Tax Strategy for Growing Georgia Businesses: Keep More, Stress Less

When you're starting a business, taxes are the last thing on your mind, and rightfully so. You're focused on finding product market fit, building your team, and landing those first clients. After all, to pay taxes, you need to make money first!

That’s where things get interesting. Eventually, your business becomes profitable enough that you can't reinvest everything back into growth. You start paying yourself real money, enough to take that vacation, upgrade your home, or build an investment portfolio outside the business. If you're at that point, congratulations. And also? Welcome to a whole new world of tax complexity.

If that’s where you are, this educational blog series is for you. This blog series will cover the taxpaying basics for small business owners in Georgia as well as advanced strategies that can help you save money on your taxes, reduce your stress, and keep more of what you make year after year.

Let’s get started.

What Tax Problems Do Growing Businesses Face?

Almost every business owner that I know has faced an unexpected year-end tax bill. However, it doesn’t have to be that way, and it shouldn’t happen every year. Most often, this happens in the first year that you generate significant cash flow. You’re used to all your profits going back into your business, you have a great year, and then you receive a major tax bill at the end of the year.

These surprise tax bills are usually the result of poor tax projections and/or miscommunication.

Poor tax projections are typically a result of poor data. Do you know how much you are projected to net this year? Even if you think you do, have you updated those numbers at some point throughout the year? If you’re expecting to grow by 20% and instead grow by 100%, you will owe more in taxes! Due to the variable nature of most businesses’ income and the projections that were originally made, you need to update your projection throughout the year.

Miscommunication is the second reason that I see business owner tax problems and it’s really a derivative of poor projections. For those business owners that do an early year tax projection, they’re typically relying on the estimated payment projections made by their accountant.

However, this recommendation is based on last year’s taxes, not this year’s taxes! This is where the disconnect comes from. Most business owners think that if they pay the taxes that they see on their estimated payments stub, they’re good for the year! The reality is that these estimates are not connected to their current year taxes due.

Accountants know that they can’t predict the future. When your taxes are filed and the estimated payments are generated, those payments are based on avoiding underpayment penalties, not paying the right amount in taxes. This is based on the IRS safe harbor regulations. The safe harbor regulations for high-income taxpayers ($150,000+ of AGI for S/MFJ, $75,000 MFS) state that you must pay the lower of:

• 90% of your current tax due
• Or 110% of your previous year’s taxes

When your tax return is generated, the software takes your taxes from that year and usually multiplies them by 110% to generate your next year’s estimates.

Here's an example:

• 2024 Taxes: $50,000
• 2025 Safe Harbor: $55,000
• 2025 Actual Taxes Due: $75,000
• You won’t owe penalties and interest, but you will owe your balance due of $20,000!

While it’s better than nothing, it’s a recipe for a nasty surprise if your taxable income went up by more than 10% and you misunderstood how the taxes were calculated.

Luckily, these problems are easily handled with good planning. By setting realistic expectations upfront, updating your plan throughout the year, and making your payments you can make your Aprils much, much less stressful.

Why Your W-2 Tax Habits Don't Work Anymore

When you make the change from being a W-2 employee to business owner, you make the pivot from steady, predictable cash flow to uneven, unpredictable cash flow. Because of this, your taxes also become unpredictable. The easiest way that this is illustrated is in the change from payroll withholding to quarterly estimated tax payments.

Even though your tax return is due April 15th, your taxes are due as your income is earned on a quarterly basis throughout the year. If you don’t pay these taxes on time, you will owe interest and penalties to the IRS for the late payments.

The due dates for each quarter’s taxes are:

• Q1: April 15th
• Q2: June 15th
• Q3: September 15th
• Q4: January 15th

Even while you’re waiting to file last year’s tax return, this year’s quarterly taxes are already on the clock! As a note, the state of Georgia uses these same deadlines so your payments should be synced up.

To avoid these tax penalties, there are two payment methods:

• Equal Installment Method – you take your expected liability and divide by 4, making equal payments each quarter.
• Annualized Income Installment Method – you vary your payment amounts by your actual income received each quarter. In quarters with high income, you pay more, and you pay less in your lower earning quarters, matching your cash flow.

The equal installment method is most common, but the annualized income method may work better for those with extreme fluctuations in income.

These drastic changes in tax payment methods result in a bit of a learning curve, but understanding how your taxes are paid as a business owner is the first step towards reducing your stress, and eventually the taxes themselves.

How to Create Your Tax Plan in 4 Steps

Now that we know the basics and how to pay taxes, let’s discuss the logical steps you can implement to begin reducing your tax burden. The outline for creating a tax plan is deceptively simple:

1. Create your business projections for the year
2. Use these numbers to develop your tax baseline
3. Review tax strategies against your baseline
4. Revise and iterate as new data becomes available

Tax planning is an ongoing process. It’s not static and a great tax planning idea can become a poor one as your business year develops.

Let’s break these steps down into a little more detail.

Create your business projections

This section needs the least explanation, but a solid foundation makes planning possible. Your business projections form the basis of your tax plan. How much revenue are you projecting that you will generate and what will your net income be?

This is where bookkeepers are worth their weight in gold. If you don’t have good, clean financial data then effective tax planning is borderline impossible.

