If you are a coach or consultant, you likely started your business from a place of passion. You have a unique skill set, experiences, and/or talents that you decided served your dream clients better as a solopreneur or small business owner – so you decided to go out on your own. And to great success!
You have a thriving practice, bring in clients and cash with ease, and are running your business on your own terms.
Yet, what I’ve observed as a tax specialist who works with hundreds of coaches and consultants is that often the financial aspect of the business gets swept under the rug.
For sure, it is not glamorous or exciting. Many entrepreneurs also do not have a background or specialized training in managing their business finances. However, that is exactly where their growth edge lies, as well as the key to building a thriving business financially. In this article, I share three simple strategies that will make a world of difference if you are a coach or consultant looking to improve the financial health of your business by managing your taxes better.
Why is Managing Your Taxes Important as a Coach/Consultant?
This is a question you may be wondering now, and with good reason. Many coaches and consultants run very lean businesses. You are often the only one working in your business as the provider of the coaching or consulting packages and don’t have any other employees. Your overheads and expenses are usually low too, particularly if you run your business virtually. In terms of accounting, it seems to be a simple process of recording a few income transactions and a handful of monthly or annual expenses.
Why would you need to understand how to manage your taxes?
It is precisely because your accounting needs are so rudimentary that a tax strategy becomes so important. By delving a little deeper into planning your taxes, you can save on the taxes you have to pay and make your business work better for you. When you understand and implement these three strategies in your business, you will have better control over your finances and be able to make better decisions that benefit you and your business in the long run.
Note: This list of strategies is not comprehensive and is not intended as tax advice. Please consult with your financial expert for advice on your specific tax situation.
Fix Your Mindset
Mindset is a common buzzword in the coaching and consulting industry and with good reason. While there are limits to the adage “change your mindset, change your life” and you cannot “manifest” a new reality where systemic oppression does not have any impact on your life, mindset work does have a part to play in creating better outcomes in your business and life.
In fact, as a coach or consultant, your dream clients may be attracted to you because of your unique perspective and mindset. You may even be helping your clients with their mindset blocks!
However, that does not mean that you are free of your own money mindset blocks.
As a first-generation small business owner myself, I have had to face my money mindset blocks head-on. I have coached many other entrepreneurs through this process too. At the root, what I have noticed is that thinking about money, dealing with finances, or planning for taxes is something that many entrepreneurs avoid.
Everyone has money mindset issues – but not everyone can avoid them. As entrepreneurs who want to build thriving businesses, we need to get comfortable with our finances and deal with any mindset blocks that may be holding us back.
Perhaps planning your taxes seems out of alignment with the work that you feel called to do. Maybe your avoidance of dealing with finances has to do with your relationship with money growing up or how your parents viewed money. Whatever the reason, the result is a lack of initiative and strategy in financial planning – and this can have disastrous consequences for your business.
That’s why addressing the mindset issues that underlie your hesitation and discomfort in dealing with the money aspect of your business is key to being able to manage your taxes and finances. Whatever else you do, start by addressing your money mindset blocks first!
Once you have started the journey of facing your money mindset blocks, the next step is to get your finances organized. It is a simple task but acts as the foundation for your business so be sure to spend a little more time and effort to ensure that everything is well organized.
A lot of coaches and consultants handle their own finances and that is perfectly fine. However, it is important to implement a simple system that works for you so that you do not overlook anything when it comes time to file your taxes.
Remember to track all invoices and expenses (keep your receipts!). Whether you manually process payments or use a merchant like Stripe that handles it for you, ensure that you have processes in place so things don’t fall through the cracks.
Create templates for billing and invoicing to relieve the mental load you carry. If you use a payment processing platform, you can automate this process and it also makes it easier to receive payments securely. You can keep track of all the money flowing in and out of your business using a simple spreadsheet, but bookkeeping software like Quickbooks (*affiliate link) and Wave can help you to stay on top of your accounting for tax time and make reconciling the books a breeze.
