Successful people learn a lot from their mistakes, and it compounds their success when they can learn from others’ mistakes, as well. As a CPA who works primarily with fitness professionals, I’ve noticed patterns in how people manage money and taxes, and I’ve developed a list of the top five mistakes fit pros make in these areas. Do you recognize any of the following in yourself? What can you learn from the mistakes of others?
Mistake #1: Ignoring the Subject
All too often, I hear stories about people who, because they didn’t understand the requirements, never bothered to track their expenses and file taxes. These tasks cannot go to the back burner. If you ignore the legal requirement to file your taxes, you’ll have to pay significant penalties and interest, not to mention the extra fees your tax preparer will charge, based on how far back you need to file, how difficult it is to pull records and how quickly you must file.
No, taxes are not the most enjoyable subject, but you must understand your responsibilities. Also, if you think you can simply hire an accountant and sign off on his or her work without reviewing it, think again. You’re responsible for errors or false claims on your tax return, as you sign the statement, indicating that you have reviewed it and agreed with the contents.
Mistake #2: Not Separating Personal and Business
One of the first things any business owner should do is separate personal and business finances. If you don’t, it will make filing taxes and managing your business more difficult. At the end of the year, you’ll have to go through stacks of bank statements and figure out which transactions were business-related, increasing the chance that you’ll miss something. In addition, if you’re ever audited, this is one of the first things the IRS will ask for. They may perform a bank statement analysis, and if your transactions are commingled, it lowers the likelihood that they’ll work with you on disputes.
Many people presume they need to set up a separate business entity, such as an LLC, to open a business bank account. While banks often require this for business checking accounts, you can still open a separate checking account (using your own name and social security number) to manage your business funds.
Mistake #3: Not Taking Advantage of Tax Deductions
If you earn income from a fitness business or you’re an independent contractor, you can reduce your taxable income by deducting ordinary and necessary expenses. You may think that seeking aggressive deductions is an issue, but I actually find that fitness professionals tend to underreport their expenses and leave money on the table, possibly due to a lack of awareness about what’s deductible and what’s not. Fit pros also fail to consistently track expenses so they can be easily reported to tax preparers.
Some of the deductions people commonly miss are related to vehicle mileage or transportation (subway, bus, etc.), continuing education, office expenses, professional association memberships, and certification renewal fees, among others. No matter how small the individual expenses are, they add up. Consider using apps to track your receipts and/or mileage if you want to minimize the time you spend documenting these items.
Mistake #4: Managing From Your Bank Balance
Would you ever measure your client’s health and fitness level based solely on what the scale says? That is what you’re doing when you judge your financial health using only your bank account. This account is just one business metric, and, besides, a simple snapshot of your balance on a given day can be misleading. Assuming the available balance can be spent is a very common mistake. Some of that money may be earmarked for taxes, personal savings or a large upcoming investment. It’s easy to be tempted by a large balance, especially after a high volume of sales, a program launch or a busy season. In an industry of fluctuating behaviors, it’s paramount to make that money last and to manage it responsibly.
One solution is to establish separate bank accounts and allocate funds for your various expenses, such as tax savings, personal pay and operating expenses. You can automatically transfer portions of your income into these accounts so you’re not tempted to spend your income on operations. Consider managing these account balances using a software platform like QuickBooks® or Excel spreadsheets. However, be sure you have a solid understanding of these tools, or work with a professional to ensure that you’re implementing them effectively.
Mistake #5: Not Hiring the Right Professional
Surprisingly, many of the people I work with have not actually met the professional who signs their tax returns, nor have they ever met with that person to discuss their tax situation. You need to be able to trust your tax preparer to the same degree you trust your primary care physician. In fact, you may be providing more private information to your tax preparer than you do to your doctor!
Another misstep is not hiring a professional at all. You may think your situation is simple, so you can prepare your tax return using consumer software, or by hand. While that may be the case, it makes sense to seek advice from a qualified professional and establish a relationship, so that when your taxes do become more complicated, someone knows your unique story and can effectively advise you. Hiring an accountant is a small investment that will generate tax savings and prepare you for good decision-making throughout the life of your business.
Making any of the mistakes outlined here can result in penalties, interest, fees, and even lawsuits or jail time. Ensure you have the right process and people in place to help you—this is crucial to your success. Consult with a tax professional if you wish to implement any of the strategies outlined above, and avoid making costly mistakes.
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