Taking on the Tax Bite
THE TAX BITE IN SMALL BUSINESS
We have been talking on occasion thru various blog posts about Financial Education. A big part of this is knowing how your cashflow is effected. This isn’t limited to the cash in cash out view. This involves planning where the cash flowing in has to go. Keeping your focus is important and one part of this will be controlling the Tax Bite.
Everyone knows they have to pay their Tax obligations. However, if you haven’t been in business for yourself before, you need to make yourself aware of just what your Tax bill will take out of your earnings. This isn’t the easiest (and be sure to talk with a Tax Professional).
Planning your business (simplified) includes analyzing your customers’ needs, stocking your inventory, then you are ready for business. You do not have any (income) tax obligations until you have earnings. Once you make a profit, you have a taxable event. BE PREPARED FOR THIS EVENT!
TAKING ON THE TAX BITE
Understanding taxes is almost like running 2 businesses. You run your own business then you spend countless hours keeping up with the taxing authorities. In the post: The Responsibility of Wealth, I wrote the following:
She commented: “When we retired, the executives were ushered into a room and given instruction on handling the financial retirement affairs. The rest of us were just given our last check and shown the door.”
Some people get that extra help with financial education. Some take it on and gather the education themselves. If you run your own online business, you need to “GET” this right away! (at least when you start making money)
By taking on the tax bite, I am referring to taking into account the preparation that is necessary to not only keeping your tax liabilities as low as possible but also paying your taxes in a timely fashion. This takes into account that you will have the funds for your tax obligation in hand at the time it is due.
I saw an outline once from a small business whereas the owner had a budget line item for everything. In his case, he kept a reserve fund of 35% of his income to meet his tax obligations. He felt he was cutting his budget close but he was seasoned with his accounting.
Your taxable income is your net income. This is what you have left after your deductions have been subtracted from your “Gross Income”. When you are running your own online business, you have more deductions (such as business expenses) that you can subtract from your Gross Income.
Here we go again with this announcement:
SEEK ADVISE FROM A GOOD TAX PROFESSIONAL!
If you get nothing else, I hope you take serious consideration to the above statement!
In the blog post: Financial Regrets in Business, the author wrote:
Now, we all have a chance to correct our past mistakes. We are entering a new venture with Compumatrix. With this new venture, I will pay myself 10% and 25% will be used to purchase more “SEEDS” for future crops.
That 10% is a part of the taxable income while the 25% is a part of the business expenses and are deductible from the gross income. These are just 2 aspects of this business we have discussed. All other business expense will be added to this 25% and deducted from the gross income. Then charitable donations will be taken into account (per IRS rules up to 50% of your taxable income can be deducted).
At this point, after the business expenses are removed and the charitable deduction are accounted for, our plan is to set aside 50% of the remainder to save towards taxes. (Not all of this will b necessary for taxes.) After the tax liabilities are met, the remainder of these funds will be savings. Remember we took 10% right off the top for ourselves and that has to be accounted for as a part of taxable income.
You may be confused by all this whittling down of your income before IT’S YOURS! Keep in mind that if you haven’t been in business before, then all of this was done for you before you received your paycheck from your job.
I’m writing this for those of you that are with us in Compumatrix that intend to earn money online with substantial incomes.