I finally have business license! I run a small retail arbitrage venture and I am the only employee. I’m finding there is a bunch of tax jargon that I have to know now and it’s daunting. What can I do? I also need innovative and positive feedback from people who are in business. I’m the only person in my social circle with my head in the stars and it’s frustrating at times. I’m a new mom and active military duty as my hubby is in the Navy. Woes of a young twenty something:)
Begin by taking time to educate yourself. No, I am not suggesting that you handle all your tax filings yourself (more on that later) but I am saying that you really should have a working knowledge of small business taxes including different categories of taxes (sales taxes, income taxes, payroll taxes etc.), types of tax filings and due dates, and basic tax jargon.
While it may be easier to hand everything over to a professional and forget about it, remember that your name is at the bottom of all tax filings (and “I didn’t know” won’t help you if you get in trouble with the tax authorities). The good news is that there are a lot of wonderful resources online to help you learn the basics. Counterintuitively, the IRS website is a great place to start. They have a whole section of their website devoted to small businesses and the self-employed (see here).
The Small Business Administration is another great resource.
Once you have the basics down, it is time to find a good accountant. A do-it-yourself approach is fine as an employee but taxes for small businesses are complicated and it is advisable to find a professional to help you. Many people mistakenly believe that income is the metric to follow when deciding when it is time to find an accountant but complexity is a much better measure.
And when you have your own business, you are officially in complicated territory. A good accountant should be able to not only keep you compliant and minimize your chances of an audit but also help you pay less in taxes by knowing all the deductions and credits you are entitled to take. Also, do not wait until tax time to find a good accountant. Unlike life as an employee where taxes are withheld throughout the year, as a small business owner you are responsible for planning ahead to pay your taxes when your file your tax return (or quarterly depending on the circumstances).
Working with an accountant ahead of tax season will eliminate the potential for nasty surprises. When looking for an accountant, don’t be afraid to meet with several until you find someone who feels like the right fit. Not all accountants are created equal. Besides the basics like making sure they have proper credentials (like a CPA or EA designation), ask about their experience with businesses like yours and make sure they are reachable all year if you have questions (and not just a during tax season).
While hiring an accountant is an added expense, so are the potential penalties and fees associated with not complying with the the tax code and not hiring one is penny wise and a pound foolish for a small business.
The best way to find a good accountant is by referral which brings me to another important key piece of advice I would give to anyone starting a business for the first time. Life as an entrepreneur can be lonely and finding a tribe of likeminded women (and men) is the best thing I ever did for my business (and my mental health).
Attend networking events with other business owners and entrepreneurs to connect with people who share your passion and can relate to your successes and struggles (sites like Meetup and Eventbrite are great places to start looking for events in your area). There are also many online groups geared towards entrepreneurs which foster a real sense of community. Explore groups on LinkedIn and Facebook to find online forums that will allow you to share ideas and gain support.
Lastly, good luck. Running a business is not easy but it is worth it.
A follow up question:
Because every business is different and the tax code is extremely complicated and always changing, there really is no good substitute for a knowledgeable professional. Health care provides a good analogy. I might treat myself for a cold but I would never attempt to operate on myself. Filing taxes as an employee is like treating yourself for a cold – you can Google the best over-the-counter medicines and be just fine. Filing taxes as a business is like attempting to operate on yourself. It is wise to get someone with years of training involved. In the end, the cost of paying someone to represent you during an audit or the expense of paying more taxes because of missed deductions usually far outweighs the cost of paying for an accountant. I have worked with many clients who paid way more than they had to in taxes or got themselves in hot water because they DIYed their business taxes.
About the author:
Pamela Kornblatt is the President of Tax Strategists, an accounting firm based in New York City. The Tax Strategists help startups, small businesses, entrepreneurs, and individuals make tax efficient decisions so they can keep more capital to grow their businesses, save for their futures and enjoy. Pam believes that taxes can be approachable, understandable (and maybe even enjoyable).