How To Balance Taxes And Profits (The Surprising Truth Many Entrepreneurs Don’t Know!)

One of the things that Entrepreneurs like the LEAST is, of course, paying taxes. Who can blame them, though, right? We all want to make money rather than pay money. But, this is also where something really important comes in, that a lot of us Entrepreneurs and Small Business Owners don’t take into account: how to balance profits and taxes.

Now, here’s something that might sound obvious, but I’m going to say it anyway…

The point of a business is to make money. But what a lot of us don’t know is that this means balancing taxes and profits.

Now, why am I saying what sounds like a no-brainer? Because a lot of us start off in the entrepreneurial space not knowing why paying the right amount of taxes is such a big deal. We do what we can to pay as little taxes as possible. But sometimes entrepreneurs get carried away with this idea.

I’ve seen so many people start their businesses thinking they’re going to outsmart the system. They’re going to pay as little tax as possible, write everything off, and show a loss so they can avoid a big tax bill.

Not that there’s anything wrong with wanting to slash your tax bill (see more on how to do this the RIGHT way on this post!). BUT here’s the thing…

Believing that you can outsmart the system and pay as little tax as possible might work in the short-term. But over time, constantly showing a loss (or breaking even) just to keep from paying more taxes will mess up a lot of your plans. And in ways that you probably didn’t even think about!

Here are 4 potential pitfalls:

#1: It will disrupt your financial energy and damage your relationship with money.

How does this happen? If you play “poor” on paper (i.e. show a deliberate loss on your tax return) but play “rich” in the real world, it will wreak havoc on your money mindset. Not to mention it will hurt your long-term relationship with money! This happens because you’re playing one role on paper and another one “IRL.”

#2: Nobody will want to invest in your business.

If you show a loss or a break-even in your business year after year, what does that say to the world? It says that your business model doesn’t work. You aren’t showing any growth or growth potential. This means you’re not likely to get any investors in your company. It also means you’re not likely to get any loans. Even worse, it’ll hurt your chances of ever selling your company in the future.

#3: It might disqualify you from Social Security.

Here’s the deal with Social Security: you have to qualify for it. This isn’t usually something that employees worry about because employers take care of this for them. But if you run a business, things like paying into Social Security become your direct responsibility.

You need 40 of what they call “working credits” to qualify for Social Security. These credits are based on how much you pay into the system over the years. You get these credits by either paying in year after year or paying in a certain amount of money over time in order to qualify for Social Security payments in your retirement years. (Get more on the specifics on working credits and Social Security right HERE.)

Now, what happens when the net income in your business shows a loss for too long? You pay less self-employment tax. Over time, you pay less money into the system. Eventually you might not earning enough working credits–and even disqualify yourself from retirement benefits down the line.

#4: You might lose your status as a business.

Now, showing a loss or breaking even is pretty common in the first few years of any business. But if you get much past three to five years in business and you don’t show a profit, the IRS converts you to a “hobby business.” If this happens, it means that you don’t have a business anymore–and you might find yourself disqualified from certain exemptions and deductions.

Now, what’s the take-home message here?

You want to balance everything. We’re talking about not paying more than you need to in taxes, but ALSO not going out of your way to not pay taxes at all.

Keep in mind that the point of your business should be to make money. Your business should ultimately sustain itself. It should fuel your dreams and goals, and make enough to cover an appropriate amount of taxes for where you are at every stage.

The idea is to keep more of the money that you make over the LONG haul. When you make a plan to balance taxes and profits, this becomes SO much easier.

Now, what do you think? Have you ever fallen into the trap of going too far to avoid a tax bill? I know I have (read more about my experiences there on this post). Leave me any comments about your experiences there, or if you have any questions that I didn’t cover on how to balance taxes and profits, leave a comment below.

Until Next Time,

Love, Light, and MONEY, Honey…

Kaylee