Unexpected Tax Bills: What to Do Now and How to Prevent Future Shocks

Unexpected tax bills can be stressful, but there are practical steps you can take to handle the current situation and prevent surprises in the future. Creating proper financial systems and working proactively with your CPA will help your therapy practice maintain financial stability throughout the year.

• Options for handling an unexpected tax bill include filing extensions or setting up payment plans with the IRS
• Take what you owed this year, divide it across remaining months, and increase withholdings accordingly
• Consider life events that may have affected your taxes (marriage, children leaving home, new income sources)
• Establish separate bank accounts for different purposes, including a dedicated tax account
• Increase the percentage of income allocated to taxes if you've been underpaying
• Meet with your CPA at least twice yearly - during tax season and again mid-year
• Work with financial professionals who can help establish proper systems and infrastructure

If you need help creating financial systems for your practice, there's a link in the description to talk to our team members and get assistance in that area.

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*Intro/outro song credit:
King Around Here by Alex Grohl

Chapters

• 0:00 Dealing with unexpected tax bills

Transcript

Speaker 1: 0:00

So we just wrapped up tax season and, if you're like a lot of people, you might've been hit with a really big tax bill. I have some clients that I was working with who were shocked when they realized they owed a lot of money for their taxes. What can you do at this point? They were stressed, they were overwhelmed, weren't sure what their options were. Today I'm going to guide you through not only what you can do if you received a big tax bill, but also how can you prevent it again in the future. My name is Craig and I'm the owner of Daisy Financial Coaching. Our team is on a mission to make your therapy practice permanently profitable. If you own a solo or group practice, we're here to help you build a business that creates more time, makes more money and serves more people. This is the Therapy Business Podcast.

Speaker 1: 0:50

I remember tax year back in 2024, whenever I was filing my taxes. We were shocked when we found out that we owed a lot of money on our taxes. We were, I'm talking like over $10,000 on a tax bill. Never in the past had I owed money on my taxes. I'm always been really good about paying my tax estimates, about managing that and keeping a pulse on it, meeting with my CPA regularly. However, in 2023, we had a lot of life change happen that fell under the radar, and by that I mean I didn't really take it into account and my CPA, I guess, just didn't know all the facts I wasn't giving take it into account and my CPA, I guess, just didn't know all the facts I wasn't giving them to him, and so, therefore, we were shocked when we owed a big tax bill. My wife had just started a new job back in 2022 at the end of 2022. And so we didn't see the effects of those tax changes on the 2023 when we filed back in 2023. However, what we discovered last year was that we weren't withholding enough on her paychecks. We didn't notice it the year before because she'd only been working there for about three months of that year, and so it really didn't have a big impact. However, for that full year that she was working and not enough was being withheld, it didn't matter what I was doing on my end we weren't withholding nearly enough as a married couple, and so we ended up having a huge tax bill On top of that.

Speaker 1: 2:07

I'm a musician. I had a really good year in my business as well, as I was very active musically, and since that's just a side sole proprietorship side income, it raised up our tax, our tax obligation. So here we are facing this bill and luckily we had money in savings. We kind of had a pulse on it when I talked to my CPA in January, before we actually started submitting paperwork, and realized we are probably going to owe and so we had some ramp up time to start saving money. However, one of my clients just recently came back to me after being gone for about a year. They came back for more coaching and one of their biggest pain points was they received a big fat tax bill, similar Things. I guess they were just more profitable last year and because of that they weren't paying in enough taxes.

Speaker 1: 2:54

So what can you do at that point? A lot of times it is overwhelming, it's stressful. We're already kind of anxious and nervous when it comes to filing taxes and then here we are, owing the IRS. It's too late to do anything about the past, so the only thing we can really do is either you can file extensions if you need to have a little bit more time to collect things, if you feel like there's something wrong, if you feel like you need to get more paperwork together or you just get on a payment plan with the IRS to pay off this tax debt. Now, if you have money in savings, then it might be beneficial to go ahead and just take care of that, like we did. We had some money set aside in savings and then we took a few months to ramp up and save a little bit extra to, so we didn't have to drain our savings too low. But if you have the cash, then yeah, it might make sense to just go ahead and take care of it, pay it off. If you don't, that's okay. Just set up a payment plan with the IRS to make sure it's getting taken care of. Really, what we want to focus on is what can we do moving forward to make sure that this doesn't happen again.

