and find an easy answer. But that’s not the same as actually researching your question and developing a concrete understanding of how the tax system works and what you can do, as an entrepreneur, to make the most of your income.

When you take the time to learn what you’re doing, tax season will start to feel more natural. As a result, you can focus on the business itself and avoid feeling like all your time is eaten by having to deal with last year’s accounting.

Don’t Let Taxes Consume You

When you’re an entrepreneur, taxes can be a source of pain and headaches for you. But you can transform them into just one of the many responsibilities you have to tackle on an annual basis.

It might not feel like it, but this is ultimately your choice. You can either get stressed out about taxes and let them consume you every year, or you can be proactive and get this facet of your life under control and humming along evenly. Which will it be?

Although the approach of spring means warmer weather is on the way, it also means that tax season is here. If you’re an entrepreneur or specifically the founder of a startup, knowing how to navigate some of the complexities of tax season will be useful for you (both now and down the road).

And the sooner you wrap your mind around how critical it is to be meticulous about your approach to filing taxes, the better off you’re apt to be.