The entrepreneur’s guide to the Year-End Tax Liability projection.
Have you been making your estimated tax payments each quarter? What do you mean you didn’t know you were suppose to? Well, you are in good company and the penalty for missng your payments is not that severe. Today, however, we need to get ready for the upcoming tax liabiliyt that you are facing at year’s-end. Unfortunately, the upcoming tax payment coming due next April has been the down fall of many good business owners. So, we shall make sure that we got this one correct.
What is a tax projection?
A small business owner’s tax liability is the amount due to the IRS based upon the amount of money you, and possibly your spouse if married filing jointly, have made from all sources of income through the year. Realize that the liability is based on ALL sources of income and not just the amount of net income in your business. This, of course, assumes that you or spouse receives a wage as an employee or income from mulitple businesses and venture. Do not forget that all sources of income also includes any investments, cash payments, real estate income, capital gains from property sales, and the like.
Why is determing the tax liability important?
I cannot give any more justice to the importance of the tax liability than your prior experience has likely given you, but fees and penalties, liens on income and property, bankruptcy, and a whole bundle of badness looms in our wake if don’t take it seriously. I have had clients sit in front of my desk and explain their lack of tax return filing or payments for the last 4-5 years. Fear and dread fill their wrinkled faces as they explain their reasons for skipping out on their tax payment. Please do not misunderstand me here; the IRS has the right to place direct liens on any and all sources of your income until they are paid in full, both the tax liability and the penalties. The overwhelming burden of the liability can leave you facing bankruptcy as your last option. However, we have a plan to keep you from ever facing any such tragedies. All we have to do is save enough money from our income each year to pay our tax liability.
How to prepare for your tax liability projection.
1. Select the best appointment date
This can be tricky for several reasons. You want to select an early enough date so that you have time to save for the upcoming payment. However, depending on your type of business, you want to receive a projection late enough in the year to be able to accurately forecast your projected year-end income. The last consideration is that your tax preparer likley has many other clients trying to get an appointment during crunch time so you will have to fight for your own. Here are a few tips to consider:
- If you are in seasonal retail sales then consider later in November or early December. This will allow you to consider most of your 4th quarter sales in the projection. Additionally, if your 4th qaurter sales prove to be astronomical then you should be able to set aside the first of your fruits for the tax liability.
- If you are in a service based business that remains consistent through the year then you should be able to take the appointments earlier in the 4th qaurter. An October apponitment will be perfect for you, and you will have ample time to save up for projected liability.
2. Prepare your data for projection
Your tax preparer simply needs to know how much income you expect to receive and where that income is coming from.
- W2 wages: this is money received from being an employee. You need to simply bring last year’s W2 for a base amount, and then explain in writing any increases in salary that you expect to recive this year. If you have new jobs this year then ask your employer for a year to date pay stub. This will provide the numbers you are looking for.
- Business income: You will need to provide your tax preparer with the amount of money you will receive in salaries and distributions from all business that you own, or are a part of, regardless of busines type. The more accurate the year to date informtion is then the more accurate your preparer will be when projecting the tax liability. Additionally, it will be up to you to provide a projectin of income that these businesses will make in the final qaurter. This could be the bulk of your income for the year if you are in retail so consider getting serious about this forecasted number. Lastly, do not forget about the cash payments made to you by your customers. All cash payments should be included in business income.
- Investments, stocks, bonds, annuities, and any other source of income. Bring proof of any statements that you may have and be willing to ask questions about every type of possible income if you are unsure.
- Inheritances, gifts, and life insurance proceeds typically do not count towards taxable income.
- Capital sales and expenditures: all gains and losses from selling your property needs to be brought up at the projection. Provide the cost basis, any depreciation taken, and the final sales amount to your preparer. Large purchases of assets that were not immediately expensed during the year did not show up on your profit and loss either, so you will need to provide this information as well. Depreciation is a magical tax deduction that can greatly reduce your tax liability. Do not lose out.
- Tax filing status: believe it or not the status of your tax return will make a considerable difference in your tax liabiliyt due to the deductions available. Married filing jointly, married filing separate, and single to name a few options. Be sure to explain any dependants, or your dependancy, that will need to be explained on the tax return.
3. Provide your data bfore the projection
A tax preparer should be quick with numbers, but no one should be required to prepare an accurate projection in less than an hour. Please be willing to provide your data to your tax prepare at least 7 days before the appointment.
4. Prepare any last minute changes in forecasted income
Be ready and prepared with any last minute changes in projected income before your appointment. Are your sales outperforming your prior forecasts by a material amount? You will want this expected income to be considered.
5. Set aside the amount of your projection
The greatest mistake you can make at this point is to ignore your tax preparer’s recommendation. The reason for a tax liability projection is to prepare you for the upcoming tax payment that will be due next spring. A wise business owner will take this amount of cash and set it aside into a savings account. Consider adding 10% to your projected amount in order to avoid being short in cash.
Biggest takeaway about your tax liability projection
Make the appointment and keep it. I want to encourage to be the better business owner this year and complete the tasks that will save your from debt and interest payments. A simple set of books, a proper tax projection, and a savings account ready for the tax bill will make for a happy heart come next spring.
Have a question? Please comment below! Have a suggestion for the improvement of a step above? The community and I are always listening. Do not forget to sign up for the upcoming blogs that will finish out the final 2 “DO NOTS” of the year-end process.