It's Not Fun, but It Has to be Done Benjamin Franklin wrote a 1789 letter that states, “But in this world nothing can be said to be certain, except death and taxes.” Even at the United States’ early beginnings, federal taxes were a necessary evil to fund various public projects and administrative costs. Today, federal taxes serve much of the same purpose. While virtually no one likes to prepare and file their taxes, it is a necessity if you want to avoid fines and further hassle. It is no secret that preparing and filing your taxes is notoriously complicated. Many people lament that it should not be so difficult to pay the government. However, some of the complications allow people to save money if they discover specific tax benefits. Knowing how to file your own taxes may be a good option if your tax situation is relatively straightforward, or if you are willing to learn the process. Why Do You Need to File Your Taxes Every Year? The short answer is that federal law requires that most individuals file taxes annually. Income taxes are assessed every year based on your income earned during that period. You then pay a percentage of that income to the government, less any deductions, adjustments, or credits that you qualify to receive. If you do not file (and pay) your taxes, then you may be assessed penalties and interest. The Internal Revenue Service (IRS) can even go as far as garnishing your wages and repossessing your property if you do not file and pay as required. The Benefits of Filing Your Own Taxes If you are one of the 43% of Americans that are doing your own taxes, you are certainly not alone. Roughly 53 million people prepared and filed their own taxes in 2018. There are many benefits to filing your own taxes, including: Saving money: Hiring a tax professional is expensive, and many people can prepare and file their returns on their own, completely free of charge. Control: Some people like knowing the exact information that is included in their return and being able to control the data, and for some, knowing precisely how the numbers work out, is comforting. Gain helpful information: When you prepare your taxes, you can see what items saved you money this year or which issues you should address so you can save money next year. While filing your own taxes is complicated, it can be beneficial under the right circumstances. There are several programs online that walk you through the process to help ensure you are taking advantage of all of your available deductions and credits. The Drawbacks of Filing Your Own Taxes In addition to the benefits, there are also some disadvantages to filing your own taxes. These include: Time and effort: Preparing and filing your taxes takes time and work You have to sift through financial information and deal with concepts that you may not understand well. The process can be frustrating and take a considerable amount of time. Error risk: If you do not completely understand how your taxes work, you run the risk of making a mistake because of misconceptions. If that happens, it could lead to underpayment and audits down the road. Questions: Even if you use a tax preparation software, you may still have questions that will remain unanswered unless you do significant research or reach out to a tax professional. For some people, the risk of having a substantial error that triggers the IRS’s attention is enough to scare them away from preparing their own taxes. Preparing for Filing Your Taxes When you begin work on your taxes, you should have information gathered throughout the year. Some of the most common items that you will need include: Social Security numbers for you, your spouse, and any dependents Information about wages, such as W2s or 1099s Investment income information Documents that represent any other source of income Information regarding adjustments to income, such as student loan interest paid, IRA contributions, and health savings account contributions, just to name a few Information regarding potential credits, including, for example, child care expenses, education expenses, or retirement savings contributions Data about any tax payments that you may have made throughout the year Keeping good records will help make tax preparation easier at the beginning of the year. [youmaylike] The Basics About What You Can Claim When Filing You must pay income taxes on all your income earned throughout the year. However, that income is reduced by a few things. The further you can reduce your taxable income, the less you tax you will pay. There are three general categories of tax reduction methods: Standard or Itemized Deductions Everyone can claim either the standard or itemized deductions. Standard deductions are a set amount that is based on your filing status. Itemized deductions are based on actual expenses that you incurred throughout the year. You can choose to use the higher deduction. The higher the deduction, the less tax you will have to pay on your income because your income decreases on paper. Itemized deductions include things like medical expenses, state and local tax payments, and home mortgage interest deductions. Itemized deductions will only decrease your income by a certain percentage, or up to a specific point. Adjustments Some adjustments to your income may also be available. These include things like paying student loan interest or alimony. Adjustments are more valuable compared to deductions because they decrease your income dollar for dollar. Credits A credit decreases your taxable income as well. Some credits are refundable while others are not. For example, you get a child tax credit simply for having children that qualify for that credit, but that credit will not be paid out to you if you do not have any tax obligations. On the other hand, the Earned Income Credit, which is available for low-income filers, will be refunded to you even if you do not owe any taxes. There are a wide variety of deductions and credits available. Take a look at the federal forms and related schedules to determine whether you might qualify for any of these. How to File Your Own Taxes If You Live Overseas If you earned income in the United States as a U.S. citizen or resident alien, you likely need to pay taxes on that income. This is true even if you live overseas. You can still choose to e-file or mail your tax return to the IRS once you have it prepared, just as if you physically lived in the United States. In some cases, you will be taxed on the income that you earned throughout the world. However, you may be able to deduct a portion or all of the revenue that was not made in the United States in some circumstances. Filing Online The IRS offers an online filing option that is free for individuals that have an adjusted gross income below a specific threshold. Generally, your income must be below $66,000 to qualify for this service. You can also file online by using a commercial tax preparation software. Examples of this type of software include: H&R Block TurboTax TaxCut TaxSlayer There are many programs available that will file your taxes for you, often for a fee. Knowing how to file your own taxes can be a great way to save money, but it can be tricky as well. If you want to file your taxes yourself, be sure to read the form instructions thoroughly and get familiar with various tax saving opportunities before you begin preparing your return.
