Mid-Year Financial Planning for Small Businesses

Author: Stephanie Taylor Christensen | July 31, 2016

You’ve got several months until you need to file your 2016 tax return, but summer is the ideal time to make sure you’re poised to claim the many tax advantages available to entrepreneurs. Check in on your financial planning and business financials before Q4 hits:

  1. Confirm your tax payments reflect reality

    You should have made two rounds of estimated tax payments based on the self-employment income you expect to earn in 2016 thus far, yet unpredictability is a part of entrepreneurship. (Depending on the type of business you run, you may also be responsible for payroll, sales, and excise taxes).If clients have proven slower to pay, or sales slower than you anticipated, for example, projected earnings could be lower than you thought. If you picked up new business, on the other hand, your tax liability may be higher than your estimated tax payments for 2016 reflect. While the Internal Revenue Service (IRS) prefers that quarterly estimated tax payments are made in equal increments, you can (and should) make adjustments to the amount of your remaining estimated tax payments if you know taxable income will differ from your projections. The more accurate your estimated payments are, the better you can manage potential penalties and interest charges for underpayment.

  2. Confirm that you have accurate tax paperwork for employees and contractors

    Because contractor and employee classifications are determined based on the financial and behavioral aspects of the work relationship, they’re often misunderstood, especially if the relationship changes over time. If you hire an independent contractor to manage your web functions, for example, but provide the worker with a computer and specific software to do the job, pay them an hourly rate, establish a schedule when work is performed, and evaluate productivity during or after completion of the job, that person may be an employee, per the IRS and U.S. Department of Labor standards. Misclassifying workers (albeit, unintentionally) could lead to an investigation and result in significant fines, penalties, and back tax liability.

    A mistake here can throw off your financial planning for the year. Confirm your employee/contractor classifications are accurate based on the work performed thus far, and how you expect to use their services going forward. Once you’ve done that, make sure you have tax-related paperwork completed, signed, and on file by mid-year. You need a completed Form W-4 before you issue an employee’s first paycheck so you can report employment-related tax information according to IRS’ semi-weekly or monthly due dates. For independent contractors, secure a completed Form W-9.

  3. Take stock of your equipment needs—crucial to financial planning

    If you need to buy new equipment or sell existing assets to run or grow your business in 2016, strategize the optimal way to make such purchases mid-year based on the tax advantages and implications both present. Business owners can elect to depreciate equipment over time, but opting to deduct the entire cost of some equipment in the year it’s placed in service may result in a tax benefit. Likewise, if you have business equipment to sell, consider the best way to receive payment based on your anticipated financial performance for the year. For example, installment payments that take place in more than one tax year could help you manage the tax implications of the sale. Similarly, claiming the payment from the sale in full during one tax year (even if payments won’t post until the year after) could work to your tax advantage if you expect to report losses for the year.

  4. Check your retirement savings status

    Small business retirement plans can help you limit your personal tax liability, save for the future, and take business deductions for contributions you make to employee retirement accounts. Despite this, fewer than 15% of small businesses offer them, according to the Government Accountability Office.

    While the amounts you’re allowed to contribute for tax advantages and contribution deadlines vary based on the small business retirement plan you have, a mid-year retirement check gives you time to plan accordingly. If you aren’t on track to max out your annual retirement contributions, for example, you can adjust your budget and establish automatic monthly transfers to ensure you do so by year-end. While some plans like SEP-IRA’s require very little paperwork to establish, SIMPLE IRA’s, which allow for employer and employee contributions, may take longer to establish due to administrative complexity. Give yourself time to research the best plan for your small business, which is an integral part of your overall financial planning, so you have time to maximize its value by the end of the year.

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