By Bonnie Lee
Over the course of my career, I have become aware of the fact that most of the people who end up with tax problems are entrepreneurs rather than wage earners.It’s not inherent in the entrepreneurial DNA-- it’s more a result of being in survival mode. For one thing, wage earners have taxes withheld from their pay whereas business owners usually make estimated tax payments. It’s easy for those quarterly payments to sometimes get overlooked.
But there are reasons behind that.
Here’s what usually happens: A person gets tired of working for “the man” and comes up with a marketable product or service to sell. Lucky individuals will secure a massive amount of venture capital funding and live happily ever after. Or, (and here’s what usually happens), they take all their savings, maybe even cash out their retirement plan or remortgage the house to fire up the business.
It’s predictable that during its first year any business will lose money or show a meager profit. Let’s say the profit is $10,000. The owner files his tax return only to discover that he owes $1,500 in self-employment tax as well as the income tax and 10% penalty for early withdrawal from his retirement plan. And if all he’s made is $10,000 you know he’s been living on canned goods and the benevolence of friends and loved ones. So this tax bill might as well be $100,000 instead of $1,500+. He just won’t have the money to pay it.
Not only that, but his tax pro is telling him he must make estimated tax payments for the current year, the profit for which has quadrupled from the first year, but it’s still not enough to live on. He’s drowning in debt making enough to keep the top ramen in his belly and now he’s supposed to pay not just last year’s taxes but this year’s as well?
And so the cycle begins…
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