Ep: 12 Understanding Your Tax Obligations

Today we are here with Lindsey as promised, discussing understanding your tax obligations. She’s going to break some things down and make it simple, so we can understand what we’re facing, and be prepared as the year comes to an end.

Lindsey: First off in the podcast, we will be talking about income taxes. Income tax is often times a very big issue for creatives to wrap their arms around, as it is so black and white. Contrary to popular belief, it is not that complicated, and actually easier than you think. Bookkeeping is the only way to accomplish this well, as you need to know what you spent in order to do your taxes.

There is an equation to all of this, and it goes as follows: First off, we have your sales. This is the money that hits your bank, or your gross sales. It can be tuition, special events, rent, or workshops. The next is your expenses, or what you spend your money on. It can be costumes, office supplies, rent, utilities, other teachers, or even your vehicle. In reference to vehicles, there is a module on tracking mileage in SOS that you are welcome to refer to. Some people try to keep track of too much, some too little... There is a happy medium, and you need to know where it is to make decisions wisely. It is not all or nothing.

The next part in the equation is tracking expenses. Now what is an expense? An expense is anything you use for your business, regardless of if whether it’s coming from your business bank account or not. Expenses and deductions are one and the same.

So, first you have your sales, then you subtract that from everything you’ve spent for your business, and that will equal your net income. You need good bookkeeping to know what your expenses are, and just because someone is a tax professional doesn’t mean they care about your numbers. Pick the right person, not the cheapest, and have a good relationship with your CPA. It’s not about the money, as pure money doesn’t mean anything. I know someone that paid taxes on their gross income instead of their net... This is really important because for most people, your net income will go on your personal taxes.

Secondly, there is a cousin to income tax. This would be the wonderful sales tax! (yay) You may think they are the same, but they are not. Just because you paid your sales tax, doesn’t mean you’ve also paid your income tax. Dance studios are already in a strange category, but if you’re purchasing and selling items in your studio, you are liable to pay sales tax. Sales tax does differ by each state, so you have to understand what your state deems taxable and non-taxable. If you’re someone that mistakenly was NOT collecting sales tax, the first step to rectify this would be going to your state taxes website and figuring out what you need to change. They should have the information available and listed for you in that regard. The second step would be to notify your people (staff, parents etc) that there will be a change coming. Some states require tuition to be taxed too, so make sure you look into that. Lastly, if you are unsure, please call and have them point you to the specific code in the tax law. This is often times easier, as you can see it in writing and have it explained. Remember that you are liable and obligated by the state to pay it.

With all of that being said, know what is taxable for you, update everyone, and change your point of sale. Make sure you are moving forward correctly to avoid being audited in the future. Repent, go forward, and you’ll be good. And if you ever run into an issue (or are currently facing one) with the government, Harquin will help you!

The last part in all of this, in regards to deductions, are donations. A common misconception is that if you donate something, you get a giant write off. This is simply not true. You only write off what you paid for it. And at this point, if you don’t do anything with it, you still get a write off. And that would be the same amount as if you donated it. SOS also has a module on this topic that you can refer to, providing you with alternate ideas that might benefit you.

Before you let go of it all, these are things you can do to maximize your profit. While it feels great to donate, sometimes there are other studios that are willing to purchase products from you. Other times, there are things you have that are specific to your studio, that you could use for promotions. If you use these things to promote your studio, you could be giving away a T-shirt for free, but bringing a new, paying student in the door. They sign up and you could be gaining a hundred dollars a month in tuition.

To summarize what we’ve spoken about: please don’t forget that you are first a business owner, and you are liable to make sure these things are taken care of. It may sound scary, but if you’re on top of it it wont be! Know how much you spent, deduct your expenses, and figure out your sales tax. This will protect you from any unnecessary audits. And if you haven’t been doing this, you are not hopeless!

Even if you are currently doing your own bookkeeping, HarQuin can give you a “Catch Up”. We can asses you at any point in time, and get you back on track so you can stay on track. Once you get a handle on all of this, it will completely change the trajectory of where you are headed!