3 Financial Tips for Starting a Business

In 1975, a young Bill Gates dropped out of Harvard to start developing software out of a garage and focus on building his Microsoft company. The following year, college dropouts Steve Jobs and Steve Wozniak began building the Apple I, the first personal computer. The stories of these tech moguls are what every entrepreneur dreams of emulating. However, the reality is that more than half of small businesses fail within the first five years.

If you’re considering branching out on your own and starting a business, how can you become one of the success stories? Here are three financial tips to keep in mind:

Maintain a Source of Income

Most people who decide to become entrepreneurs do so because they become dissatisfied with their current job situation. They can become frustrated with the lack of work-life balance, they may work in a mentally or emotionally toxic environment, their salary may be too low, or they may have lost interest in their work in general.

Whatever your reason may be, don’t walk away without a financial plan. While you build up your business to be financially sustainable, you’ll need a source of income. If you can, remain at your current job until your business becomes profitable. If that’s not possible, try finding part-time or temporary work that will allow you to meet your living expenses but also provide time to dedicate to your burgeoning company. You might find yourself working longer hours in the beginning, but maintaining a steady, positive cash flow in the early phase of your venture sets the stage for a successful future.

Open a Business Bank Account

As soon as you start your business, open a business checking account to keep funds separate from your personal finances. If you’re eligible, apply for a business credit card as well. Once your company is in the black and after you’ve paid yourself a salary, you might also open a business savings account as an emergency fund.

If you need to “borrow” money from your personal account, pay yourself back. If you need to use a personal credit card for business expenses, save the receipts and note it. Separating your business and personal accounts will make bookkeeping easier for tax purposes.

Keep an Eye on Your Books

Becoming a small business owner also involves becoming an amateur bookkeeper. To gauge the success of your business, you’ll want to keep track of all your income and expenses. Although you can do this in an Excel or Google Sheets spreadsheet, inexpensive accounting software is available. Not only is this software easy to use, but several have features to track time, invoice customers, create estimates, and even manage payroll if you have employees. Some accounting software also allow you to calculate and pay quarterly estimated tax payments and are compatible with income tax software.

Whether you do your own accounting or hire a professional, consider consulting with a certified public accountant your first year in business to doublecheck your recordkeeping and for advice.

Getting Started

After you have a business plan and are ready to become a business owner, the best place to start is at your local bank. Your local business banker will be able to help you with funding, if necessary, and assist you with determining the best bank accounts to ensure your business succeeds.

Do I Owe Quarterly Estimated Taxes?

Whether you are self-employed, a small business owner, an independent contractor, or a company employee, your earnings will be taxed at some point.

For company employees, taxes are automatically calculated and taken out of your gross salary along with any additional withholdings that you request. Your employer then pays the Internal Revenue Service (IRS) your total withholdings on your behalf.

If you work for yourself, you are responsible for setting aside a portion of your income and sending it to the IRS. Depending on the amount of your income, you must pay these estimated taxes quarterly to avoid paying a penalty.

Whether or not you should be paying estimated taxes can be confusing, so we’ll answer some common questions.

Who must pay estimated taxes?

According to IRS guidelines, you must pay an estimated tax if both of the following apply:

  • “You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.”
  • “You expect your withholding and refundable credits to be less than the smaller of:
    • 90 percent of the tax to be shown on your current year’s tax return, or
    • 100 percent of the tax shown on your prior year’s tax return.” (The prior year’s tax return must cover all 12 months.)

Taxable earnings may come from a job, investments, hobbies, rent, and even alimony to name a few sources.

You don’t have to pay estimated taxes if you meet all three of the following conditions:

  • You had no tax liability for the year before.
  • You were a U.S. citizen or resident the entire year.
  • Your prior tax year covered 12 months.

How do you calculate your estimated tax?

To figure out your estimated tax, you’ll need a copy of your tax return from the previous year. The amounts of your reported income, deductions, and tax credits will help you estimate your adjusted gross income, taxable income, deductions, and credits for the coming year. You can use the Estimated Tax for Individuals worksheet on Form 1040-ES to calculate your tax payment.

When are estimated taxes due?

You must pay your estimated tax payment based on your earnings each quarter:

  • Q1 (January 1 – March 31) is due April 15.
  • Q2 (April 1 – May 31) is due June 15.
  • Q3 (June 1 – August 31) is due September 15
  • Q4 (September 1 – December 31) is due January 15 of the following year.

If the 15th of the month falls on a weekend or a federal holiday, your payment must be made or postmarked by the next business day.

You should mail your payments with the appropriate payment voucher from Form 1040-ES. You can also make a secure payment online through IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS).

What happens if you don’t pay or underpay your estimated tax?

If you don’t pay or you underpay your payment, you will owe a penalty. However, you may avoid the penalty if you owe less than $1,000 after subtracting your withholdings and credits or if you paid either at least 90 percent of the tax for the current year or 100 percent of the tax shown on your tax return from the prior year—whichever is smaller. Also, if you underpay one quarter, you can include the amount with your next quarterly payment.

Final Words

Everyone fears an IRS audit. If you have questions about estimated taxes, the IRS has several resources to ease your concerns. You might also consider consulting with a certified public accountant or a tax professional at the beginning of the year. If you owe estimated taxes, every season is tax season. Make sure you’re prepared.