Why we owe the IRS and what we are doing about it.

Owing the IRS is like a rite of passage for first year entrepreneurs. Financial hazing.

It’s a mixed bag.

Owing means you actually made money! YAY!

It also means you didn’t plan and pay what you should have. Obvi.

It’s a rookie mistake and one that lots of entrepreneurs make.

You’re used to having taxes taken out of your paycheck for you. Then when it’s up to you, it’s painfully hard to write those quarterly checks after that money hits your bank account. You worked hard for it and it feels like it’s all yours.

Last year was our first full year supporting ourselves as self employed robots.

We paid exactly ZERO quarterly taxes last year. I know!

We needed as much cash in our hands as possible to pay business expenses and personal expenses. We probably could have paid half or even all of what we owed, we just didn’t. (It would have been $334/mo)

It was no surprise when we found out we owed about $4,000.

We set up monthly payments of $400. Not a big deal really. Sounds a lot more scary than it is.

This year we are making quarterly payments so we don’t owe that much next year. Double duty.

Our plan is to pay about $300/mo this year so that we owe less than $2000 next year and then we will pay it all up front, no more payments!

$700/mo in taxes. Sucks to be me! I know, I know, taxes are good and necessary (sort of). But I’m still looking for someone I can punch in the face just to make me feel better.

Earning $10k in a single month sounds like a freakin’ gold mine, but after you pay taxes, health insurance, expenses, and everything else that a traditional employer would pay for you…  then actually pay yourself, it’s all gone! That $10k can easily turn into $4k or less when compared to a traditional job.

And on top of that, we aren’t currently putting anything back for retirement, yet. No company match either. Our plan is to become totally debt free in 2017 and start putting together our retirement plan.

Now that we are tracking our business financials better we are in a much better spot. Seeing what is coming in and going out is so helpful. Just like a budget for your personal life, duh!

We are able to see what are profitable projects and what aren’t. Then we spend more time on the profitable ones and drop the ones that don’t make money. Double duh! But for real, without tracking it’s really hard to tell what is making money and what isn’t. Triple duh.

We can also cut unnecessary expenses which is huge. You can expense yourself to death if you don’t keep a close eye on it.

Someone said it this way… “Making money is easy, holding on to it is hard.”

Bingo. It’s the holding onto it part that really matters! $100k/year gross sounds great, but not if you only hold onto $20k.

Well, I rambled a bit on this one. Hopefully it was helpful somehow.

I feel better.

How are you?

-Derek

P.S. Did those first year taxes sneak up on you during your rookie year? Please tell me we aren’t alone!

P.P.S. Here’s an update on our IRS payment progress. (It got interesting!)