Why Entrepreneurs Pay Too Much in Taxes

What businesses and individuals have in common in this 2019 tax season is that a goodly number feel the recent changes in tax laws have somehow left them worse off than in 2018. One of the biggest reasons is they overlooked the fact that the extra money they got in their paychecks over the past year would drastically reduce their 2019 refund amount. This is not the fault of the tax law since all people had to do was to pay a visit to their Payroll or Human Relations department and adjust the number of deductions on their W-4 Form. Yet both simply are guilty of not being aware of the changes in the tax laws, a part of financial and tax planning that should be as routine as paying the monthly bills.

Now many entrepreneurs are not even vaguely aware they need to do tax planning as a normal part of their business. It goes beyond taxes because once the business starts making a consistent income the nature of the business and tax planning changes. Their CPA or legal counsel may tell them to establish an LLC for liability purposes, but omits the importance of how the LLC structure will affect the amount of taxes they will have to pay.

But the responsibility of the business rests squarely on the shoulders of the owner. There are three main reasons why entrepreneurs fail to do tax planning:

  • Ignorance – they just don’t know how to create a tax plan
  • Failure to communicate – that is, with their accountant who should have informed them
  • Fear – of the IRS

One unique feature of having your own business is that when thinking about the IRS the tendency is to fear them more because they can shut your doors and bring all your hard work to a screeching halt. If an entrepreneur gets a hug tax bill they are much more likely to pay it than question it because the IRS can be a powerful threat to someone who does not have a tax plan. The problem with the fear approach is that unless there is a tax plan in place and a reputable accountant-lawyer team working in concert to protect your profits, the chances are the entrepreneur will be seeing more and more of their profit disappear into the hands of the government. The solution is to be willing to hire and pay for the talent needed to protect your growing business.

A piece of good news is that this situation is generally temporary as the entrepreneur gets tired of paying so much in taxes and finds the quality financial advice they need to reduce their tax load. But the years the business paid in all the extra tax money is money lost that could have been used to expand or hire new people. If there is one thing every growing business understands it is the concept of cash flow. Not only it is essential to growth, it is also essential to becoming competitive in today’s global economy. Cash flow will improve with knowing what to expect from changes in the tax laws and planning for the effect those changes will have on the day-to-day operations.

Simply being aware of the implications of tax planning will go a long way to righting the ship and being able to focus on what you do best. Accountants and lawyers are paid to work in your best interests, and anything short of this standard should result in you finding a new accountant, lawyer, or both. Once a tax plan is established and updated throughout the year as necessary, you will likely find that the extra money you paid for a quality support structure is money well spent.

If your business is already established and you are not certain whether the reason for slow growth can be attributed to taxes, call your accountant and start asking questions. For example, an LLC organization may not be the best for you come tax time, so changing it will put more money in your pocket every month of the year. Returning to the similarities between the individual and business taxpayer, the rule is the same: it’s not how much you make, it’s how much they take.

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