For most direct sales professionals, the biggest selling season of the year is now at a close.
With all that year end income, you probably haven’t given much thought to your tax situation until just now.
A colleague of mine, Scott Lovingood, is a tax pro and reminds me often that the only difference between tax planning and tax paying is December 31. That deadline is fast approaching, and there are still a few things you can do to make sure you’re paying as little on your taxes as possible:
- Examine your gross income & expenses for the year. You should have some idea of how much income you’ve earned so far this year. Chances are good that won’t change much in the next ten days. Do the math and determine the approximate net profit you’ll have for the year. This number will give you a rough estimate ofyour taxable income.
- Contribute to your retirement. If you have taxable income, you may be able to set up or add to your retirement plan with a year-end contribution. This may help lower your taxable income. You may also be able to make a contribution after the end of the tax year if you have an IRA, and still have it count for this year.
- Make a donation. If you itemize, there’s still time to send a check to your local food bank or other charity before the end of the year. Be sure to get a receipt to document the contribution for your taxes. Most charitable contributions may be deducted on your Federal tax return – and often your state has special deductions as well for charitable giving.
- Go shopping! Pre-pay for a service, like an annual subscription to your autoresponder service, or buy that new laptop you’ve been eyeing. So long as it is used for business, it may count as a business expense to offset your taxable income.
After December 31, you’ll need to start planning for the new year. Here are a few tips to get you started on the right foot:
- Set up a system to record your receipts and reconcile them monthly. Don’t wait until the end of another year to figure out your income and expenses. Track your income and expenses quarterly, if not monthly, and know what kind of money your business is actually making.
- Set aside a portion of your income for taxes. If you’re building a growing direct sales business, you will, at some point, pay taxes on your income. The best thing to do is set aside at least 15-20% of your income in a savings account to cover the amount due at tax time. According to Scott, “self-employment taxes are 15% of net profit. Any income taxes would go on top of that. ” Put it in an interest bearing account, like a Christmas Club account, and you won’t be able to touch it all year.
- Get professional help. If this is an area of your business that gives you fits, hire a bookkeeper and let them do the data entry and the math. A good bookkeeper does more than just data entry. They will give you guidance on income and expense ratios, and help you look for ways to lower your tax burden throughout the year. Plus, hiring a bookkeeper may be a tax deductible expense, as well. At the very least, hire someone to do the data entry in a program like Quickbooks, and run the quarterly reports yourself.
- Talk to a tax professional. Especially if it’s your first year in business, have them walk you through the “how-to” of doing business taxes. A tax pro can help you spot potential deductions, as well as ways to save even more on your taxes. According to Scott, it’s money well spent.
In short, if you take the time to prepare now, tax season will be a lot less painful. Put in a little bit of effort each month of the year and you’ll have fewer headaches come tax time.