This post was co-written by Kat Boogaard and Ken Boyd.
As a business owner, tax time stirs up plenty of emotions.
There’s disdain and then dread. Confusion followed by frustration. Anxiety prefaced with a little overwhelm. And then a little more disdain for good measure.
Rest assured, those feelings are normal. You’re probably never going to countdown the days to tax season with the same sense of enthusiasm you would an approaching vacation.
But, tax time doesn’t need to be totally painful either.
We connected with several different business owners to find out exactly what they hate about this season, and we’re following that up with some of our best advice to make this necessary process a little less groan-inducing.
Hassles and headaches: What business owners hate about tax time
1. It involves a lot of uncertainty.
Ask any business owner what they loathe most about tax time, and you’ll hear the word “uncertainty” uttered more times than you can count.
For many, filing their annual tax returns often feels like pulling the lever on a slot machine. When there are so many different factors at play, they’re essentially gambling as to whether they’ll be pleasantly surprised with a refund or be required to hand over even more hard-earned money.
“I’m always fearful and nervous of an uncertain outcome,” explains Querida Walker, who owns and operates My WOAB, a social networking site geared toward fitness enthusiasts.
“I don’t enjoy going through a year of paperwork and having the fear of owing more than I expected.”
Not only is potentially being burdened with a larger-than-expected tax bill disheartening, but it also stirs up concerns about whether or not business owners can actually afford to handle it.
“This causes a great deal of anxiety, because I’m never 100% sure that I have enough cash flow to cover the tax bill—especially with the tax laws always in flux,” shares Mike Pearson, Founder of Credit Takeoff.
“The call from the accountant with the news of what is owed is always stressful,” adds Jonathan Faccone, Founder of Halo Homebuyers, a real estate development and investment company.
2. It’s incredibly time-intensive.
Business owners already have numerous (and oftentimes competing) demands on their time, so the last thing they want to do is spend hours wading through paperwork, receipts, and complicated tax codes.
“It’s just time-consuming,” explains Yungi Chu, Owner of HeadsetPlus.com, and online retailer of professional office headsets, “It normally takes a weekend, if not longer. That’s a weekend I could be doing something else. I work 60-70 hours a week, so any free time is precious.”
Even if preparing for tax time doesn’t cut into the weekend, business owners still recognize that it’s time they could be dedicating to more profitable business activities or the work that they actually love.
“I am so busy this time of year preparing for our busy tourist season that taxes and the paperwork surrounding them is the last thing I need,” shares Georgette Blau, Owner of On Location Tours, a television and movie-themed tour company in New York City and Boston.
3. It’s intimidating and confusing.
Tax time brings with it an influx of overwhelming jargon, regulations, and requirements—and that can be intimidating for the average business owner without an accounting background.
“As our small business continues to grow, we encounter a litany of new tax issues that we never faced the year before,” says Ben Huber, Owner of DollarSprout, a personal finance website.
“Which of these expenses are legitimate business expenses? Does our transition to filing as an S Corp impact the way we file our returns? What about the remote workers we’re hiring out of state? Do we have to withhold state income tax in their state, our state of business, or both?”
“From a non-accountant background, these questions are overwhelming,” Huber adds. “Further complicating the issue is that the industry lingo isn’t always beginner friendly, even if I would be so conceited as to consider myself as someone with above average intelligence. It’s a lot to take in and it’s not something I feel comfortable guesstimating my way through each year.”
4. It inspires self-doubt.
That barrage of complex information is enough to make anyone feel inadequate—which is another strong emotion that most business owners are saddled with come tax time.
First, there are doubts about whether or not they’ve maximized their eligible deductions.
“As a small business owner with tons of clients and expenses throughout the year, tax time triggers lots of anxieties for me,” shares Matt Ramsey, Founder and Head Voice Teacher at Ramsey Voice Studio, “The biggest one is that I won’t remember to deduct all the expenses I have throughout the year.”
“I usually keep a list of my big expenses, but often it’s the little stuff that adds up,” he adds. “Not knowing that I’ve maximized the deductions of my business expenses is always a worry.”
That sense of doubt is a common one—many business owners trudge their way through tax time with the unshakeable feeling that they’ve screwed something up.
“The thing I hate most about tax time is the fear I’ve made a mistake on my return and will have to face an audit,” says Ian Wright, Founder of Merchant Machine. “In reality, there’s no reason why I should feel this way as I have an amazing accountant. But there’s always this nagging fear I’ve done something wrong.”
