Making IT Profitable:
A Guide for New Businesses & Freelancers

Chapter 3: Dealing with the Taxman
How to Avoid a Tax-Bill Nightmare

It's no secret that taxes are complex. As a business owner, you should meet with a tax professional, and you should do it well before taxes are due. In the meantime, Tristan Zier New browser window icon., founder of , recommends these four strategies to keep your finances in reasonably good order for whenever you do meet with a CPA:

  • Understand how "1099" status works. Zier notes that it's common for new single-person businesses to get the majority of their revenue from a single client. But if you're working for that client on a contract basis, you aren't considered an employee. That means you don't receive any employee benefits like health insurance or Workers' Comp. It also means that no employer is paying taxes on your income, so you have to do it yourself. You're responsible for paying taxes for income, Medicare, Social Security, and more.
  • Pay your quarterly taxes. Because it's not easy to save money in the early days of a business (and because Americans aren't historically great at saving money generally), the IRS requests that 1099 workers pay taxes quarterly. This helps spread the burden throughout the year so you don't have to write a massive check in April. Quarterly taxes are due on January 15, April 15, June 15, and September 15. If you don't pay these taxes throughout the year, you will likely face an underpayment penalty of six to eight percent of your bill. Ouch. Luckily, you don't have to make a wild guess about how much to send the IRS every few months. Form 1040-ES New browser window icon. [PDF] includes instructions for calculating these taxes and sending them off.
  • Track your income weekly. Of course, in order to calculate your quarterly taxes, you have to know how much money your business is making. This is one of those tasks that is not hard in theory but can be super-hard in practice if you don't keep good records. (Dr. Deborah Osgood claims that a lot of what determines business success comes down to "good recordkeeping and basic math." That's especially true when it comes to tracking expenses.) Zier recommends tracking income weekly. Beyond that, he says, things get too out of hand and too difficult to remember. Do whatever it takes to make weekly income recording happen: add it to your schedule, reward yourself with ice cream, or hire a part-time accountant. Just make sure it happens. There are some great tracking apps and software that can help (see our Resources section for details), but a simple Excel sheet will do in the beginning. It will take a while to make this a habit, but it's one of the most valuable habits you can develop for the success of your business.
  • Track your expenses daily or weekly. Are you driving to clients' offices? Paying for top-speed Internet connection? Investing in a seminar to learn a new skill? All those expenses might be deductible, along with a whole bunch of others. The SBA has great resources on deductible startup expenses New browser window icon., but the important thing to take care of is recording what you spend. It may help to get a separate credit card for your business and use it exclusively for business purchases. Keep in mind, though, that not every business-related purchase is deductible. Your best bet is to track carefully and let an accountant worry about how to get you the most savings on your tax bill.

Using cloud apps to track finances? Be sure to have a hard backup. If something happens to the company, your information could be lost.

What Happens When You Mess Up?

Because it's a massive government organization that takes our money, the IRS often gets a bad reputation. But Zier insists that it's not a hard one to work with, even if you mess up your taxes. In fact, Zier claims that the IRS is actually very good about working with people who admit they messed up and are genuinely looking for a solution.

So what can you do if you, say, didn't file quarterly taxes all year and are faced with a giant fine in April? Ask your accountant about your options. He or she will likely recommend reaching out to the IRS as soon as possible to see if you can work out a payment plan.

And next year, keep better records.

“If I could give advice to my past self, it would be to prepare for future data crashes. A few years after we first launched our business, we had a drive crash and it ended up costing us $4,000 just to recover four files. Some of the files were unrecoverable and cost us tens of thousands of dollars in lost productivity. Today, we have backups and redundancy on everything, but if I could advise my past self, it would be to protect our data from unforeseen events.” —

Ian Aronovich New browser window icon., president and cofounder of

Next: Chapter 4: Keeping the Books

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