Small business statistics say that most new business startups go under within the first five years of business. There are a number of reasons that contribute to these potentially discouraging stats. Unfortunately, one of the financial mistakes that many sole proprietors and freelancers make is one of the most preventable.
As a small business owner, you are expected to set aside and then deposit estimated taxes on a quarterly basis. Those quarterly tax deposits should cover your anticipated federal and state income taxes and self-employment taxes. Unlike an employee who has their taxes withheld from each pay check, the self-employed must make that ‘withholding’ themselves and be disciplined enough not to spend those tax withholdings on other expenses.
To maintain the financial discipline required to set aside those tax payments and not dip into them can be more temptation than many business owners can handle, especially when you have other bills to pay. We can so easily convince ourselves that we’ll make up for it in the next week or month.
DON’T DO IT!!!
Set aside a set percentage of every payment you receive from a client into a savings account for your tax payments. Deduct out of every payment, in the same way it would be deducted if you were being paid through an employer/employee relationship. Don’t dip into that savings account in an ’emergency.’
Maintain the mindset that the money you withhold for taxes is not yours. In doing so, you will protect your business and your financial future from a vicious downward spiral that many have found themselves in. Dipping into the funds that should be set aside for tax payments is the first step downward. Don’t take that first step. If someone isn’t going to get paid, be sure that someone isn’t Uncle Sam. He’ll get it sooner or later, and if he gets it later, he’s going take a lot bigger chunk than if he gets it sooner.