I submit final draft of my business plan to my mentor soon (I can’t thank you enough for the business plan template you have included in your packages). My question is for the financial aspect of the business plan: calculating the income taxes. There are so many websites out there and not one that offers suggestions of what a someone in our business could file. I mean, you have state, federal, etc. Is it just the same when you are taking an owner’s withdrawal vs. salary? I really want to check all of my resources before I pay an accountant for the same thing I can find myself. –MK
I love to see how you are doing your actual homework!
I can’t stress enough to new business owners the importance of not being penny wise and pound foolish.
What I mean by that is I think every business owner should do this homework to make sure they have a good grasp of these things. That way, when they do talk with an accountant and/or business attorney, the information makes more sense; they understand it at a more cellular level.
Even after doing your own homework, it is more than wise to still consult with an accountant and/or business attorney.
The reason you can’t find all this info spelled out for you is because it all depends.
Your business formation will be relevant. If you are in the U.S., besides federal obligations, different states and localities will have their own varying requirements.
Every person’s situation and circumstances are different. Therefore, there’s just no way around simply going to all the pertinent agencies in your own location, talking to them and getting the low-down on exactly what your particular tax, licensing and reporting obligations are.
And don’t expect one agency to know the particulars of another. It’s not their place, and relying on wrong info they might give can cost you. You need to talk with each one.
As far as figures go, you can figure on 15.3% right off the bat to Uncle Sam. Technically, it’s 12.4% for Social Security up to $106,800 and 2.9% for Medicare. After $106,800, you only have to pay for the Medicare portion of the self-employment taxes.
However, things can get more confusing depending on individual circumstances, like for example, if you have a job in addition to running a business.
Personally, I don’t worry about cut-offs and just keep setting the same amounts aside. Anything extra can go into the fund for future payments or turned over to savings. (And realistically, it’s not likely that you would even hit the $100,000 mark, if at all, until several years in business. Not that’s it’s not possible; it’s just that most people in our industry don’t know how to work with clients or run their businesses in a way that allows them to reach that potential.)
But 15.3% isn’t all that you want to set aside for taxes from your business income…
As far as your state goes, you want to find out if there is an income tax or not (some states have one while others don’t). How much is it? When do you need to pay it? Does your state require a business license? How much is that? How often must it be renewed? What are your reporting obligations?
Your city, even your county, may also have their own business licensing and tax requirements as well. You’ll need to find all of this out.
As you can see, there’s no one-size fits all answer. It all depends. And this is exactly why it is always in your best interests to work with an accountant and/or business attorney.
Even if you think you understand things or have covered all your bases. Because unless you are an accountant or attorney, you simply don’t always know what you don’t know.
And they can literally save your butt from making potentially costly errors, giving you the right advise based on your own particular set of circumstances and business formation and saving you all kinds of time, energy and money trying to figure all that stuff out on your own.
PS: No, an owner’s draw is not the same thing as a salary. Just one of the myriad bits of knowledge you must know about in order to do your own bookkeeping.