What Female Businesses Owners Need to Know About Taxes in 2021
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NEW FEMALE BUSINESS OWNERS AND TAX SEASON 2021
Does anybody else feel a kind of mood shift in the small business community around this time of year? And not really the good kind.
New female entrepreneurs, such as yourselves, have been crushing the game throughout the season previous. Right? You’ve been innovating your offerings, investing in your marketing strategy, developing your small business ownership mindset, building your confidence.
And then, boom. March hits. The wave of tax season hysteria washes over you. You feel confused; you worry about making detrimental mistakes as you complete your small business tax return. And, just like that, you’re back to wondering if you really can handle this whole female business ownership thing. It’s crazy how quickly looming questions regarding taxes can make us feel helpless.
I’ve seen it happen way too much.
But not this time, girl. Because you do have what it takes to tackle your small business tax return like an expert. You’re not helpless. Like with everything else, you just have to learn.
UNDERSTANDING SMALL BUSINESS TAXES
Tax-related things are given weird names, and the code is long, but nothing in the tax world is so complex that you, the badass female entrepreneur that you are, can’t comprehend it. And once you comprehend it, you can proactively put your knowledge to work for you. The key, really, is to make tax preparation and planning a year-round thing, not just a March thing!
Imagine a strong small business infrastructure supported by a personalized tax plan you so clearly understand that you don’t ever worry about penalties and you never get hit with unanticipated liabilities. What you owe never eats into your small business goals for the year or affects what you’re able to bring home to your family.
Sounds nice, right? Well, it’s possible. Super possible! You’ve got this.
Hang with me and, just as we always have, we’ll tackle what you need to need to know piece by piece until your arsenal of small business ownership knowledge is completely stocked and you’re ready to kick tax season’s butt.
TAXES FOR NEW SMALL BUSINESSES
Today, we’ll consider taxes from the perspective of a female entrepreneur brand new to small business ownership: what you need to know for this year and what you can be doing throughout the months ahead to make sure your life this time next year is that much easier.
If you’re a female entrepreneur new to small business ownership and operating without partners or employees (who are not the same as contractors or suppliers!), your small business is likely classified as either a Sole Proprietorship (SP) or single-member Limited Liability Corporation (LLC). But both are actually the same in the eyes of the IRS--they are taxed the exact same way.
If the term ‘single-member LLC’ sounds unfamiliar, then your small business is most likely classified as an SP; to become classified as an LLC, you would have filed Articles of Organization and paid fees to your state, all of which is not required of SPs. And you would have done all that for purposes of limited lawsuit liability, which are unrelated to taxation.
In either scenario, come tax time, you’ll present your small business’ earnings along with your personal income tax return on a form called “Schedule C”.
WHAT KIND OF TAX EXPERT SHOULD YOU HIRE?
And while we’re on the subject of tax time, let’s talk about your tax expert.
First of all, you certainly should have one. But what should they be like?
Well, most importantly, your tax expert should be knowledgeable about tax laws and regulations applicable federally, as well as specific to your state. And they should follow all laws and regulations with integrity.
Basically, they should be realistic and have sort of bad news for you sometimes. Because it’s just the truth: taxes are expensive. But evading tax liability by exploiting loopholes will come back to bite you in the end. So your tax expert should strategize for the greatest benefit of your small business without ever breaking any rules. Because if they do, and you get audited, the resulting penalties will fall on you, not them.
But besides compliance with tax laws and regulations, another way your tax expert will demonstrate their value is by making themselves available to you year-round. Your small business operates outside of tax season, right? So professionals paid to help you care for the health of your small business should too.
If you find that, besides during the month of March, your tax expert is too busy for you, it might be time to find a new one.
But maybe this is the first time you’ve thought about hiring a tax expert... And lo and behold, it is March. How will you know if the tax expert you’re considering is a good one?
Do they patiently and kindly answer your questions, or do they brush you off? Do they strive to support your financial awareness and decision-making empowerment as the female business owner, or do they make the world of taxes feel like a distant and mystical place in which you’ll never be welcome? When you hang up the phone, do you feel more confident and at peace regarding your tax situation than before you called, or do you leave the conversation feeling dumb and overwhelmed?
If you answered the latter to any one of those questions, that’s not a good sign. Keep in mind, between you and the tax expert, you’re the superior in this scenario--the employer. You’re paying them to do a job for you.
WHAT TO ASK YOUR TAX EXPERT
Now, I will say, as somebody who has operated within the business financial world for a long time, tax-related concepts can be difficult to communicate. Especially when speaking to someone with whose financial background and small business situation you’re not yet familiar.
So, if on the phone with a tax expert for the first time, show them grace and patience as well by asking clear and thoughtful questions. It will help them out a lot.
And if, to that, you would say that you honestly just don’t know what you don’t know right now, so clear and thoughtful questions feel like a tall order, I get that. Instead of asking something specific, then, simply start by explaining generally about your small business and what’s going on with it financially. And follow that with a question like, “Knowing all that, what should I be pulling together for this year, and what should I be thinking about from a tax perspective over the months to come?” That will really help get you off on the right foot.
WHAT TO EXPECT FROM YOUR TAX EXPERT
And one thing you should definitely expect them to discuss with you is the self employment tax imposed on small business owners. It’s a big one, and if you’re not prepared for it, it can hurt.
Not trying to scare you. Let’s break it down.
WHAT IS THE SELF EMPLOYMENT TAX?
If you’ve ever been employed by a business that wasn’t your own, remember how you originally agreed to either an annual salary or an hourly wage, but when you got your paycheck, a chunk of it was missing? That was because your employer was withholding a portion of your earnings to pay the IRS your contribution to our nation’s FICA tax.
