What has been the hardest lesson you've learned about managing business taxes?

[smithbx]

Hey everyone, I hope you're having a fantastic day!

Taxes are necessary but they are no one's idea of fun, and they can be complicated to navigate — especially if you are just starting out.

We would love to know:

What has been the hardest lesson you've learned about managing business taxes?

What happened and how did you handle it? Share your experience, and any tips or advice with us!

P.S. We may have a small business certified public accountant (CPA) react to your tax situation in our newsletter! If your response is chosen to be featured, someone from the Seller Community team will contact you directly.

[sjd3470]

Been spending so much on equipment, insurance, and setting up right now that I know I will not owe anything so I figured I will wait until next year.

[mustardseed21]

I quickly realized that sales tax adds up and every quarter I have to actually pay what I've been collecting. Just starting out, I needed every penny to keep products on the shelves and pay for overhead. I am paying for it now with a huge monthly payment plan for previous quarters. I've learned to set aside each day's taxes into its own bank account and pay quarterly taxes from that account. It's a much easier pill to swallow by setting aside smaller payments each day than to be hit with a 3-month grand total. 

[KatKatniss]

Oye... first year with a very thorough CPA and filing as an S-Corp and it's been a rough transition. SO much I thought I was doing in the simplest way has turned out to be not at all simple. Earlier this year I turned OFF daily Square balance transfers thinking it's easier for running payroll if I leave a running Square balance and do manual transfers to my bank occasionally. It was for payroll, but it also ended up over-complicating my monthly bookkeeping. I had 4 separate business bank accounts to keep money separated (Incoming, Expenses, Savings, Profit) and that also turned out to just complicate tax prep. I would leave money in my business Venmo account for occasional payments to vendors or contractors, simple at the time but also complicated monthly bookkeeping and tax prep (and I just found out, not FDIC insured so that money isn't protected if lost). 

What have I learned? Two bank accounts is enough if you're doing monthly bookkeeping (one biz checking and one biz savings, but if it was still just me doing the tracking I'd likely keep an Expense checking and an Incoming checking). Set Square balances to automatically transfer daily so you have a running bank statement of income (FAR easier for income and expense tracking from a bank account than from Square balance). Transfer money from Venmo account weekly or monthly and make sure Venmo payments to venders are able to be drawn from the biz bank account instead of directly from Venmo balance. Basically what I've learned is that monthly bank & credit card statements are the simplest, straightforward way to track and prove income and expenses quickly and easily. So I've set everything up to run through bank accounts or credit card now, and it's become much simpler. 

[DinaLRosenberg]

I come from a long line of business owners.. and what I learned is that it's the State that will bite you in the rear end much harder than the Fed... especially New York.

I've seen my dad nailed on state sales tax back in the day and so I have always been extremely careful to make sure sales tax is remitted on time.

When we opened Amityville Apothecary 5 years ago we signed up with Davo for our sales tax (it connects with Square) and they calculate our sales tax liability and pull it into an escrow account daily. They file and remit our sales tax for us and we literally do not have to think about it. Never had an issue with not having the sales tax on hand & because it gets pulled after every day, we don't even really "feel" it.

As for tax planning, we found as we were growing, it was incredibly important to partner with an accounting firm. While we do pay a monthly retainer (I know many of you aren't at that point of your business journey) they do everything for us: reconcile our bank accounts, our payments, inventory amounts, create our P&L, etc. They've been vocal in tax planning and helping us, as owners, maximize our profits.

[mksavage]

I think the hardest thing for me has been how to limit our year-end tax burden. For example, are there strategic purchases should we make to help lower the amount that is owed at the end of the year, etc.? Our accountant has been helpful in making sure everything is filed correctly, but we've really struggled to find a CPA or adviser who can help us with proactive tax planning in a way that is advantageous to the business. Everything I know about business has been self-taught, or learned the hard way through experience, but this is one area where I'd really love an expert to be able to speak into the decisions we're making throughout the year.

[QuokkaCoffee]

Have you spoken to vendors about who they're using for their businesses?

It's how I found mine--brilliant, hyper-competent, slightly intimidating, new and earnest dad--and honestly I would be lost without him.

His is my favorite Christmas card to write. 🙂

[mksavage]

"Slightly intimidating," haha. Totally get that. I've asked around for recommendations in the past, but it's a great idea to do that again.

[LBBOUTIQUE]

I'm realizing that you have to pay taxes often, and on time.

[Ubrand]

Is there a way for square to keep sales tax aside and submit monthly and quarterly to the city on our behalf? Is there any app that can do this automatically? I find that filing sales taxes is time consuming and cumbersome. 

[mksavage]

This is a great question, @Ubrand! I don't think Square has a way to do this, but I'm curious if anyone knows of other apps that might. One thing that's challenging for us is calculating the total tax amount that we need to remit. It seems like it should be straightforward, but for us, we live in a town with two universities and a ton of nonprofits, so a lot of our sales are tax-exempt. Trying to calculate what we actually owe has been a challenge, and has often resulted in us paying more in tax than we've actually collected. (Which is not great, obviously.)