Making a Profit Is the Next Step After You Break Even
The whole point of being in business is to make a profit. But sometimes, especially when you’re first starting out, that isn’t always possible. The secret to staying in business is to first stem your losses. Ideally, you’ll want to turn that loss into a profit, but first you’ll have to break even.
This isn’t as simple as you’d think. In this article, we’ll go over the break even point formula so you can figure out how to turn a profit with your business.
How to Calculate a Break Even Point
The break even point occurs when a business makes enough revenue to cover their costs. Note that a profit hasn’t been made at this point, but it’s usually the next step.
How do you figure out this number for your business?
First, you must add up all your fixed expenses. Typical fixed expenses might include:
- Staff wages
- Equipment costs
- Loan payments
- Manager salaries
Next, it’s time to look at variable expenses. These tend to fluctuate with the number of units sold. Note that most of the time production costs per unit will decrease as more product is produced.
Typical variable expenses will be:
- Cost of raw materials
- Labor to put the product together
- Marketing and promotion
You’ll notice that advertising is in the fixed cost category, while marketing and promotions are variable costs. All three can be variable costs. Advertising is usually easy to cut when times are bad. However, a business should never abandon marketing completely, or else it could start a death spiral of epic proportions.
Entrepreneurs should note that fixed costs will mostly stay the same, whether your business produces one unit or 100. This is why it’s important to keep those expenses as low as possible when you’re first starting out.
Say I want to make coffee tables. My fixed costs are $5,000 per month for the shop, my staff, and so on. If I only make one coffee table, that piece of furniture will need to sell for $5,000 plus the cost to produce the item in order for me to break even. If it costs $500 to make one unit, I have to sell it for $5,500 to break even.
That’s obviously not a viable business plan.
But what if I make 50 coffee tables per month? This brings down my break-even point to $600 per unit: $100 per table in fixed costs and $500 per piece in variable costs. If I can sell each one for more than $600, I’ve done even better; I’ve made a profit.
There’s just one problem. Figuring out my costs is relatively easy. All I need to do is come up with a business budget and stick to it. But how does a business owner accurately forecast revenue? This is the tricky part of a break even formula.
Forecasting Sales Will Help You Stay Afloat
The bane of every good break even point formula is when sales start to falter. This increases your fixed costs per unit and can throw your whole business into chaos.
Figuring out your top line is notoriously tough, especially for new entrepreneurs. How can one forecast sales when there’s no data to back anything up? It’s basically a wild guess.
The first tip I’d give new business owners is to be conservative. Build your business to be able to withstand lower than expected revenue, especially in the first few months of operations. Take your first three months’ worth of sales expectations and slash them in half, then build your business accordingly.
This is when doing your market research is important. Find out how many sales your competition expects in a typical week. Surpassing your rivals is a reasonable (and motivating) long-term goal, but don’t expect it to happen right away. Happy customers aren’t going to stampede over to your new product even if you give them a compelling reason to switch. It’s a process that takes time.
Another way to get an idea of your potential sales expectations is to research a competitor operating in another city, in a market that has similar characteristics to your home. You’d be surprised how much employees will tell you if you make a visit and start asking questions. After all, you’re not much of a threat.
Some entrepreneurs find value in having two sets of sales projections. One is a conservative measure, while the other takes a more aggressive approach. Since business can go up and down seemingly randomly, switching from one forecast model to the other can keep a business owner sane.
One last piece of advice is to make sure you have enough start-up capital to endure worse than expected conditions. If business takes off, you can always invest that excess cash into expanding operations. And if it doesn’t, your business can survive while you figure out the next step.
Getting Back on Track
What should you do if sales aren’t quite up to expectations?
This sounds counterintuitive, but the first step should often be spending more money. A good marketing campaign at the right time can save a business. Many new ventures panic and cut their advertising spending, which decreases new revenue sources.
One of the most difficult decisions for a struggling entrepreneur to make is whether more capital should be injected into a money-losing business. The time to make this decision isn’t when the owner is panicking. This decision should have been made months beforehand, when calmer heads ruled the day.
Further to this, have additional sources of capital lined up before you need them. It’ll be a lot less stressful this way.
Falling into money-losing mode is also a great time to look at your fixed expenses. Perhaps a staff member isn’t working out, or the company has too much space. These might be big changes, but they could literally be life or death decisions for your organization.
A riskier move is to try raising your prices. Many first-time entrepreneurs are convinced undercutting the competition is their ticket to success. This often backfires, especially when they don’t have a low-cost business model. Besides, customers will often conclude something is wrong with a discount version of the same product.
The Bottom Line
Your business needs to do a break even analysis before it even opens its doors for the first time. Yes, it really is that important. Opening a new venture is hard enough. The last thing you want to do is put more of your hard-earned capital into it.