Speaker 1: 3:56

So I'm going to guide you through just a few things to be thinking about, a few exercises you can do. Now I want to preface this with I am not a CPA, my team, we are not tax professionals, and so all the things I'm going to be sharing today it's not tax advice. I highly highly recommend you take all of this to your CPA to make sure that for your specific situation, it makes sense. What I'm going to be guiding you through is some ways to think and process through it so that you can set up and make a change for the future. I don't know the specifics of your situation and I definitely don't know tax law well enough to be giving you advice in that realm, advice in that realm. That said, let's talk about some ways that you can reframe your thinking, some systems you can set up in your business and your personal life to make sure that you are set up for next year to not be in this situation again.

Speaker 1: 4:42

First of all, we want to take what we owe and figure out what do we need to increase our withholdings from and again, this is a conversation for your CPA. This is what I did. We talked to my CPA and I said okay, do I and my business need to increase my withholdings? Does my wife and what we decided? Like I told you she wasn't withholding enough. So we went in and we changed her withholdings. What I did was I took what did we owe that year, we divided it across 12 months and we went and changed her her paycheck withholdings so that we could offset that. So we in your, when you go to your HR department, if you can do it online, or again if it's yourself inside your payroll software, you can change how much is withheld by just simply saying I want X dollars amount additionally withheld on top of what you're already withholding.

Speaker 1: 5:27

So let's just say that you were. For simplicity's sake, I'm going to say $1,200. I know that's probably if you're listening to this and you're worried about your tax payment, you probably owed a lot more. But $1,200, that would be divided by 12 is $100 a month. So I'm going to say monthly, I'm going to have an additional $100 withheld from my paycheck. If I'm paid twice a month, then it's going to be $50 per month withheld from my paycheck. That means from now until the end of the year, after 12 months.

Speaker 1: 5:55

Then here we are. We're going to be able to withhold that 1200 and that should balance itself out. Now, if you didn't find out until April, you don't have 12 months, right? So figure out how many months you have left in the year. If there's only six months left, well then that's $200 a month. We're going to be withholding extra on our paychecks to pay for our federal income taxes.

Speaker 1: 6:18

So this is just a school of thought that we can go about it If you want to be safe a little bit. On the safe side you could do 250. You could just round it up a little bit to make sure that you're covering your taxes there. You could also make sure you're doing quarterly estimates. So if you're somebody who's doing quarterly tax payments you're not on payroll, maybe you're just a traditional LLC or a sole proprietorship then make sure you are doing your quarterly estimates accurately. And you might increase those as well by about the same amount. So the same thing 1200,. We're going to divide that by four. So every three months you're going to pay $300 more for your tax, quarterly tax estimates. Where this does not become a solid rule of thumb is your business might grow over the I hope it grows this year and that means your tax obligation is going to increase because you're making more. And so by simply just paying an additional a hundred $200 a month towards taxes, if you have an identical year to last year, then theoretically that should solve the problem.

Speaker 1: 7:10

But not always Some other schools of thought want to take into into. To think about would be what happened in our personal lives last year. Is there an anomaly that maybe changed? What happened? Home purchases, home selling, any major purchases you're having. Did you have a major life event? Did you have kids? What could have maybe swung this one way or the other? And that can go back a couple of years too. Maybe two years ago you had one of those life changes that helped you on your taxes and then now this year you're not. Maybe two years ago you had one of those life changes that helped you on your taxes and then now this year you're not. Maybe you had a kid move out of the house and you're no longer claiming that dependent and suddenly boom, you're hit again with just more tax. So take all of these things into consideration as we're making a change Now.

Speaker 1: 7:53

The best way to set yourself up for next year is to make sure you have a tax account, so we are big believers in having multiple bank accounts to organize our finances so that when you have income coming in, you can divide it out across these core bank accounts to make sure that you're always covered. Now, the core accounts that we recommend for therapy practices would be having a profit account, so that you can make sure profit is specifically set aside. You have an owner's pay account, so to make sure that you are getting paid regularly and on time, in the same amount every single time. A tax account, which is what we're talking about now, money that you're setting aside towards taxes, operating expenses, and then also, we usually recommend a payroll account if you have a team of clinicians working under you. Now, this tax account, what percentage are we allocating to that? And so this is where you can increase that percentage, so you have more money going toward taxes.

