By now most everyone has gone through the painful process of filing their taxes. However, your tax return can also be an opportunity to take a deep and thorough look at your business, and identify areas for improvement for the coming year.
First of all, if you paid taxes, give yourself a pat on the back. As much as that check is hard to write, it means you are profitable!
But let’s take a closer look…..Start by asking yourself these five questions:
1. Did you charge enough?
This is the big question that looms for so many business owners. We constantly balance the demands of the market with our need to pay ourselves fairly. If in completing your tax return, it looks like you did not charge enough, it’s time to take a thorough look at your pricing structure.
I wrote up this tutorial a little while back that gives a high-level look at pricing:
But to truly price your business you need to dig deeply. You need to determine what you would like to earn for a salary, and then look at every expense you have – both your direct costs and your overhead costs, to determine what you need to charge. And don’t forget to look at your time investment per job to ensure you are paying yourself a fair hourly wage.
It’s never too late to make a change to your pricing. Your business is only sustainable over the long-run if you pay yourself fairly.
2. Did you keep track of all of your expenses?
As you compiled and filed your business tax return, were your expenses complete? Did you have accurate and organized records?
Every dollar matters, so it is critical that you don’t miss an expense. With the proper bookkeeping/studio management system (I use 17 Hats) expenses will flow automatically into your books (where you can then quickly an easily assign the expense to the proper category) to ensure you don’t miss anything. In addition it is important to file the corresponding receipt into folders labeled by month or by quarter in the event you are audited.
I also keep an “open receipts” folder on my desk for those expenses that don’t flow through my business credit card (such as items I purchase on PayPal), and once I month I input all of these into 17 Hats and filed them away.
Also, did you track all of your mileage? Using an app like MileIQ, or even having a simple pad of paper in your car, can help ensure you don’t miss even a dollar of your mileage deduction.
3. Are your expenses too high?
For many, tax season is a harsh reminder that it’s time to tighten the purse strings a bit. Take a look at your primary expense categories. Where did you blow your budget? Too many new lenses? Was your packaging too expensive in relation to your sales per session? Were advertising dollars greater than you anticipated? Use the data in your tax return to fully understand your financial picture, and then identify areas for improvement.
If you didn’t have a budget for 2016, use this time to set a 2017 budget. Look at your actual expenses by category for 2016, and estimate where you think you should be for 2017. Access this each quarter when you are cleaning up your books to make sure you are on track to meet your goal.
4. How is your business structured?
One of the more painful aspects of being a small business owner is the 15% self employment tax we have to pay. When you work for a corporation, they company pays half of this and you are only responsible for 7.5%. As a small business owner you have to pay the full 15% on your net profits- and it stings…a lot!
One way to reduce your self employment tax burden is to consider restructuring your business to an S Corp. As with an LLC, an S Corp limits your liability, however the S Corp has one big extra benefit: you are allowed to pay yourself a reasonable salary as an employee of the company (as a sole proprietor or LLC you cannot – your salary is the net profit of the business). You only pay self employment tax on this salary, and then you can receive any remaining profit as a dividend from the business.
There are fees involved with setting up an S Corp, and it likely will require additional filings (depending on your state), so please consult an attorney if you are looking to make this change for your business. Also, due to the fees involved, this may not be the best business structure for those just starting out, but if your business is comfortably profitable, it is absolutely worth looking into.
5. Do you have a Solo 401K?
A great way to reduce your taxable income is to set up a Solo 401k. This allows you to set your pre-tax income aside into a retirement plan, thus reducing your net profit subject to income and self employment tax. A Solo 401K allows you to play both the roll of employer and employee, thus allowing you to save significantly more than the $5k IRA annual limit (up to $53K in 2016!!)
The downside is that you cannot access this money until retirement without facing penalties, but if your family finances allow the flexibility to save, this is a fantastic way to reduce the money you pay to the IRS today while setting up a nice little nest egg for retirement.
As photographers, we entered this business because we are creatives with a passion for creating beautiful and timeless art, but in being business owners, we must also embrace financial side of our business. We must learn from mistakes, and push to make the business as financially healthy as possible.
There is a lot we can learn from that tax return….and hopefully next year, come tax time, it will sting just a little bit less.