Let me explain…
It’s time to have an honest conversation about small business income and taxes. You may have heard of this popular quote by Benjamin Franklin: “Nothing is certain but death and taxes”. I am here to tell you that this is absolutely true and Uncle Sam is here to make sure of it. At this point, you may be thinking that I am going to talk about the importance of paying your taxes. Well, you’re sort of right. However, what you may not realize is that once we start considering sales vs. profit vs. taxable income, the money was never yours from the beginning. (Don’t shoot the messenger). Let’s get into this, shall we?
Some accounting and tax lessons are best taught through example, so let’s consider the example below:
Let’s imagine that this is your first day as a professional service provider. By the end of your launch day, you have made $5,000 in sales. Congrats! That’s a pretty epic launch. I know that you are super excited and I am extremely proud of your strong start… BUT…. that 5k is not your money. As a business owner, you automatically have to deduct the cost of everything that has helped you generate the sales. The costs of the marketing, processing fees, web designer, other team members, supplies, etc. can all add up and take away from your overall sales. Once these costs (expenses) are deducted from your sales, we arrive at the profit.
Alright alright alright! You now have a profit. But guess what, it’s still not your money. There are a lot of other deductions that can be considered like contributions to retirement accounts and 401(k) IRAs. Once these are deducted, you now have your taxable income. The funny thing about taxable income is… It’s STILL not your money. .
This is where Uncle Sam (the IRS) swoops in for his cut. Taxes. Some common taxes that you should be aware of are – federal income taxes, state income taxes (if applicable), and payroll or self-employment taxes. As an ethical and professional business owner, there is no way to get around paying your taxes. Uncle Sam does not play around. He will seize and freeze and if you plan on being a successful business owner, a problem with the IRS is the last thing that you want and/or need.
If we revisit the example of making $5,000 in sales, you will see that by the time you have deducted your expenses (profit), contributions (taxable income), and taxes, you may be looking at a number that is significantly lower than anticipated.
Just as a heads up, the more you make, the worst it can get. Making more money means that you move into higher tax brackets, which means that your money starts to be taxed at a higher percentage. That’s not to discourage you. Another bright philosopher, Calvin Cordozar Broadus Jr. (aka Snoop Dogg), once said “Mind on my money, and my money on my mind”. If you stay knowledgeable and abreast of what’s happening with your business and finances, then you can beat the IRS. It’s going to take a high-level strategy that will require input and advice from a tax strategist or a full service accounting firm like Right Choice Accounting Solutions. For now, every time you make a sale, I want you to think of me and say, “This ain’t my money”. Because that will help you to mentally prepare for what’s to come.
Right Choice Accounting Solutions is proudly a black owned, CPA led outsourced accounting and tax firm. Right Choice offers a one-stop shop accounting and tax solution that covers high level strategy, accounting insights & analysis, financial statement preparation, tax planning and preparation, basic bookkeeping, and much more. Schedule your FREE intro call TODAY to learn more about what makes us the Right Choice for your accounting and tax needs.
Keywords: Accounting, Tax, Black Owned, Taxes, Accounting Solutions, Full Service Accounting Firm, Payroll, Self-Employment, Profit, Taxable Income, Money, Outsourced Accounting