Speaker 1: 8:45

If you've been setting aside 10% of your income toward taxes, then if it wasn't enough, let's ramp that up, maybe to 12 to 15% going into that tax account. Then at the end of the year, let's just say you do have a tax bill. Maybe you have some cash in there. So even if you don't change your withholdings, if you're adding more money, if money's building up in there, you've increased what you're putting into that tax account. Then by the end of the year, hopefully you should have some cash built up in there to pay off any unexpected tax that you might owe when it comes time to file.

Speaker 1: 9:17

So a lot of these things we can do to be proactive. That is really the key. Don't beat yourself up if you found that you have a tax bill. You're not a failure. It's really difficult and confusing. We have something as complicated as tax law and filing taxes and it falls on us as individuals and business owners to try and figure it out as we are getting things compiled ready to file. So give yourself grace, but also use this as an opportunity to learn and to grow and to make sure that this doesn't happen to you again in the future.

Speaker 1: 9:46

So look back to see what factors came into play. Why was this tax bill higher? Talk to your CPA, see what insights they can give you. Why might it have been different this year than previous years? If you've been owing every single year, then I think it's probably time to go ahead and make some of these tweaks and changes. If your CPA is saying, yep, it looks like moving forward, this is going to be the norm, then talk to them about those changes that you can make. What adjustments to your withholdings do you need to make, either on your payroll side or, if you're married, on that spouse's payroll side, if you have side hustles, side income? So again for my situation with the band, I wasn't paying into quarterly and now I am, because that's just as the band was growing and I was making a lot more money from that. Previously it wasn't really affecting our taxes and now it is, and so I have to adjust what I'm doing.

Speaker 1: 10:36

I highly recommend having a tax pro in your corner that you meet with at least twice a year, usually around tax time, when you are filing, you're going to go over what it looks like, and then I always recommend setting up a time in the summertime, maybe halfway through, so that's July August. This is a great opportunity to reconnect with them. Usually in the summers they are. Their workload is a lot less. They still have a lot of things they're doing. I'm not saying that they're doing nothing. They're busy, but the April 15 tax deadline has passed and so usually they're a lot more available to have those 15, 30-minute calls.

Speaker 1: 11:11

A great CPA like mine is going to walk you through exercises and project what they think you might owe this next year. So they might take what your revenue was this year Mine will. So if I met with mine in July, we're going to take my six months of revenue from this year. We're going to look at my PNL. He's going to take that into account. He's going to take into account any other side income we're earning and we're going to project what we might owe, what we might receive back. So these are all exercises that you can do with a good CPA, and I highly recommend it. If yours is not willing to do that, then it might benefit you to find one who will, so that you're not caught off guard Again when April hits, it's too late. It's too late to do anything about it, and so this guessing game every year. We want to move away from that, and so find a CPA, and then also find a person who can be in your corner, somebody who's looking into your finances with you, whether it's a CFO, whether it's a profit coach, like what we do somebody who's able to help you stay organized and have that system if you don't have it already.

Speaker 1: 12:11

Paying more, saving more for taxes, is a great philosophy, a great thing to be doing. If you don't have the systems and infrastructures in place, it's not going to happen and you're going to keep this cycle going where every tax year, you are stressed, anxious, frustrated, because a big tax bill is hitting and you don't have cash in the bank to take care of it. If you need help creating that system and infrastructure we eat that stuff for breakfast. There's always a link in the description to talk to one of our team members and get some help in that area. Don't let the taxes get you down. You're doing great. You are on top of it.

Speaker 1: 12:44

Let's make this the last year you owe a bill. If you owed one, if you have never owed a bill, great job. But stay on it. Keep in pulse. All the advice I was giving about communicating with your CPA is still into effect. I didn't owe for years and then, all of a sudden, we owed one year. So it can sneak up on you if you're not careful. So be proactive, have those conversations, save for taxes and you'll be doing great. Thanks for joining us on the Therapy Business Podcast. Be sure to subscribe, leave a review and share it with a practice owner that you may know If your practice needs help getting organized with its finances or just growing your practice. Head to therapybusinesspodcom to learn how we can help.