I am in love with the calendar sticking the landing this year.
The first day of the year is a Sunday. I’ve always been a big fan of the weeks beginning with a Sunday anyway.
It’s like beginning your morning with a brief time of peaceful silence, whether sitting alone in a semi-dark kitchen sipping that first cup of coffee, or meditating, or whatever. The week beginning with a day of relative calm, and/or possibly rejuvenating and relaxing family time is just exactly right.
I wanted to go ahead and begin this year with our regularly scheduled Sunday blog. For this very special first week of the year let us focus on what you and I can do to make 2023 epic.
As I was thinking about this, it hit me! I was honored with an opportunity to talk about this very subject on the Alicia Cramer podcast The Mindset of Business Success just this past Friday, and it fits perfectly for this topic as well.
She had asked what her listeners could do about the horrible but sadly inevitable necessity of tax considerations in business in such a way that 3 important steps came to mind. It’s all fresh in my mind, and I’d love to share them with you, too!
Sound good?
Let’s do this!
Keeping Score
I am currently enjoying a really great metaphor I’ve been hearing repeatedly the last few months.
Here it is: if you’re coaching an NBA game, what if you look up at the scoreboard, and over half of it is dark because the data feed that runs it breaks. Are you as informed as you need to be?
Should you hack the opponent as he takes it in, or are you in a position to trust your defense?
How the A.F. do you know without information?
I want you to think about that the next time you need money from your business account.
There are levels of awareness of one’s business performance, and I would like to put forth that the lowest, most caveman knuckle-dragging level is this:
Look at the business checking account. If there’s money in there, and you want it, take it.
(I still have checks, and my debit card. I must have money).
Operating at this level means you need to just remain blissfully ignorant of revenue vs. expenses, and the necessity of income taxes.
In fact, people in this world worry about taxes only once a year, generally. When it can’t be avoided any longer, like a root canal or an ugly wart removal.
They are not even aware there’s most of a scoreboard hanging over them, dark and unknowable.
The second level of awareness is having a bookkeeping system, and knowing that you should be looking, at the very least, the profit and loss statement periodically.
Third level? Reconciling your bank accounts, ordering your transaction into clear categories, and reviewing your balance sheet, profit and loss statement, and statement of cash flows every month, no later than the 10th of the next month. Having some idea of how you’ve been doing recently, in other words.
But there is even greater awareness available to those with the ability to light up the entire scoreboard, and understand all of its numbers.
The fourth level of understanding, of knowing the whole box score, the internal statistics, are a deeper level of metrics known as value drivers and key performance indicators, and how they are intertwined with the more obvious financial indicators.
The goal? To have an idea, not of just past performance, but forecasting the future, creating budgets, making hiring and firing decisions, making product development and marketing decisions, all of it.
Setting one- to three-year goals, and tracking performance against those goals. Why would you not want this, now that you know you can have it?
How do you think the big famous corporations make these kinds of moves? Answer: they know the scoreboard, like a sports fanatic!
That is super-charge tip number one. I gave a way a hint of what the second one is just a little bit ago…
Timely Estimated Tax Payments
Remember when I said that if you put off thinking about taxes because the whole idea of it sucks like Electrolux until it can’t be avoided, between early February and mid-April, you’re at a lower level of awareness?
Well, there’s something else. Two “something else’s,” in fact.
One is you that you set yourself up for a rude shock, and either wiping out your business accounts or even personal savings to pay an unexpectedly large tax bill all at once.
Oh, you can get an installment plan with the IRS, and pay them over time, too. But then they get even more money out of you that they don’t deserve. Because they do charge interest, better believe it.
I hate when people pay Uncle Sugar a penny more than necessary, and installment agreements make me sad. They are a necessity of my work, but not a favorite.
The other thing is basically adding insult to injury. If you owe over $1,000 in April, and you made no estimated tax payments during the year you owe even more.
It’s called underpayment penalty. This also makes me quite sad.
If you work for a wage, your taxes are withheld with every pay event. You never think about it, and if you do it right when you file the following year you get a small refund.
If you work for yourself, you’re left to your own devices. Well, not really, but you may think that.
In actual fact you are required to make an estimate tax payment four times a year.
On the 15th of: April, June, September, and the following January.
Go to my blog article on Estimated Taxes to learn more about how to do that, and why it’s an awesome idea.
You will save yourself money by paying as you go, but you’ll also be giving them the money increments throughout the year, so you “miss it” less, too.
It’s like keeping your room neat, but it also maximizes your net profit because it minimizes your tax.
This next and final tip will save you quite a bit more money. Ready…?
S Corporation Tax Strategy
We touched on this in last week’s blog post, so let me just hit the highlights.
S Corporation status eliminates the self-employment tax entirely, but remember that as an officer-employee of your S Corporation you need to take a salary.
The savings occur on the income you keep after that salary, though, because that part is now only taxed at ordinary income tax rates. No self-employment tax.
Electing S Corporation status provides you with thousands of dollars of savings on unnecessary and avoidable double taxation.
Yeah, I said it last week, I’ll say it again. Double taxation.
Done correctly, this can save you thousands, even tens of thousands of dollars.
Every single year you’re in business.
You can read more about the benefits of the S Corp election here, and even learn how to do it yourself if you want the control and savings of doing so.
Final Thought
We are doing all three of these things in our own business, and quite a bit more as well.
The really good news is that we also guide the wealth creation and tax planning journeys of a number of entrepreneurs and real estate investors.
We’re starting out the New Year taking on a select few new clients. If you’re interested in learning more about whether you’re a right fit for Fourth Level services visit our Work With Me page here.
No matter what, let’s make 2023 truly epic, and as prosperous and fulfilling as possible!