Okay full-disclosure, I still hate April 15, but just not as bad as I used to. Paying taxes can be a challenge for anyone, but it seems especially hard for those who are self-employed. Every spring, I used to get a big surprise from my tax returns until I changed one, small thing.
For the first dozen or so years I was in business for myself (yes, 12 years – I guess it takes me a long time to learn) I would always end up owing much more money to Uncle Sam than I had anticipated. There were many years that I owed more money than I even had to my name. Some years, I had no money at all and still had a big tax bill on my desk. Why was I always caught unaware? Truth be told, it was never much of a surprise, but it always felt like it. I kind of expected it each and every year, but I did not change my behavior as a consequence. Isn’t that the definition of insanity? I digress.
One day, my accountant sat down with me and had a heart-to-heart. “Dustin,” he asked, “why don’t you open up a new savings account, name it ‘Tax Savings,’ put a certain percentage in there each time you take a distribution, and leave it alone till April 15?” Great question. Seems simple, but I had never thought of doing that. I asked him what percentage I would need to save and he gave me an estimate.
My appraisal firm is set up as an S-Corp. Each month, I receive a salary. I do not do anything with those payments because my payroll team takes care of that. Every year, I fill out a W-4, claim my dependents, and the rest is automatic. However, I will regularly take a distribution check (well, me and my partner) and it is here where things are different. The first 10% of this money goes to charity. The next 30% goes directly into that escrow account. And it sits… and even gains a little interest.
When taxes are done in the early months of the year, I know what I will owe on April 15. I almost always dip into that escrow account, but I have never been short. Whatever is left over can either be kept there for next year or I will sometimes write myself a ‘tax refund’ check so I can feel special like all my W-2 employee friends and neighbors. Hey, I like to take advantage of the tax season specials too, ya know.
Running a business is hard work, but adding the stress of not being able to pay your tax bill each year should not be part of it. If you are finding yourself short every year when April 15 rolls around, I urge you to create a system similar to the one outlined above. Do not wait till spring to find out you do not have enough money to pay your taxes. Put the money away throughout the year. If you are like me, you will hardly miss it.