[QuokkaCoffee]

... but for us, we live in a town with two universities and a ton of nonprofits, so a lot of our sales are tax-exempt.

---

Wait, what does this mean, and why is that a thing?

[mksavage]

@QuokkaCoffee Certain types of organizations (specifically 501c3 organizations that are charitable, educational, or religious) don't have to pay tax on purchases as long as they show proof of their "nonprofit" status. So, while their sales show up as part of our monthly net sales, no sales tax is collected on the transaction. So, if we just pay tax on the reported net sales number, we'd be remitting tax that wasn't actually collected. For us, since there are so many 501c3 organizations in our community, we actually do quite a bit in tax exempt transactions and for some reason I have previously struggled to account for that when I remit our monthly sales tax. (Does that exist in Australia...?)

[joer0]

Davo connects directly with square and takes care of this

[Candlestore]

@smithbx ;

I am finding that here in PA for our Sales TAX which I pay monthly there is a nice online form I fill out the data they request.... Gross Sales, Taxable Sales and maybe 1 or 2 other things, then I hit Calculate.... and the Tax that the state says I owe is basically within $1.00 of What Square report I collected for Sales Tax.  Takes maybe 5 min, mostly signing in and waiting for webpages to load.  I see this and am amazed how The State, Square, and even my Old POS were all so close, so my question is how can the Government which makes us watch ever cent we take in, have a $6 Billion accounting error, what if I had an oops of $6 Million dollars, can I just tell the IRS .... oops Accounting error and all is forgiven?   Asking for all other business owners and myself that are feeling cheated by this.

[ryanwanner]

@smithbx  Hardest lesson I've learned is to not get behind on taxes, especially at the state level. The only time I've ever felt terrified about losing my business is the time that I got behind on my sales tax payments and a rep from the state walked in my front door. I was able to get a payment arrangement set up, and those payments were on the state's terms, not mine, so it was touch and go for six months while I paid the balance down.

After that, the biggest lesson I've learned is that a good CPA and bookkeeper are worth their weight in gold. They may be pricey, but knowing that the IRS and the state are happy with you makes it a lot easier to sleep at night.

[Kimberlym]

As an inventory based business (plant nursery), my first year I was surprised in tax season to find out my inventory at the end of the year was not an expense but actually deemed income. This doubled the amount I thought I was going to owe to $8K. Now I slim down my inventory as much as possible before the end of the year and wait until Q1 to bring in my big inventory buys. I buy almost nothing in Q4.

[Doran]

just how often things like tax codes change!  You think you got a handle on it and then it all switches up the next year.  

[awakenings]

I felt incredibly dumb because logically it make sense, but when it's your business logic sometimes goes out the window. It never occurred to me that when I would make estimated tax payments, that I should be making those from "my" money vs. having the business pay them.  It was one of those oh shoot (and a lot of other words) moments, when our accountant informed us that she had spent 4 days trying to find anything we missed as a deduction because we had a tax bill of $30,000 due.  Luckily, we were in a position that we could pay the bill (draining our savings), however it's a lesson I'll not soon forget. 

Another one was with bookkeepers.  Even though the books are "their" responsibility, I still need to do things like check my bank account regularly, and login to Xero, etc.  We had someone that had been great for 2 years, steal over $12,000 from us by sending ACH transactions through that were a specific type that only allow 24 hours to dispute.  It made for a great tax deduction that year and lesson learned even though I hate bookkeeping and accounting - I've got have some idea of what's going on even if it's just surface level. If something seems odd/off - ask LOTS of questions.  This is why I keep my bookkeeper and accountant separate - what one doesn't catch, the other will.

[mksavage]

@awakenings I think your note about asking a ton of questions is such a good one. I go through the General Ledger from our bookkeeper each month, and it has taught me a lot. I do the same for our tax forms at the end of the year. I used to feel silly for asking so many questions (they're the experts after all!), but I think it's our responsibility as business owners to be informed about what's happening in our businesses. And honestly, I have caught some pretty significant errors just by asking a question about something that didn't make sense to me. Sometimes it's helpful to be able to look at things through the lens of a beginner, because you don't make the same assumptions as a professional does.

Similarly, we have also benefitted from keeping the bookkeeper & accountant separate -- provides some checks and balances that are super helpful, especially come tax time! 

[QuokkaCoffee]

We haven't hit the stage where we can outsource our bookkeeping and payroll so I still do it myself, but it surprised me, avid math-hater, how much I've grown to love that part of operations. My accountant's just in charge of checking my work and offering strategic advice on top of ad hoc consults. He is brilliant and patient and kind, and I refer him to everyone I think might benefit from his services.

Spending money in order to keep the business growing was probably the harder thing to learn, as well as overcoming a fiscal conservatism ingrained by growing up within a certain income bracket.

P.S. If you can, or haven't as yet, have a chat with your CPA if it's possible to review your entire financial situation in case there's a way to simplify your liabilities/make your hard-earned money work a little smarter.