Some years ago, I was teetering between working for a company and earning money on the side through websites I had created. I also dipped into freelance writing. When it came to tax time, I really didn’t have much of an issue because my main job covered the brunt of the taxes and whatever I made from the side-projects were easily included thanks to W2’s and 1099’s.
It wasn’t until I began making more than my normal work and deciding to leave the position that things started to get shaky in terms of finances and taxes. I was so focused on the money-making part that I neglected to plan for the taxes and by the time April 15th rolled around I was looking at owing quite a bit of money to the government (uh-oh).
I made it a point that I’d learn that lesson only once.
The problem I had was compounded due to my ignorance:
· I didn’t fully understand what I could claim as business expenses
· I went with one of the popular tax filing companies that just rushed me through the system
· I wasn’t withholding enough money
After all was said and done I was facing well over $2,500+ in owed taxes which was quite a bit considering that I was still just getting started on my own in business. Every dollar counted because I needed it to help grow (and pay the normal bills).
Turns out that one of the other up-and-coming entrepreneurs within my circle happened to be a CPA for their day job so I got a hold of him on Skype and talked about the benefits of going with one. After about an hour I finally had a solid understanding of what I did wrong, what I need to do next time, and why I really needed to stick to a CPA from that point out.
Here are the main things I learned when talking to this individual about taxes and doing business:
A. Find someone local – As much as I wanted to just hire the guy on the spot, it would have been a pain overall because he lived so far away. I’m in the Central Florida area so I made a list of every CPA Orlando has to offer. I found one and having them so close made it very easy to do taxes the next year because I could fax over the documents, swing by to discuss any issues, have them walk me through it step-by-step, and also help me find ways to add deductions.
B. Frequency is better – We are all used to doing our taxes when it comes tax time because we have this love for one giant check. When you’re doing a business it’s far better to do your taxes quarterly so you won’t get caught off guard by a major hit if you did something wrong during that year. You can easily handle smaller taxes every few months than having it slam on you at the end of the year.
C. Deductions & Withholding – I thought I knew what I could claim as deductions that first year of doing taxes independently but boy was I wrong (it resulted in an audit). A CPA is trained in all of this and can answer your questions; they can help you fully understand what and what not to claim. Working with one that really knows the tax laws can help you save thousands and prevent you from making an “oversight” that could lead to potential tax fraud.
D. Retention – A CPA (or the firm) is going to keep all the files you’ve submitted on record. Compare this to the big envelop you receive or online account (which you forgot) and you see the benefits. If the IRS suddenly digs up something from a few years ago and you’ve been going to the same CPA you can bet that they’ll put in the effort to find the documents and fight back.
These days it’s all about keeping good records. I learned my mistakes early on (at least I’m thankful for that). Taxes aren’t that big a problem anymore and business is booming. In the end I would recommend a CPA to anyone that is out there on their own trying to build something from scratch; it’ll save you a ton of headaches and money.