The first mistake most service business owners make with their taxes is the biggest mistake of all: it’s a failure to plan…
…Which is essentially planning to fail!
For a lot of business owners, one of the few times over the course of a year where they really think about their taxes is the middle of April, aka. the last possible moment.
Unfortunately, that’s pretty much the worst time to start thinking about taxes.
Think of taxes like a murder (there’s a mental image for you!).
By the time April rolls around, the deed is done and the only thing we can do is find out how it happened.
Your tax accountant is the crime scene investigator and unfortunately, they can’t do much to save the victim (your business) at this stage. They can only really tell you how it died.
And the cycle repeats all over again next year.
Tax planning is like knowing the murderer is coming through the back door and having your house booby-trapped “Home Alone” style.
You’ve got your battle plans lined up and are ready to live another day.
So, let’s take a step back for a moment.
As a contractor, no matter how many jobs you do or how much you make, you are a business.
This means that money flows in and out of your business in three basic ways:
- Gross income
We all know the formula: Gross income – expenses and taxes = net income. Net income is the actual amount available to go into your pocket.
How do you increase your net income?
You’ve got three choices fundamentally: you can play a better offense, or you can run a better defense or a mix of both.
First, you can increase your overall income.
You can land some more clients, quote more jobs, improve your marketing and lead generation, and generate more sales.
In sports terms, you work hard to put more points on the board.
You can also decrease your expenses and your taxes.
In sports terms, that’s like playing defense: you take steps to keep your opponents – in this case, your expenses and the IRS – from putting more points on the board.
Cutting expenses can and does make a difference, but for most contractors taxes are your biggest expense so it makes sense to focus on the biggest win.
Besides, you don’t want to shave cash out of revenue-generating activities in your business. Reducing your marketing budget now may save you some money in the short term but it’s going to cost you in the long run.
The taxes you pay do not benefit you but they do benefit the government.
Paying less tax is a good thing. Period.
Tax planning gives contractors, like you, two powerful benefits you can’t get just anywhere.
First, it’s the key to your financial defense.
And for most of you reading this book, taxes are your biggest expense. So it makes sense to focus your financial defense where you spend the most, which is the check you cut to Uncle Sam every year.
Second, tax planning guarantees results.
You can spend all sorts of time, effort, and money promoting your business – and have nothing to show for it.
Or you can set up a medical expense reimbursement plan, deduct the cost of your teenage daughter’s braces, and guarantee savings.
But those guaranteed results start with planning.
You can’t ever deduct money you spend on a medical expense reimbursement plan if you don’t set it up in the first place.
Ultimately, there are two kinds of dollars in this world: pre-tax dollars, and after-tax dollars.
Pre-tax dollars are great because you don’t pay any tax on them. Earn a dollar, spend a whole dollar!
And after-tax dollars aren’t bad. If you go to the grocery store to buy dinner for your family, the check-out clerk won’t turn up her nose and say “sorry, we can’t accept these after-tax dollars.”
But they’re not nearly as good as pre-tax dollars, simply because you don’t get to spend the tax you pay on them.
And the only way that can happen is if you plan ahead now!