Many business people have found that in their first year in business, the biggest challenge is keeping the doors open and paying the bills. The second year another problem arises…how to pay all of the income tax! Because there is a lot more money flowing in the second year they find themselves spending too much and having too much fun. Unfortunately they don’t foresee how large the impact of taxes can be and don’t set enough aside for taxes.
The good news is that your overhead as a handyman is low and you should be earning a profit early on. The bad news is that you will need to plan for taxes right from the beginning. The best way to handle this is with a savings account specifically for taxes. Every time you deposit your earnings, deposit 20% of the total into your tax savings account. Yes…20%. Want a different number? An alternative is to transfer funds at month end after you’ve closed your books and calculated your profits. Transfer at least 35% of your net profit after expenses.
I know from experience that this is not easy. So whatever you do, make deposits regularly into your tax savings account. Use these funds to make quarterly estimated tax payments to the IRS and to your state.
Quarterly tax payments?!? Yes, otherwise known as Estimated Tax Payments, these are a sad reality of working for yourself. These are the equivalent of withholding from your paychecks. The federal government and most states want to be paid throughout the year, not just at the end. They’ll penalize you if you don’t make payments at least four times a year. (IRS due dates are Apr 15, June 15, Sept 15, Jan 15)
The percentages I’ve given are obviously an estimate. Unfortunately, you may not know exactly how much you need until it is too late so save all that you can and as often as possible.
If you’ve been generous with your tax savings account you will find that the estimated tax payments won’t be so painful after all. At year end, after your income and sales taxes are paid, you may even have money left for that hard earned vacation. It’ll be just like getting an income tax refund!