Taxes for the Weary
So, let's talk about something that no one really wants to talk about.
But really, everyone deals with them at some point in their lives. And here's what I'm finding:
There are tons of blogs about taxes and how to pay them, deduct for them, track them, plan for them, and emotionally prep yourself for what you'll be dealing with. But if we are completely honest with ourselves, how many of these posts are actually true life situations that young people share with the world?
Money is uncomfortable. More than that, telling other people about your money is uncomfortable. And terrifying. I feel like I want to throw up a little even when discussing it with my mom.
I'm going to put myself out there for a minute today and tell you my money story. My only hope is that it helps someone else out there when they get to a point in their business when money is not only scary, but it's something they will deal with every day, whether they want to or not.
I started my business almost 5 years ago. My first year, I grossed something like $6,000 total. Living was difficult, but hey, we've all been broke at one time or another. My second year got a little better - I rented an office, started to actually make a living and not live off noodles, and had a reputation beginning to build.
I have more than doubled every year since. Doubled, meaning gross income, net profit, contracted service costs, hours worked, clients served, equipment needed, sleep lost, and the list goes on.
Don't be deceived by those who claim they have increased at such and such a percent over the years - they may mean money, but really, that success comes with an increase in everything.
Included in those things is KNOWLEDGE.
I cannot tell you how much I've learned in a very short amount of time about money. Never, ever, in a million years, did I think I needed to understand money like I do now. And I anticipate it only means I will learn more as I grow up. I'm astounded already, what my brain will hold in knowledge, simply about this subject, by the time I teach #babyandreini about it. Our bodies are amazing, aren't they?
But back to money. I nearly fainted the first time my tax bill was over $1,000 at the end of the year. And it wasn't that far into my business. I knew and understood that the more I made, the more taxes I paid. But silly me, I kind of attributed that ratio to be the same as my business grew.
I was wrong.
Unless you're a business or accounting major, you don't learn the tax code. And let me tell you people, it's gnarly.
Here are some things I heard that were supposed to put my heart and mind at ease when I thought about taxes and money (but be forewarned, I should NOT have listened):
Getting married and filing jointly will give you tax break.
You get to write off all that interest you pay on your new home, and what you pay is mostly interest that first year.
A growing business means growing deductions.
Your new baby is a write off.
Your spouse has his taxes taken out of his paycheck already, so you only have to worry about yours.
His return could be used as part of your tax payment.
If you file early, you'll have lots of time to prepare for the April 15th deadline.
Send your taxes to an accountant. They will be done more accurately and you'll pay less in the end.
Pay your estimated taxes and you'll have a nice small, if not eliminated, tax bill at the end of the year.
Shall I continue?
Though all these statements are true, they did not help me.
Here are my list of tips, re, what I think the list above should have said:
Getting married and filing jointly MAY give you a tax break. However, as an entrepreneur, it may be beneficial to consult an advisor on ways around this. Key - you have self employment tax. Since you're married, it's not as simple as filing as an individual. And now your income is combined. If you both grow in worth, your tax bill grows, too.
Yes, you get to write off your interest. However, there is a flat deduction that most accountants file for a married couple. Find out what this is, look at your end of year mortgage statement, and make sure your accountant has all the information to make sure you get the highest deduction.
A growing business DOES NOT mean a perfect ratio of deductions. Let me explain: My business grew by 62% last year. In 2014, I made 1/3 of what I made in 2015. However, my cost of doing business did not increase by 62%. Which means that though my deductions were more, they were not nearly THAT MUCH. As a creative business owner, there are only so many computers I can buy and miles I can drive... there's a tipping point, and I hit it. Hard.
As far as the baby, ya, we'll see. I don't trust it, though. We are planning for that deduction to just simply not exist, then maybe we'll be pleasantly surprised when our tax bill is a little lower than expected.
This is the biggie - your spouse and their retained earnings. EVEN WHEN you think they are withholding enough, withhold more. Find the bracket that spouse falls into, and MAKE SURE they are taking that percentage out of their paycheck. And if that amount, nevermind if you're married to a self employed creative like myself and have COMBINED INCOME, is not being withheld every month, you will owe taxes at the end of the year. Goodbye the days of tax returns.
Which leads me to this point - if there is no return, there is no help. If you're lucky enough to get a return, yes, it may be used as part of your tax owed. But most likely, it won't be enough.
No matter how early or how much you prepare or think you understand your finances, you'll never really be prepared. Tax is spooky... it comes out of nowhere...
Yes, send your book keeping out for review and have an accountant do your taxes. But then, if you feel like you need it, REVIEW THEM YOURSELF. And maybe even get a second opinion, too. This will prevent any mistakes, and more importantly, you're much less likely to go crazy trying to do them yourself.
Finally, the estimates. Sure, pay your estimates. Just remember that those estimates are based on the previous year. If you plan on growing, they won't cover what you need to pay. Or, if you're getting married, or buying a house, or have any major life changes coming your way, they don't take those into account. Tell your accountant about these plans, and have them adjust your payments accordingly. And then pay them. Really, pay them.
Granted, this is just my experience and things that I have learned the last 5 years. It may or may not apply to you, and it is definitely not coming from an accountant, who would probably scold me for providing tax advice. But, as I was in inconsolable after our tax bill got delivered last week, of course I went online to find another creative's story on how to deal. I couldn't find one, and it made me wonder why.
Hence, this story. It's true, it's raw and it's not pretty. It's not something that is easily shared, whether it's because we are scared to share our story, uncomfortable getting this personal, or afraid that the tax gods are going to come after us for telling the truth.
I encourage you all to be honest about your money, be open with other business owners and spouses of entrepreneurs about your experience, and then maybe we can all help each other emotionally deal with this.
Money is the worst thing to fight about. It's also the worst thing to deal with alone. And trust me, it feels like a huge weight is lifted when it's understood and shared with someone else.