One of the biggest milestones an entrepreneur dreams of is breaking the six-figure mark. When I first started my business, The Organized Money, to help people manage their budgets and debt, this goal felt out of reach. So when I unexpectedly crossed the threshold a few years ago, I was ecstatic.
But my excitement was short-lived. After sending my tax paperwork to my CPA, she informed me that I owed the IRS $10,000. How did this happen? It boiled down to how my self-employment business was set up.
Here’s what I learned and how you can avoid making the same expensive tax mistakes I made.
What led to my surprise tax bill
If you’re just starting out as a freelancer or side hustler, take note. These are the main mistakes I made as a new business owner that had major tax implications.
1. I didn’t file quarterly tax returns
When you first start freelancing or working for yourself, it can be freeing. But it also comes with additional responsibilities, such as paying the IRS estimated quarterly taxes throughout the year. And I had no idea I needed to do this my first year as an entrepreneur.
If you expect to owe $1,000 or more at the end of the year, the IRS expects you to make quarterly tax payments throughout the year. The deadlines for quarterly payments for 2024 will be due: April 15, June 17, Sept. 16 and Jan. 15, 2025.
By paying a portion of your taxes each quarter, you will ultimately help to break up your tax bill into smaller installments, avoiding a bigger bill come tax time. And it can help you avoid IRS penalties on top of a looming tax bill.
2. I set up my business incorrectly
I originally set up the company as a single-member limited liability company, or LLC. This let me file my business tax information along with my personal tax return to keep things simple. It seemed like the right choice at the time, but I didn’t know the benefits and drawbacks of this business structure.
I’ve since learned that this tax filing method is best for businesses with net income under $40,000. Once your self-employment or business net income exceeds $40,000, it’s a good idea to adjust your business tax structure. (Note, this is just a rule of thumb. You should talk to an accountant about the best business structure for your company.)
If you earn less than $40,000 in profit as an entrepreneur, a single-member LLC or sole proprietorship — the default if you freelance or side hustle and don’t register as a business — may work fine for you, but it could exclude you from certain business deductions.
3. I didn’t keep up with my business income
One of my key mistakes was not tracking my business revenue throughout the year. Tracking my company’s income and expenses could have helped me spot my business growth and adjust my business structure before the end of the year. I was so busy working on increasing my revenue that I didn’t consider how that increase could impact my tax bracket. Having up-to-date financial records and checking in more frequently would have helped me make more accurate projections and better decisions.
My tip for staying on top of your business revenue? Accounting software. I now use QuickBooks to simplify this process — and it even helps me keep track of what I’ll owe in estimated quarterly taxes. It’s connected to my bank account, which makes it easy for me to monitor my income and expenses (I can add pictures of my receipts). Plus I can run payroll and pay my taxes using the same software. What I love most is that It takes the pressure from each step of monitoring my business finances.
4. I didn’t know retirement contributions could lower my tax bill
Contributing to retirement when you’re self-employed can be more challenging. I eventually learned that my best bet was opening a SEP IRA — a simplified employee pension plan that lets employers contribute to traditional IRAs that are set up for employees. I didn’t know the tax benefits of this plan the year I received my surprise tax bill — but I do now.
I set up a SEP IRA for myself as an employee of my business, which came in handy toward the end of this year. Last year, when my business revenue was higher than expected in the fourth quarter, my tax accountant calculated the numbers and realized that I would owe $2,000 to the IRS. Instead of paying the money as a bill to the IRS, I had time to contribute into my SEP IRA. So I paid the money I would have sent to the IRS into my retirement account and took the deduction on my business tax return.
5. I didn’t meet with my tax pro throughout the year
My last — and biggest — mistake was not meeting with my CPA throughout the year. She could have helped identify strategies to help me lower my tax liability while still following regulations. When I first realized that my business wasn’t set up properly, I began meeting with my CPA quarterly. Now that things are smoother, we meet twice per year to review my income, and she offers me guidance ahead of tax season.
Knowing what I know now, my CPA could have identified strategies to help me minimize my tax liability while still following all tax regulations. If I had communicated with my accountant throughout the year, she could have assisted me in preparing my business.
Now my accountant and I complete my taxes well before the deadline so I have time to prepare for any payments prior to the due date. Tax returns for S-corporations are due in March, so my accountant completes an estimated tax return in January for me to review.
Getting with a tax professional who can explain the basics can help you make informed decisions so your business is operating efficiently and legally. Knowing your tax deadlines, tax structure and the potential tax deductions could save you thousands each tax year.
How I paid off $10,000 in tax debt
After my initial shock, and subsequent denial of my tax bill, I met with my accountant to discuss my payment options to pay off my $10,000 balance.
My first step was to reach out to the IRS and establish a monthly payment plan. After a two-hour conversation with an IRS representative, I set up an installment agreement to pay $300 per month toward my balance until the $10,000 was paid in full. Interest and penalties would still accrue daily on any amount not paid, so I decided to also put any additional money I received throughout the year toward my IRS balance as well.
To knock out my tax debt even sooner, I created a second stream of income for my business. I found partnership opportunities with brands that aligned with my money-coaching mission — from Audible to Office Depot — and put any brand sponsorship revenue I earned toward my tax balance.
It took me one year to pay off that bill, and while it wasn’t fun, I learned a lot.
If you’re a new entrepreneur, I highly recommend looking into how your business structure is set up and finding the right accounting software to help you streamline your estimated taxes and profit and loss statements.
And most importantly, find an accountant you can rely on. It’s well worth the cost.
The bottom line
As entrepreneurs, we start our business because we have passion for our field and love of our craft. Taxes can feel like a daunting task that is never-ending. Whether you’re just starting your business, or you have been in business for years, the best tax strategy for an entrepreneur is taking time to understand the basics of how taxes work in your field.
