Doing Your Taxes - For Branding Agencies
As the year comes to an end, one of the things I'm thinking about is taxes.
It’s not a sexy topic I know. But I do love thinking about it because my taxes are a representation of how much money I made.
There's nothing wrong with looking to minimize your tax due. But I actually feel good about paying high taxes because it means that I was profitable.
So today, I want to share how I think about taxes, and specifically how I think about taxes in December, and what I'm doing to prepare for taxes while also minimizing them.
In this post, I’m going to talk about how I build taxes into my revenue goals and pricing for the year, what’s worth spending money on in December to get the tax break, and what’s not, and how to shift your revenue at the end of the year to minimize your tax bill.
Taxes and your revenue goals
Now I'm going to preface this by saying obviously, I am not an accountant and do not take my financial advice as some sort of authority.
That said, I feel like I'm pretty good with money - I've got my systems set up and they've worked really well for me.
So I'm going to share how I think about this, because I think taxes and how you approach them is as much a money mindset thing as anything else.
The first thing is basic. When I plan for how I'm going to price my services and my revenue goal, I always take taxes into account.
Now that might sound really obvious, but most people don't do this.
It's why my Freedom Calculator asks you to calculate your business income and your personal income, and then it spits out the full revenue you need to make, including the taxes you need to pay.
And the reason this is so helpful, is because when I do this exercise of figuring out exactly what that total revenue number is, then I have one clear Northstar to aim for.
I know that if I generate that number at the top, I will have enough taxes to pay my bill this year.
And what's funny is that even though I've been doing this for many, many years, I'm still always kind of amazed at the end of the year that I have exactly enough for the taxes.
It's because I already had pre-planned for them.
So if you haven't done that, I highly suggest doing it for next year, because then, instead of taking taxes out of what you made, you add them into your revenue goals.
So number one - I don't want to worry about taxes - I want them to be embedded in my goals.
Simple tax minimization strategies for branding agencies
The second thing that I alluded to before is that I love paying lots of taxes, right?
The more taxes I pay, it means that I was profitable in my business.
Now remember, you only pay taxes on your personal income, you don't pay taxes on anything that you expense for your business, which is a beautiful thing of running your own business - you can expense quite a few things.
But I find that some people are so obsessed with lowering their taxes that they will buy things that they don't even really need just so they can expense them and lower their tax bill.
Now, I'm all for spending money, especially at the end of the year to minimize your tax bill on things you would actually buy.
But I find that a lot of people will buy things that they wouldn't normally buy just to get that tax break.
And I'm telling you right now, it's not worth it. Don't spend money on things you weren't going to spend money on just to save on the taxes - you will end up spending more because of it.
That being said, if you have things that you are going to be investing in, in the next couple of months, see if you can spend that money in December.
If you have a computer that you're looking to buy in the new year, buy it now.
If you're on a subscription service and you can pay for the full year upfront right now - do it.
If you are in a coaching program, a business development program and you can pay up front for the year or you could pay the balance this month - see if you can. Those are all great ways to lower your tax bill.
Of course, I'm talking about a situation where you did make a decent profit this year and you've got taxes to pay.
A great way to minimize them is just pay for them using money that you already are going to owe. And a nice way to do this, if this is available to you, is just to open an interest-free credit card and pay it off there.
So whenever I have things that I know I'm going to be paying for in the next few months, I open an interest-free credit card just to pay for it now, and I'll pay it off next year, but I'll get the tax break this year.
So number three - to minimize your taxes without spending money that you don't need to spend.
Think about what you're going to be offering to your community and to your prospects in the coming months, and see if you can schedule it so that you only make those offers in January, or see if you can book clients where they're going to give you the majority of the payment after January 1.
This will mean that your income will roll into next year's taxes and not come off of this year's taxes.
And basically, it will push off your need to pay those taxes for an entire year. And that's a huge difference.
Because a year from now, your business is going to be way more profitable and successful than it is this year, assuming you're on the right track, and you're doing the things you need to do to build your business.
Tax planning and estimating tax payments
The last thing I would say, (although it probably should have been the first thing) is that it's really valuable to have an idea of how much you're going to owe throughout the year.
And it's a pretty simple calculation to do - I'm not sure why so many people end up in December or January or February with a tax bill that they didn't expect.
What I always do is I just have my books up to date, which is tracking the revenue coming in, and then the expenses going out.
And I always just look at that bottom number and I say,”Well, what's 30% of that? That's what I owe.”
I have a very simple spreadsheet that shows my estimated taxes that I owe, and every time I pay in April, June, September, I know that they’re there, and I put in the confirmation number, so I know that I did it.
I’ve got a running tally of how much I've paid, and it’s just a simple calculation.
I've got the net profit on my balance sheet, 30% of that equals x, and I've paid y so x minus y, that's how much I'm going to owe.
I look at this number about once a month because I always want to know how far off I am from the amount that I'm actually paying on my estimated taxes and how much more am I going to owe at the end of the year.
And just knowing that can be incredibly valuable, because first of all, it really sucks that you would get to the end of the year, and then your accountant would look at your numbers and tell you you owe $10,000 more than you thought - that's a terrible surprise. And I've known lots of friends in that situation.
This will basically guarantee that doesn’t happen, because I usually take 30% and I usually owe less.
So I'm being very conservative with that number.
But the other thing it does is that even if you're going to owe quite a bit more, because you made more profit this year, at least you can start to plan for it.
Because you're going to want to make that last estimated tax payment in January, and then you're going to have a few more months to generate the rest of it.
At this point, I might find out or realize that I'm going to owe an extra 10s of 1000s of dollars, but I've got five or six months to find it.
A lot of people also will take extensions, which I’m not a big fan of - I just like to pay for things and get it over with.
But I feel like five or six months is plenty of time to find the amount of money that you need, especially if you're already keeping track of it throughout the year.
So was that the sexy taxes blog post that you were expecting? Probably not.
But I love talking about these things and thinking about them, because they are such a critical part of business.
And I feel like most people don't want to look at them - they don't want to talk about them.
They have a really bad feeling around taxes - they hate them and they want to minimize them.
And I'm just offering a different perspective, because if you use your tax bill as a representation of how successful you are, you're going to feel really different when you pay it.
And you know what they say - the only things in life that are definitely happening are death and taxes!
So embrace it, own it, let it be a part of you growing as the CEO of your business.
Here’s what you need to get…
Taxes are a necessary part of running a business, but that doesn’t mean it has to be scary or stressful or that you have to avoid them.
Do the planning, work them into your pricing strategies and you won’t get any nasty surprises at the end of the year.
P.S. You can always jump on a call with my team if you want to learn all my other tools and strategies to scale up your agency - just go here to get started!