Today is tax day.
Relax, it’s not tax day for you unless you run a business. I incorporated my software consulting business a few years ago, so every year I have to file two sets of tax returns, one for the corporation and one for me. Corporate taxes are due today.
Rather than wait until the last minute, I started working on them yesterday. At 8:30 pm.
Now, eight hours later, with the help of 32 ounces of caffeinated Diet Coke and a dose of Sudafed to keep me wired, I’ve calculated depreciation for all corporate assets, created the closing accounting entries for 2006, downloaded the corporate tax software from Intuit, imported last-year’s information, imported Quickbooks data, answered a ton of tax software interview questions, corrected a bunch of accounting mistakes, answered more questions about my state taxes, made a quick run to Walgreens to get printer paper, printed archive and filing copies of my taxes, printed a check for $27 to the Illinois Department of Revenue, signed everything, and driven past the post office to drop it all off.
Whew.
My corporation is small, and like most small corporations, it doesn’t have to pay a lot of taxes. That sounds like a good deal but it’s not. My corporation doesn’t pay taxes because it doesn’t have anything or do anything: Every dollar of the corporation’s net assets is borrowed from either a bank or the shareholders (just me), and all the work is done by paid employees (also me). And when I pay myself from the company, as a shareholder or an employee, every bit of it is taxable. I’ll be paying those taxes on April 15th like everyone else.
I do all this myself because my business finances are really simple, and because when I started I had more spare time than spare money. If you’re thinking of starting a business, and you can afford to pay someone else to worry about this stuff, I strongly recommend it. Even with no employees, real estate, inventory, or vehicles, it was still a huge and painful effort to figure this stuff out. Also, the tax software is a lot more expensive for businesses than for personal taxes.
The expense and effort doesn’t start with the actual taxes, however. The tax system complicates a lot of other things. Because I have to be able to figure out my income and taxes, I have to keep detailed financial records in Quickbooks. The software costs money and it takes a lot of time to learn and use.
(Good accounting records are also useful for running a business, but my business finances are so simple that I could figure out everything I need to know using a few spreadsheets if I didn’t have to worry about the taxes.)
It gets worse. I have to pay myself as an employee, so I have to pay a payroll service to work out the tax deductions and withholding for my paycheck.
All in all, despite being a one-man operation, I end up spending hundreds of dollars and probably a hundred hours a year just to do the calculations for my taxes.
The taxes themselves are another problem.
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