My practice experienced tremendous growth last year! I stopped working my part-time franchise job last February and have been earning a living exclusively from my massage business ever since (my sales increased 188% over 2014)! As fantastic as this is, I didn’t manage my tax obligation well and owed an uncomfortably substantial amount for 2015.
My 2015 taxes were filed and paid in full by April 18th (this year’s due date), so half of my tax preparation goals for April have been fulfilled (I didn’t make an estimated payment for the first quarter of 2016). Due to poor planning and wishful thinking, I owed way more than I had on hand and ended up using a credit card to pay my federal taxes (not an ideal situation, but at least I owe my credit card company and not the IRS). I learned some valuable lessons from this experience (please keep in mind that I am not a tax expert and every situation is different).
- Claiming self-employed health insurance as a deduction under the adjusted gross income section of the 1040 form rather than as a Schedule A medical expense reduced my tax debt by about $1000.
- Contributing to an IRA* instead of a self-employed retirement plan reduced my adjusted gross income AND provided a tax credit.
- Federal taxes can be filed for free provided income and age qualifications are met.
- Colorado state taxes can be filed electronically on the Department of Revenue’s website.
- I like H&R Block’s software better than Turbo Tax.
I’m so grateful and at peace now that my taxes are caught up, and I’m using a new tax management strategy to make sure I never have to go through this again. In my case, the taxes due were about 13% of my gross receipts and sales, so I’m transferring 10% of my deposits to my business savings account twice a week. This way, I’ll be able to make respectable estimated payments throughout the year and owe a significantly more manageable amount upon filing next year.
I don’t recall any real tax advice being taught in massage school (I even took an additional business course) and believe the inability to pay them is a leading reason why so many small businesses fail (I recently heard that about two thirds of small businesses survive the first two years, half survive five years, and one in three 10 years). My hope is that by sharing my experience honestly, I can help other independent practitioners avoid failure. I’m confident that as long as I maintain this strategy, I’ll be able to continue improving lives in this practice that I love!
Have you had any tax challenges? Please share your tips or struggles in the comments. Thank you!
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*A traditional IRA qualifies for an IRA deduction AND a retirement savings contribution credit. A Roth IRA only qualifies for a retirement savings contribution credit. This credit is income dependent.