Set aside time in your business to get close up and comfortable with your business finances. I call these Money Dates, and I take them at least once a month, if not once a week. This is the perfect time to check on the financial transactions in your business and make any tweaks necessary to keep your business moving forward. When you have this time carved out to take care of the finances in your business, it stops being scary and overwhelming, but rather a time to get a deeper understanding of the financial health of your business. This is the time you can look into the information provided by the three main financial statements – the income statement, the balance sheet, and the cash flow statement – to avoid any nasty surprises at tax time!
*Affiliate link disclosure – if you use this link to make a purchase, we earn a small commission at no additional cost to you.
Assess and Evaluate Your Business
“Without proper self-evaluation, failure is inevitable.” – John Wooden
This applies to business as well. Evaluation and assessment are essential to managing your business finances and taxes.
One aspect of your business that you should regularly evaluate is the business structure. Many entrepreneurs and small businesses start off as sole proprietors. While that may be the optimal choice for the beginning stages of business, as your business grows, it is prudent to reassess annually that your chosen business structure is still in line with your business goals. Once your business hits certain milestones, it may be more tax-efficient for you to change to a different business structure such as an S-corp or legal structure to a LLC.
Another element of your business that you should assess regularly is your quarterly estimates and projections. Quarterly estimates should be calculated every year and projections should be done every quarter to ensure that your estimates are accurate. This is often a problem area for coaches and consultants because they run lean businesses. As such, making accurate quarterly estimated tax payments can be tricky as income tends to fluctuate from quarter to quarter. By calculating the estimates on a quarterly basis you can keep track of what you owe the IRS. Additionally, the projections serve as a baseline for you to be able to adjust your quarterly payments as well as make any necessary changes to your tax planning and strategy.
Working closely with your accountant or tax professional is an advantage when it comes to making determinations about business structure, tax planning, projections, and quarterly estimates. They will be able to provide the best advice about suitable business structures, tax strategies you can implement to save on taxes, and more. Find out more about how Exceptional Tax Services can support your business in this area.
Leverage Tax Planning Strategies
Nobody wants to pay more than necessary in taxes, but so many small business owners and entrepreneurs do – because they do not leverage tax planning strategies to save on their taxes. Avoid paying more than you need to in taxes by taking advantage of these three tax planning strategies:
1. Paying into a retirement fund
As a sole proprietor or independent contractor, you are responsible for your own retirement. It falls into your hands to set aside funds for you to be able to retire comfortably when you choose, as you no longer have an employer making this decision for you. Why not leverage that to reduce your taxes?
Setting up a Solo 401(k) is one way you can tackle this. It offers similar tax benefits to the employer-sponsored 401(k) and has higher limits than an individual retirement account (IRA). With contributions of up to $66,000 in 2023, this is an excellent way to put away funds for your future use while also reducing your current tax liabilities. Fidelity Investments and Vanguard are some options to consider to set up your solo 401(k).
2. Making an S-Corporation election
Another tax strategy is making an S-Corporation election for your company. This means that you would get paid a salary through payroll on a W-2. Rather than being taxed at the corporate level, business income is passed on to the owner. As such, the business owner is able to enjoy more tax savings while also being able to deduct business expenses from the taxable income.
3. Deferring income or accelerating expenses
A slightly more complex tax strategy that requires forethought and planning, deferring income or accelerating expenses is not commonly employed by business owners. However, in the right circumstances, this can be a powerful tax planning strategy that helps you manage your cash flow and assets better.
For example, if you are expecting a significant payment at the end of the year, you may choose to defer that income to the next year to avoid a much larger tax bill in this financial year. Conversely, it can also be powerful to accelerate any expenses such as paying for memberships or software that you are likely to use for the entirety of the year as that can help reduce your tax bill significantly. The key thing is to make these decisions with clear intention and understanding of how they will impact your taxable income so that you can create favorable outcomes.
Get Support Managing Your Taxes
With these four easy strategies, you are well on your way to being able to manage your taxes as a coach or consultant. However, having support along the way makes the journey smoother! With guidance from bookkeeper, accountant, and tax specialist Nacondra Moran and her team of experts, navigating your taxes (and business) as a small business owner or entrepreneur becomes that much easier.