The week before I wrote this column, requests for accountant recommendations flooded in—a sure sign that tax season is upon us. If you’re feeling unprepared, you’re not alone. Just like putting on a show, handling taxes with ease requires planning. Establishing a system for record-keeping, making timely estimated payments (when applicable), and diligently tracking income and expenses can help avoid penalties and interest, maximize savings, and reduce financial anxiety and stress. And if you’re not there yet, know that it’s never too late to start working towards this goal.
While there’s been an uptick in people working on their tax planning these last few weeks, it’s important to remember that tax readiness isn’t just an April endeavor; it’s a year-round commitment. By incorporating tax planning and preparation throughout the year, it becomes a more manageable and less stressful task among the long list of to-dos, and it starts with understanding your business structure.
Your Business Structure
During a post-pandemic conversation, I was talking with a stage manager who was given a Small Business Administration loan to help him through the challenging time. Unfortunately, he had taken the loan out under his social security number, so when he wasn’t able to pay it back in full, he was going to be personally responsible for the balance, and he was contemplating filing for bankruptcy. While the legal and tax aspects of business can seem overwhelming, it’s crucial to grasp the basics and seek guidance from professionals to navigate through them effectively.
Imagine you’re new to the industry and land your first freelance gig, or you’re a seasoned professional and didn’t give much thought to this before. As part of the onboarding process, you’re asked to complete a W9 Form, providing essential information about your business to the client or vendor. From the very outset, the type of business entity you identify as holds significant importance. Here’s why:
Sole Proprietorship: The simplest form of business ownership, where one individual runs the show. Income and expenses are reported on the owner’s personal tax return. It’s straightforward, but it means personal liability for business debts.
Partnership: Involves two or more individuals sharing ownership and responsibilities. Profits and losses pass through to the partners, who report them on their individual tax returns.
Limited Liability Company (LLC): A popular choice, combining protection against any personal liability and a simpler tax setup. Single-member LLCs are taxed like sole proprietorships, while multi-member LLCs are treated as partnerships.
S-Corp: Most people talk about LLCs vs S-corps, but they are not an either-or. An LLC is a legal business structure and an S-corp is a tax classification. Many people choose this election because of the potential tax savings but consult a tax professional to see if it makes sense for you. Opting for S-corp status involves additional administrative work and fees, and compliance is crucial to avoid complications. Some gigs may require S-corp status if you want to be paid as an independent contractor, so make sure to check when taking on a new gig or tour.
Corporation: Less common among freelancers due to its complexity and formal structure.
Tip: If you are looking to become an LLC, register your business name with the state first to ensure availability. You may also want to check social handles. Next, obtain your Employer Identification Number (EIN), and lastly, open a business bank account. One often overlooked task is staying compliant with any annual filing or fee requirements, which you can check out on your state’s Secretary of State webpage.
What’s Next?
Let’s talk deadlines. For partnerships and S-corps, the deadline to file your tax return is March 15 (if your fiscal year ends on 12/31). Sole proprietors, you’ve got until April 15 (MA and ME, you’ve got until 4/17). And if you haven’t set up EFTPS (for businesses) or IRS Direct Pay (for individuals), I recommend doing that early so there is time to authenticate your accounts and get you set up to make payments online.
April 15th sure does pack a punch: file your individual tax return or extend, pay estimated taxes (because even if you extend, the money is due to the IRS by the April deadline), and submit first quarter 2024 estimated tax payments. Not sure if you have to pay estimated taxes? The IRS is a “pay as you go” system, so most self-employed people who owe more than $1,000 in taxes for the year do need to pay quarterly.
Many touring pros struggle with estimated payments. It’s tough—your paycheck hits, and you want to spend. Or maybe you have told yourself that you’ll have enough write-offs to cover it. I understand the temptation to use the entire check after waiting for it for a month or two. However, breaking free from the cycle of stress and feeling behind requires proactive action and planning.
Developing the habit of saving for estimated taxes (and other future goals) may take some time, but when you can transform money into a tool that empowers you to make decisions, you gain the ability to steer your ship rather than constantly reacting with stress and worry. One first step that can help is to set up a high-interest savings account. With each paycheck, decide ahead of time what percentage will go into saving for taxes. During your more lucrative months, channel money into this savings account for other things like emergency funds or irregular expenses. Ally.com is my go-to for this because I love their virtual savings buckets. Set up a “Taxes” bucket, among your other goals, and watch your savings grow and be there for you when you need them. When researching high-interest savings accounts, look for options that have no monthly fees, no minimum balances, and are FDIC-insured for maximum protection against unexpected charges or balance requirements.
Tip: When you label your savings goals, you are more likely to contribute to them and not spend them for other purposes.
Looking Ahead
In addition to setting aside taxes from each paycheck, getting organized is crucial. Even if your records for 2023 aren’t as buttoned up as you would like, you can turn things around for 2024. Start by choosing a record-keeping software that works for you and stick with it. QuickBooks is the gold standard for small businesses, but if that’s too pricey, Excel or Google Sheets can help you keep track of the basics. Wave Accounting also offers a free program which I used for creating invoices when I first got started. Remember to track all income and expenses. Quick note: You are required to report all income even if you didn’t receive a 1099 form at year-end. Keeping personal and business expenses separate is not only a good business practice, but it helps you stay accountable to yourself and not miss any business income or deductible expenses. Make a plan for storing receipts, whether digitally or physically. I’ve found it convenient to snap pictures of receipts on the go—jotting down the details of the business purpose and who I was with right on the receipt. No more crumpled-up receipts in my wallet that I either lose or don’t know what to do with when I get home.
As you navigate the beginnings of this year and gear up for a busy spring and summer, it’s essential to prioritize planning ahead. Understanding your business entity and tax obligations lays the groundwork for success. Whether you’re a freelancer with a couple of gigs a year or a business owner with many employees, staying organized is crucial. From choosing the right software to separating personal and business expenses, small steps can lead to significant improvements in your financial well-being. And remember, it’s never too late to start or improve. Keep me posted on how it goes!
You can reach Rachael Bronstein at rachael@lifesjam.com