5. It’s expensive.
Perhaps the biggest pain point of tax time is the hit to the checkbook. Seeing the total sum of what they owe or have already paid in taxes is undeniably disheartening after a year’s worth of hard work.
“My business partner and I weren’t discouraged by the performance of our company in 2018. We actually had a pretty good year,” explains Matthew Ross, Co-Owner and COO of RIZKNOWS, which owns multiple internet properties.
“We were more so shocked and discouraged by the amount of taxes we owe. I can’t believe we owe the government that much money,” he continues. “It’s going to be pretty disheartening to write such a large check to the government for all the hard work we put forth in 2018.”
“As an entrepreneur, I have to save all year long to have enough to pay the taxes with come April,” adds Dane Kolbaba, Co-Founder of Watchdog Pest Control. “What once looked like a ton of savings gets depleted overnight. It’s depressing how much money goes out during tax time.”
It’s not all bad news: How tax time can benefit your business
With proper planning and a commitment to monitor your financial results during the year, you can reduce the anxiety of tax time—and even use the process to improve your business moving forward.
1. Automate your records.
Make tax time easier by automating your accounting system and your recordkeeping.
Use accounting software to process your accounting transactions and to generate the financial statements. Keep all of your records on the cloud, and scan important documents, such as receipts. Get rid of paper files, so you can organize and access your records easily at tax time.
2. Work with an accountant
The best way to reduce the uncertainty of tax time is to work with an accountant, and you should start consulting with a CPA from the day you start your business.
Yes, working with an accountant is another business expense, but the cost is well worth it. Here are several reasons why hiring a CPA is a smart move:
- Tax planning: Well-managed companies create a formal business plan, including estimates for sales, production, costs, and profits. An accountant can use that information to forecast your tax liability for the upcoming year.
Assume, for example, that Julie’s company budget projects a $90,000 profit for the year. The accountant uses the profit number and other assumptions and forecasts a $28,000 federal tax liability.
- Estimated tax payments: Nearly all business owners must pay quarterly estimated tax payments during the year, and a CPA can help you pay the correct amounts.
Looking at Julie’s company again, she must pay $7,000 for each fiscal quarter of the year. Her accountant will help her file the correct documents and pay these amounts electronically.
- Tax law changes: Your accountant must understand tax law changes, as well as the financial impact of the changes. If you’re a business owner, you may read about tax law changes in the media, particularly in the spring, but you don’t have time to understand the potential impact on your business. A CPA will have these answers.
Business taxation is a complex topic, and you simply don’t have time to stay on top of the details, plus you probably didn’t go into business to become a tax expert. You need a guide to help you, and your accountant can be that guide.
3. Make taxes a priority
Reduce your anxiety about taxes by taking on the problem directly. In addition to hiring an accountant, use these tips to make tax season less burdensome:
- Tax payment plan: Your annual budget should include a cash flow plan to pay your tax liability. The plan must address both your estimated tax payments and any remaining tax liability that must be paid when you file your return.
In Julie’s case, this means a cash flow plan that allows her to pay $7,000 each quarter, and possibly more on the tax due date. Work tax payments into your cash flow projections.
- Create a cushion: Perhaps the biggest source of anxiety for an owner is having to pay a bigger tax bill than planned. This situation is common because a tax law change during the year can increase your expected tax bill. Reduce your anxiety by setting aside extra cash to pay the higher tax liability—aim for 10% more than your tax estimate. Setting up a cash “cushion” reduces the dollars you have to operate your business, but you’ll be ready for the unexpected.
- Communicate updates: If you generate higher profits than expected, ask your accountant to assess the tax impact. Don’t wait until the end of the year to determine your new tax liability.
If Julie, for example, generates much higher sales and profits in the second quarter of the year, she needs to communicate that information to her accountant right away.
These steps require a real commitment in time and money, but you’ll be ready to pay a higher tax liability if needed.
4. Apply what you’ve learned.
Finally, use what you learn through this process in future years, so that tax season can be less stressful.
If you get in the habit of contacting your accountant when your profits are higher, you’ll have fewer tax surprises at the end of the year. When you consider a big transaction, such as an expensive purchase or adding a product line, you’re more likely to think about the impact on your taxes.
Tax time will probably never be something you look forward to, but it doesn’t need to fill you with dread either.
Build these tax planning habits into your routine and tax season will not only become easier and less time-consuming but also help you make more informed business decisions.