Estimating Your Taxes
The end of the year is nearing and as a salon owner you will want to make sure you budget your finances properly so you don’t get stuck with a tax bill on April 15th. Hopefully, you have kept records of your sales for the year, and equally important you’ve kept meticulous records of your expenses in order to write these off as part of the cost of doing business. If you have not, now is the time to start collecting your bank statements for the year so you can total up your revenue for all sales and services you performed as well as categorizing each expense you incurred during the year so they can be properly expensed. Using accounting software will help with this process, I recommend using Wave Accounting, its an online accounting app that works in all major browsers (Firefox, Chrome, Internet Explorer, etc) and best of all, its FREE. This accounting software lets you enter your revenue, enter your expenses into different categories that they have put together already (which you can further customize), and it syncs with your bank accounts online so once you go through the initial setup everything is then sent automatically to Wave and all you have to do is assign categories for your expenses and income. This is an excellent way to do your accounting because most of you don’t have the time to dive into a new software program and spend countless hours trying to learn how it works. Wave Accounting will have you up and running in under an hour. To sign up for their free service go to www.waveaccounting.com.
If you are not comfortable using Wave Accounting and you have your own method of tracking your income and expenses then definitely keep using it. My general rule of thumb is if something is working for you, keep doing it! Everyone has a different style of doing things and that is ok.
WHAT IS MY INCOME?
Believe it or not most business owners don’t know their actual income until the end of the year, sometimes not even until the beginning of the next year. Knowing your income is valuable because you can plan much better for your salon, purchase equipment, advertise and market more, or if need be, cut expenses if your income isn’t what you thought and your expenses are more than you had hoped for.
To start calculating your gross income (before expenses) you will need to go through all your bank statements for the year and total up all your deposits for services & products that you sold. If you have other sources of income through your salon then go ahead and add them to the list. Be sure to add up everything you have taken in as revenue for the year to come up with your total. If you use Square, Paypal, or any other point of sale software you can also run reports within that system and compare to your bank statements to ensure everything matches.
WHAT ARE MY EXPENSES?
This is an area that you definitely want to keep perfect records for because most (if not all) of your business related expenses can be written off at the end of the year as a cost of doing business. Here are some examples of things that can typically be expensed (within the allowed limits by the IRS) at the end of the year for your hair salon that a lot of people forget about:
- Education Classes
- Business Cell Phone/Landline
- Insurance policies, business licenses, health department licenses, etc.
- Bank Charges
- Color and backbar
- Interest on business loans and credit cards
- Vehicle mileage to and from your salon (or your vehicle lease, but an accountant can give you the pros and cons of each scenario for this)
- Tuition and fees
NOTE: These are not the only things that you can write-off at the end of the year but are someof the most common items you will want to be aware of and keep track of so you can claim these at the end of the year. Consult a professional tax accountant to ensure you get the maximum allowable write-off for your taxes at the end of this year.
WHAT SHOULD I EXPECT TO PAY?
At the very minimum you should expect to pay about 16%-25% of your income in federal income tax to the IRS at the end of the year. Based on your tax bracket/earnings you may be higher or lower than this. A good rule of thumb is to set aside at least 20% of your monthly revenue into a savings account that you can use to pay taxes from, and hopefully be left with some left over cash at the end of the year if you keep track of everything. This will set you up with a fairly good amount of tax money to use to pay Uncle Sam and if you owe more than you set aside you will at least have a head start on what you have to come up with out of pocket.
If you wait to file your taxes at the end of the year you may also be charged a penalty by the IRS for not filing quarterly, so make it a habit to keep track of your expenses monthly so you can file a quarterly tax return throughout the year and avoid additional penalties and interest from the IRS.
*It is important to consult a licensed tax professional to understand your actual tax liability and exposure. This blog is for information purposes only and is not meant to substitute as advice from a professional. All reasonable means were used to compile the information.