Self Employed - Taxes on Surprise Profit

By: Chip Cantrell

As a CPA, the most amazing conversation that I have during tax season with many people concerns the fact that they owe the IRS and their respective State Governments for taxes. Most self employed individuals are shocked at the fact that they are showing a profit and owe tax. Most would love to show a loss and not owe a penny. They can't stand to make those pesky estimated tax payments each quarter and, therefore, participate in the annual gnashing of teeth when their tax returns are prepared.

I am often asked what could have been done to get rid of that profit. The best answer I can think of for those concerned is to pay their CPA more. One idea could be to estimate the net profit for the year and send a check to your CPA for that amount. This will guarantee a net loss for the year and eliminate the necessity of paying taxes to anybody. Heck, if you don't trust your CPA with the money, feel free to contact me and I'll happily take it.

But, beyond that option, the best idea may be to realize that those individuals, who often pay the most tax, make the most money. PROFIT IS GOOD! When you are self employed, unless you earn a profit, you don't buy groceries.

There are many options to defer taxes. One way is to contribute to a retirement plan. This is a great motivation to put money aside for the future. But, for a self employed person trying to live off the profits generated from a small business, there must be some profit in excess of all costs that could be deducted on a tax return to live on. Money spent for business purposes or sent to a retirement plan is not available to pay for clothes, food, and all the little necessities that are required to keep the kids alive and kicking.

In the end, one good idea is to make a concerted effort to track the net profit of the small business during the year and try to set the tax amount aside to make estimated tax payments. This would eliminate the bottom line sticker shock and help in the appreciation of a hard earned net profit.