“Should five percent appear too small, be thankful I don’t take it all.”-“Taxman,” The Beatles
Although I’m left with far more than 5% of my income after paying state and federal taxes (thank goodness!), that expense is the biggest downside of owning my massage business (way more so than constantly doing laundry). I worked for a small business soon after graduating high school and learned first hand how unforgiving the IRS is. Late and insufficient payments are subject to interest and penalties that are outrageous, with absolutely no concern for a business owner’s ability to stay in business!
As mentioned in “How to Start a Massage Business,” having a business savings account to set money aside for taxes is essential for me. Even though I generally don’t have the minimum amount in my account required to avoid a monthly service fee, that small (deductible) expense allows me to hold funds aside to pay my taxes on time so I avoid those aforementioned outrageous penalty and interest fees (which are also deductible, but a huge waste of money that would interfere with my success).
So how much do I set aside? Every tax situation is unique and I am not a tax expert, so my formula may not work for you. I do my best to allocate 10% of total sales each month to taxes. I make quarterly estimated tax deposits to the IRS based on the amount I’ve saved prior to each due date, which are the 15th of April (why a quarterly deposit is due on tax day is beyond me), June, September and January. When I file my taxes, deposits made for that tax year are subtracted from any remaining tax owed. I don’t make quarterly deposits for state taxes, so I don’t have any experience with those.
Here are some (hopefully) helpful links:
Everything you ever wanted to know about estimated taxes (and I mean EVERYTHING)
Estimated tax worksheet and payment coupons (Form 1040-ES)
Pay estimated taxes online* (use your Social Security Number and select form 1040-ES)
Sometimes I haven’t paid enough estimated taxes to cover the total amount owed when I file, but at least I only have to come up with a few hundred dollars at tax time instead of a few thousand. Self-employment tax really adds up, even with personal and business deductions. By planning ahead, I’ve been able to make tax management a simple necessity for creating a successful massage practice that I love!
Do you have any business tax management strategies to share? Please do so in the comments. Thank you!
Booked and Busy subscribers have exclusive access to the Booked and Busy Bonus Room on Facebook. This free group provides resources (including a seasonal tax prep checklist) for getting more clients so you can make more money while helping more people!
*If you file jointly, apply estimated payments via Direct Pay to the Social Security Number of the person listed first on your return to avoid any glitches. 🙂