Let’s talk about scary tax surprises and how to prepare for them. These are things we truly need to pay attention to. Before we dive in, I want to give a quick disclaimer: I am not a tax expert. I have a strong accounting background and a lot of accounting knowledge. I don’t specialize in taxes mainly because the tax code changes so frequently. Honestly I can’t keep up with all of it. So, if anything I say today differs from what your tax professional has told you, please follow their advice. Still, these are important things to be aware of so you can avoid scary tax surprises.
Let’s start with the first and scariest surprise: unexpected tax bills.
This usually happens when your tax bill ends up being much higher than you anticipated. It could be because you didn’t pay close attention to taxes throughout the year, you didn’t set aside enough money, or your business grew faster than expected and you didn’t adjust your tax payments accordingly. Here’s a side note: if you’re a small business owner and you end up owing taxes on your personal return at the end of the year, it’s a sign that you should be looking into estimated quarterly taxes.
This is something that catches a lot of business owners off guard, especially in their first year. The IRS may give you a bit of grace the first time, but after that, if you’re not paying quarterly taxes, you’ll likely face penalties and fines. So, this is definitely something to take seriously and try to get right. You can also work with a tax professional who can guide you through tax planning based on your specific numbers.
Now, unexpected tax bills can feel really overwhelming. I’ve seen so many business owners stress about not having enough money set aside, and that worry lingers all year long. A general rule of thumb is to save 25% of every dollar you earn in your business. Set that money aside specifically for taxes. Of course, if you’ve already worked with a tax pro and they’ve given you a different percentage based on your situation go with that. But in general, setting aside 25% will give you a solid cushion and help prevent the receiving a big tax bill you can’t pay.
One simple way to prepare for taxes is to start setting aside money in a separate savings account. This can be a dedicated account where you regularly transfer 25% of your income and then leave it alone. Ideally, you’ll almost forget it’s there so you’re not tempted to spend it. This is a great strategy to reduce the sting of unexpected tax bills and avoid one of those scary tax surprises.
Another potential surprise to watch out for is tax penalties related to misclassifying workers.
This specifically happens with the difference between employees and independent contractors. This has become an even bigger issue in recent years. There have been quite a few labor law changes. If you’re unsure whether you’re classifying your workers correctly, it’s wise to refresh yourself on the rules or consult a tax professional.
Misclassifying workers—especially if done intentionally to avoid paying taxes—can get you into serious trouble. There are some general rules that help determine proper classification, including how much autonomy the worker has, what kind of behavior is expected, what procedures they must follow, and the nature of your working relationship. I’ll include links in the show notes where you can read more about these rules. Just a heads-up: they’re often full of jargon and can be hard to interpret. Don’t hesitate to get help understanding what they mean in plain English. The bottom line is: go through the rules and make sure you’re in compliance so you don’t end up with costly penalties for misclassifying your workers.
The third tax surprise that can catch people off guard is failing to file your tax returns—which can lead to penalties, even if you owe nothing.
That’s right, sometimes you’ll still get fined simply for not filing the proper forms. This often happens because we forget about deadlines, aren’t sure what’s due, or just procrastinate. A simple way to avoid this is to set up calendar reminders for key tax deadlines. If you’re in one of my programs, I also send helpful email reminders about upcoming filings and reports. That’s one of the perks of joining! But even outside of that, you can just do a quick Google search for your state and federal tax deadlines and plug those into your calendar to stay on track. These types of penalties are frustrating because they’re completely avoidable. No one wants to pay extra for something they forgot to do.
Lastly, one of the scariest tax surprises for many business owners is the fear of being audited by the IRS and feeling totally unprepared if it happens.
If you were to ever receive a notice of audit, there are steps you can take to make the process smoother and reduce the fear factor.
Truthfully, an audit doesn’t have to be scary. Yes, it can feel overwhelming and time-consuming because the IRS will go through your records and require proof of your expenses. But you can ease that fear by being prepared in advance. The key is to have your records in order and your receipts organized.
Keeping up with your monthly bookkeeping is also essential. That way, you’re not scrambling at the end of the year trying to pull everything together at once. Instead, you’ll stay organized throughout the year and avoid that last-minute panic.
Also, don’t forget to download my free bookkeeping checklist. It walks you through simple steps to follow each month to keep your bookkeeping in great shape. If you’re ever audited, you’ll be able to hand over your documentation with confidence. Everything will be right there, clearly recorded and easy to verify.
That’s really what an audit is all about. Confirming and proving that your income and expenses were truly business-related and accurately reported. Clean books make that process much smoother.
So, we’ve covered some of the scariest tax surprises and, more importantly, how to prepare for them. I hope you found some helpful takeaways you can start using in your business right now. Maybe there’s a small change you can make today. Maybe a quick clean up you can do before the end of the year to set yourself up for success.
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