FICA stands for Federal Insurance Contributions Act.
While you were employed, you paid 6.2% of your gross (total, untaxed) wages to Social Security and 1.45% to Medicare. And your employer also contributed on your behalf, matching both of those percentages for a total of 15.3% of your gross wages paid toward FICA taxes.
However, of course, now you as a female entrepreneur are both the employer and the employee, so to speak. Which means you’re responsible for both halves--you have to pay the whole 15.3%. And that total percentage is what’s called the self employment tax (Note that there is a way to avoid the self employment tax, which you can consider after you start generating a significant profit. Stay tuned for more information about that in April’s blog post!).
Already that’s a bit of a bummer, but you’re actually not done yet (this kind of stuff is what I mean when I say that, if they’re being realistic and honest, your tax expert should have kind of bad news for you sometimes).
HOW MUCH DO SMALL BUSINESS OWNERS PAY IN TAXES?
On top of the self employment tax, you’re also still responsible for paying your personal income tax.
And this is one instance where your tax expert will especially come in handy. Because personal income taxes aren’t calculated based on a set percentage that applies to everybody. What you owe will depend on a lot--your age; if you’re married, your spouse’s taxable salary; if you have kids, how many; applicable exemptions; miscellaneous sources of income you may have from things like interest or rental properties; etc. All the factors that go into determining your personal income tax percentage get a little too specific to your unique situation to give general instructions here, so I recommend laying it all out before your tax expert and letting them help you.
But for the average American family, the personal income tax percentage will likely range between 12-22%. And again, that’s in addition to the 15.3% self employment tax. So now you get why it’s best to avoid surprises with this stuff.
What’s best is to save for tax liability throughout the year so you’re never caught off guard.
HOW TO SAVE FOR SMALL BUSINESSES TAXES
And here’s a bit of good news--mercifully, the process of saving for tax liability is a bit more nuanced than simply setting aside the total tax percentage of all the money you made over the past year.
You’ll be taxed on your small business’ net profit, which is its income minus its expenses. AKA, you’ll only be taxed on the earnings that you got to keep.
THE IMPORTANCE OF BOOKKEEPING FOR SAVING FOR SMALL BUSINESS TAXES
But, of course, the main piece of all this will be actually knowing what your expenses are--and I think you know where I’m going with this if you’ve been around my blog for long at all.
You’ve got to have an efficient, updated bookkeeping system. You’ve got to know exactly how much money you made vs. how much money you spent in order to know how much profit on which you’re going to be taxed. Without that information, you can’t calculate how much you need to be saving for tax liability throughout the year.
LEARN BOOKKEEPING FOR TAX PLANNING IN MY QUICKBOOKS MASTERCLASS
Bookkeeping affects literally everything. And if you’re new to the idea, or are ready to up your bookkeeping game, might I suggest enrolling in my Quickbooks Masterclass?
A couple reasons you should:
I start the Quickbooks instruction from a blank slate--I assume you’ve literally never encountered it before. We’ll begin with how to choose the right subscription plan for your small business’ needs. So you truly can use my Quickbooks Masterclass as a step-by-step set-up tutorial and save yourself tons of time and headache getting going.
I focus deliberately on the features of Quickbooks, like tax preparation and planning resources, that will help you hold onto more of your hard-earned money and effectively move the needle toward true small business flourishing. We’ll get straight to the good stuff.
QUARTERLY TAX REQUIREMENTS
One particular facet of the good stuff that’s mega-important where taxes are concerned: Did you know that there’s such a requirement as payment of estimated quarterly taxes after a certain point? Yep. I meant it when I said tax planning has got to become a year-round thing through diligent bookkeeping.
If your small business generates enough taxable profit for your annual tax liability to equal $1,000, you’ve got to pay quarterly--you can’t wait until March. So you need to be ready! And Quickbooks, with its time-saving and informative bookkeeping tools, will help you stay fully financially aware, able to work ahead of this requirement. AKA, you’ll be ready!
We’ll talk more about estimated quarterly taxes in blogs to come because, on a happy note, having generated enough profit to be required to pay them is indeed a rather significant milestone. One to which you as a brand new female business owner may still be looking ahead. So we won’t get too carried away just yet.
MUST-KNOW BUSINESS FINANCIAL INFORMATION
But I’ll close with this: If, within your small business, you’re striving to reach more significant milestones, this kind of stuff is where it happens. They say practice is where you win championships? Well, business financial literacy is where you win profit.
While detrimental to avoid, when embraced, a business financial understanding represents a massive opportunity for growth and longevity for all for which you’ve worked so hard.
So you need more information like this in your life and at your fingertips. Again, I’ve got it for you.
GROW YOUR SMALL BUSINESS THROUGH THE PROFIT TO PROSPERITY MEMBERSHIP
It’s my privilege to introduce to you my complete Profit to Prosperity Membership.
My Profit to Prosperity Membership delivers all the benefit of having your own CFO--someone who would advise you about all the stuff in this blog, plus a million other things (without the steep monthly retainer fee). Plus, it contains opportunities to collaborate with a supportive community of fellow female business owners, girl bosses across industries who are working hard to figure out all the same business finance stuff as you. AND it includes direct monthly access to me, Stevie!
The Profit to Prosperity Membership invites female business owners to leave behind feelings of insecurity and overwhelm and to unlock the limitless power available to those who firmly grasp the inner workings of their small business finances.
Join me and many others who are ready to level up! Get the answers to all of your tax questions and much, much more.
Explore all the Profit to Prosperity Membership details by clicking HERE.
And, as always, please feel welcome to reach out with any questions. I look forward to connecting with you!
