If you’re a small business owner (or have ever thought about starting your own biz), you’ve probably felt fear or frustration at trying to figure out all the legal and financial pieces of running a business – especially when it comes to making a profit and paying taxes.
Maybe you’ve even stressed yourself out asking questions like: What’s the difference between tax deductions and credits? Do I need to pay my taxes quarterly? What’s the difference between revenue and profit and why does it even matter? How do I know what to deduct? Is the IRS gonna come after me?
First, take a quick second and breathe… There ya go.
There are people who spend years learning the ins and outs of accounting and taxes. So it’s no surprise that the complexities of accounting, finances, and taxes can feel a bit overwhelming to the new (or even experienced) entrepreneur.
In fact, when I first started my business, I felt pretty dang confused too.
Wendy’s super-power is providing strategies and tools to help business owners and entrepreneurs grow their profits, reduce their taxes, and improve their lifestyles.
And let me tell ya, friend, Wendy is absolutely incredible and she brought 👏 SO 👏 MUCH 👏 KNOWLEDGE.
She walks through how to understand taxes and gives some really informative answers to all the questions, many of which were sent in by people in this community.
Trust me, this one’s gonna bless your ears and your wallet.
REVENUE VS PROFIT
I kicked off the episode by asking Wendy to explain the difference between revenue and profit, and why it’s important for small biz owners to know.
And I loved her answer.
Wendy explained that revenue is the top line. It’s how much money you charge your clients for your goods and services. If ya charge $2,000 to photograph a wedding and you have 4 weddings this month, your revenue is gonna be $8,000.
A lot of people seem to get really focused on the revenue number – aiming for the biggest dollar amount and the biggest number of clients
It can get very ego-driven. And many automatically assume that increasing their revenue is the most important thing they need to do.
But Wendy shared that she has clients who have 10 million dollars in revenue but bring in less money after taxes and expenses than those who make $100,000 in revenue.
People spend so much time chasing the top line, the revenue, but then they have bills to pay. And a lot of times, the more money we make, the more money we spend.
So just earning more money doesn’t solve the problem. In fact, in some cases, it makes it worse.
That’s why focusing on profit is so important. Your profit is the money you’re bringing home AFTER you’ve paid your taxes and expenses.
It’s best to start with the end in mind. Instead of asking how much revenue you want to make, start by asking how much money you want to take home. Then ask: what are the expenses that you realistically need to run this business? From there, you can figure out how much revenue you need to sustain your plan and support your lifestyle.
WHAT TO DO DURING TAX TIME TO MAXIMIZE PROFITS
When I asked Wendy how to handle taxes to maximize profits, she told me she’d save me 4 years of college (thanks!) with one sentence: Tax law says anything is deductible for your business that is ordinary and necessary.
No matter what entity you choose for your business, or if you’re a sole proprietor, you get the same tax deductions.
You just need to consider each of your expenses and ask – could this be ordinary and necessary for your business?
Wendy even shared how one of her clients deducted grooming expenses for her dog, since her dog was on her website, was a mascot for her business, and went to meetings. The IRS did an audit one year and approved all those pet expenses.
Now, before you get your hopes up and dream about counting EVERYTHING as a deduction, there are a few things that you shouldn’t try to deduct: country club membership, gym fees, and clothing (unless the clothing has your logo on it).
TAX DEDUCTIONS VS TAX CREDITS
Maybe you’re sitting there, thinking, “Okay, J, that makes sense for tax deductions, but I still don’t get the difference between tax deductions and tax credits. Help!”
Don’t worry, I’ve got ya covered.
As Wendy explained, tax deductions are dollars that get removed from your taxable income.
For example, let’s say you bring in $100k of taxable income. Then you calculate all your deductions, like hiring an accountant, paying a lawyer, and paying rent and it comes out to $40k.
That’s $40k of deductions that you remove from your taxable income. So if you started out with $100k, then remove $40k, you’re left with $60k of income that you actually pay taxes on. From that $60k, you might owe $10k in income tax.
That’s when you start applying tax credits. Credits are dollar-for-dollar reductions in the TAXES you owe.
So if you have $2k of tax credits, and you’re supposed to owe $10k in income taxes, you’ll end up paying $8k.
So tax deductions get removed from your taxable income. Tax credits are removed from the actual amount of taxes you owe.
MANAGING CASH FLOW
Besides taxes and profit, a big area where entrepreneurs may struggle is in managing their cash flow.
I asked Wendy if there were any common mistakes she sees a lot of entrepreneurs make when it comes to cash flow, and I think her answer is really helpful and is something every small biz owner should hear.
(So if that’s you, listen up!)
A lot of people will hurt their cash flow by trying to throw money at a problem, without a way of tracking to see if the solution is working.
Online businesses may put a ton of money into online ads without any tracking to see if those ads are actually paying odd.
Or some people may throw money at consultants hoping for a magic pill. If you’re gonna choose a consultant, make sure you’re really clear on what you hope to obtain from that consultant.
Paying a certain amount of money towards a launch doesn’t mean it’s going to be successful.
Understand what creates money for your business, instead of throwing money at what you think the problem is.
I’ve heard a lot of entrepreneurs say that they just need more marketing or more clients, so they pay a ton of money in ads. Now, paying for ads isn’t a bad thing.
But it’s important to know that the answer isn’t always about more. It’s about better. Having a better quality product, a clearer message, a focused niche, or better customer relationships, so you have returning customers.
PREPARE FOR TAX TIME WITHOUT THE STRESS
Wendy shared SO much really helpful information in this episode that I can’t cover everything here.
She had so many nuggets of wisdom and great advice, so make sure you grab those headphones and tune in to the full episode.
- What the difference is between revenue and profit
- Why revenue isn’t the goal (and what is)
- Ways to handle your taxes and maximize profits
- How to determine your most profitable clients and projects
- How LLC’s and S Corps differ when it comes to taxes
- What the difference is between tax deductions and tax credits
- How to determine what’s deductible
- And more!
And let us know in the comments: what other tax or finance questions do you still have?