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The Tragic Tax Yo-yo

Uncle Sam Tax Yo-Yo

A lot of lessons I learn come from personal tragedies. I am incredibly grateful that this is not one of those. I got lucky. Quinn sat me down when I was starting and told me:

Make sure you put a certain amount of your earnings aside each and every time you get paid. It is not your money, it is Uncle Sam’s.

I’m not going to write a big old post on taxes. I’m just not that cruel. The tragic tax yo-yo is quite simple and easy to avoid. I see too many business owners in that position. You make money, you spend it. Make more, spend that too. April 15 comes and BAAM … you owe Sr. Sam $25,000 in taxes. Problem is, you don’t have it because you already spent it.

A lot of first time business owners fall into that trap. So, you file an extension and work hard, saving up the money to pay the tax bill. You have a great six month, squeak by and come September, you manage to eek out an addition 25k. Taxes get paid. Thank god that is solved. You forget all about it, until February when you meet with your new accountant who looks at your projected tax basis and your bank account and … oh damn not again. This game of yo-yo is a tough one to get out of. There are two ways to deal with it: never fall into it in the first place (Thanks Quinn) or be frugal and figure out how to save up enough to get out of the trap. It is never too early to start preparing for taxes.

So how much should you save? Look at your projected income for the year, figure out what tax bracket it lands you in, tack on self employment taxes and park it. Depending on my earning at the time, I set aside 25-45%. That money gets transfered into a separate high interest savings account (ING Direct for us) and is not touched until tax time. I have always over saved, which usually makes for a very nice April bonus!

Oh – and check you get all your 1099s. You should be getting them any day now (deadline in the US is Feb 1). Make sure they have the same numbers as you do on your books, entered your name and your Tax ID correctly. I have had a dozen or so be incorrect over the years.