Updated on September 27, 2023 by Nate Yesner
As we approach October, all small business owners begin to set their sights on the end of the calendar year. There are several things that all small business owners should be focusing on as we enter into the 4th quarter (Q4) to set up their business for success and to limit any unpleasant surprises for the upcoming tax season.
1. Review your Financials!
Have your books been updated? If you do not currently utilize a bookkeeper, then you, as the business owner, must keep your books current. Whether you use an Excel spreadsheet to track revenue/expenses or use accounting software like QuickBooks Online, it’s important to make sure all revenue/expenses are recorded on at least a monthly basis.
Having current, accurate, and complete financials (Profit and loss Statement and Balance Sheet) will give you insights into how your business is truly doing. Business owners often have a general idea of their gross revenue at any given point but are often unaware of profitability (Revenue less variable/direct costs). Further, Overhead expenses can be better managed when reviewed throughout the year to identify trends. We often hear prospective clients ask, “Where did all the money go?” This is usually a sign that the business owner is looking at Gross Revenue as the barometer of success for the business and is not paying attention to the bottom line. Q4 is a good time to identify those variable/fixed expenses that can be reduced/cut in order to put more money in your pocket.
2. Run a Tax Projection
Once you have a decent picture of your current net income for the year, the next step is to forecast out the revenue/expenses expected in Q4: What do you expect total revenue, expenses, and net income to be as of 12/31? If you own an LLC or S Corporation, this net income is included in your personal income on your tax return. Accordingly, this should be considered along with all of your other household income (i.e., W2 income, Interest/Dividend Income, Capital Gains, etc.). All of this income shapes your year-end tax bill. It’s important to know what your expected federal and state tax liability is so that you can start finding ways to mitigate this and begin setting aside money or paying tax estimates.
3. Does your current business entity structure still make sense based on your profitability?
After reviewing your numbers is your business on pace to have net income of $60,000 or more? If you are a sole proprietor and/or Single Member LLC or LLC Partnership, your business may be paying more in taxes than it needs to, thanks to the Self-Employment Tax. This 15.3% tax is assessed on net income from self-employment and can dramatically increase your overall tax bill. This is not a “do-it-yourself” exercise. We would recommend reaching out to your accountant to discuss this and have them review your situation to see if an S Corporation election would make sense for the current or following year.
4. Retirement Contributions
Do you or your spouse have access to a retirement plan either through an employer or your small business? It’s a good time to take inventory and see how much you’ve contributed to date. If you are not on pace to max out allowable contributions, now would be a good time to increase your contributions.
For small business retirement plans: A Traditional 401k or Simple IRA is worth considering if your small business has multiple employees. If your business does not have employees (other than you and/or your spouse), then a Solo 401k and SEP IRA are good options. These plans, where appropriate, are powerful tax-saving tools available to business owners.
Summary
The 4th quarter of the year is a great time to review year-to-date performance, plan for the upcoming tax season, and look at what changes can be made for the upcoming year to make next year better than the last. Our team at ENGAGE CPAs is here to help and can assist in getting your accounting up-to-date running tax projections, and we specialize in making tax-saving suggestions to our clients. Reach out to us anytime for a free initial call.