At the beginning of the year, create your best estimate and base your tax projection on this data. If you don’t have a clean data or a good bookkeeper, consider this your sign to hire one!

Create your baseline tax projection

Creating a tax baseline serves two purposes. First, it creates a tax estimate that you can base your estimated payments on. Second, it gives you a baseline to help measure the effectiveness of any tax planning strategies that you consider. Without an effective baseline, it’s impossible to determine if a tax planning strategy is worth the time and effort to implement.

This part is more difficult than creating your business projection because you will need an accountant, a tax planner, or your own software to create these projections. Unfortunately, I haven’t been able to find any retail software that works well so the only software I can find available is at business prices where you may as well work with a planner or accountant.

Professional tax planning software can model different scenarios which show you exactly how a retirement contribution, equipment purchase, or entity change affects your tax bill. This is why working with a planner or accountant who has this software is often worth it.

The other option is to create a basic calculator or excel sheet to create a good baseline for your taxes. I have a basic tax calculator here (coming soon!). Please note, this is very basic and more complex cases should not use this.

Review Tax Strategies

Once you’ve created your baseline, you can begin reviewing strategies to help you save money on your taxes. Once you understand the impact of each strategy, you can adjust your baseline tax projections with the adjustments, see the tax savings, and determine if the juice is worth the squeeze.

Almost every tax strategy available involves tradeoffs. Contributing to a retirement plan saves taxes now but locks money away until retirement. Setting up an S-Corp saves on self-employment taxes but adds payroll complexity and may lower social security benefits. Each strategy has pros and cons worth weighing carefully. If those tradeoffs are acceptable, then they may be worth pursuing. Remember, always keep your guard up for things that sound too good to be true.

Monitor & Revise Your Projections

Once you’ve created your tax plan, and even if that tax plan doesn’t contain any sophisticated tax strategies, it’s time to monitor and revise your plan. As we mentioned with the estimated payments earlier, it’s impossible to know the future so the only guarantee is that your projections will be off, the only question is by how much.

Sometimes, these changes can even affect a tax strategy to the point that something that looked like a slam dunk no longer makes sense. Reviewing your projections quarterly or semi-annually will go a long way towards lowering both your taxes and your stress.

The 3 Rules of Smart Tax Planning

There are very few legal ways to pay nothing in taxes and in many cases, those plans can result in extremely poor financial decisions. The goal of good tax planning should be to pay the lowest amount in taxes over your lifetime, not to pay nothing in taxes. At some point in time, you will owe taxes, the question is how and where you pay them.

At Ironclad Wealth Management, we have 3 rules when it comes to tax planning.

It Must Be Proactive

There are several tax strategies that can only be executed at the beginning of the year or before the end of the year. If you wait until April to plan, not only do you leave yourself open to surprises, but you will most likely wind up paying more in taxes. Plan ahead and follow the steps listed above, and you’ll be in a good place.

Focus on lifetime savings, not savings this year

Controlling when and how you pay your taxes is more important than not paying any taxes at all in a particular year. Oftentimes, the tradeoffs associated with tax savings mean you defer taxes until a later point, as is the case in a retirement plan. Often, people will save as much as they can in a retirement plan without consideration for what their tax rates will be in when they are taking out the money in the future.

Would you rather?

• Save taxes at a 22% tax rate today and withdraw them at a 35% tax rate when you’re retired?
  Or
• Pay taxes today at a 22% tax rate today and withdraw them tax free in the future?

On a $100,000 retirement account distribution, that's the difference between paying $22,000 in taxes now versus $35,000 later. That’s a $13,000 difference that comes down to not focusing on lifetime savings.

This is a personal calculation/decision and will vary for every person reading this. However, it does a good job of illustrating the point that sometimes paying a certain amount in taxes is better than always striving to pay nothing.

Keep it legal

Finally, there are tons of tax strategies that either aren’t right for everyone or are outright scams. If it sounds too good to be true, it very well may be. Living with a cloud over your head dreading an audit is no way to live. If you’re getting pitched a tax strategy, ask yourself the following:

1. What part of the tax code governs this?
2. What incentives is the government using to create this strategy?
3. How is the person I am talking to being paid?

I have seen people fall for strategies that sound too good to be true and are. For example, if someone pitches you an idea where you donate $25,000 but receive a $100,000 charitable deduction, you may want to run the other way. If your spidey senses are tingling, it’s probably not worth it.

Our three rules - proactive planning, lifetime savings, and legal strategies; form the foundation of everything we'll cover in this series. Keep them in mind as we dive into specific strategies.

Summary

This series will go deep on the basics of tax planning for small businesses in Georgia. We started with the basics today and gave you a framework to evaluate decisions moving forward. Now that you have that, we can start getting into the details of tax strategies that can help you save money on taxes. First up is where it all begins – Entity & Compensation Planning - choosing what type of business to be and how to pay yourself.

Ironclad Wealth Management is a full-service financial planning firm that works with business owners looking to reduce their taxes in order to reach their goals faster. If that sounds like you, schedule a no-cost, no-obligation intro call to get started. We take 15 minutes to learn more about you and see if we can help.

Want to Read More in the Georgia Business Owner's Guide to Tax Strategy Series?

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