Are You Habit Stacking Your Tax Payments?
Taxes are a pain, but there’s no way to avoid them, right? We try all the time to research every possible deduction and get all the wonderful benefits of being a business owner, but at the end of every year, we’re still stuck paying an arm and a leg, sometimes with penalties and interest as well.
What can we do to get ourselves out of this vicious cycle? One great way is by using some of the teachings of James Clear. James talks about something called habit stacking, and in this article, we’re breaking down this unique strategy and applying it to the way agency owners should pay their taxes.
The problem with agency taxes
So, here is the current issue with how we pay our taxes, and maybe this sounds like you.
At the beginning of the year, you make a plan. You say, “I’m going to put away 20% of my income every month for taxes into a separate account, so I’ll be prepared at tax time.”
Maybe that’s not your strategy, maybe you planned to pay your taxes every quarter, and you succeeded for a while. The problem with that is, every quarter you need to watch a large portion of your earnings disappear from your account.
While that strategy might get the taxes paid, you’re not planning properly, and if you have one slip-up or moment of weakness, that money won’t be there anymore to pay those taxes, and you’ll end up falling behind.
Regardless of which strategy you choose, you’re not creating healthy habits that ensure your taxes are always paid on-time with as little interest and penalties as possible.
Do you need to pay estimated taxes?
One interesting thing that a lot of agency owners don’t realize is that they need to pay estimated taxes on their earnings. Since you’re not receiving a W-2 or a standard paycheck, it’s important to understand that you may need to pay taxes throughout the year.
If you own a sole-proprietorship or single-member LLC, you will use the Schedule C – Profit and Loss form to determine how much you must pay in taxes. If your business is a partnership, multi-member LLC, or S Corp, you’ll use a Schedule K-1.
The IRS says you need to estimate and pay taxes if the following applies to you:
- You expect to owe at least $1,000 in tax for the year after subtracting your withholdings
- You expect the withholdings to be less than 90% of the tax shown on your tax return
Now that you know all this information, there’s no need to panic because you have options. If you haven’t started putting money away for your quarterly taxes and you think you need to pay estimated taxes, don’t worry. We’re here to offer some answers to your tax woes.
Your options for paying taxes
Now you have two options. You can continue like you are, which will lead to more penalties, late fees, and ridiculous interest, or you can change your habits and develop new ones that will help grow your business and keep you out of trouble with the IRS.
How to use Habit Stacking to help estimate taxes and get them paid
Habit stacking is essentially taking a current habit you have and putting another one on top of it. For example, we have a lot of practices that we do every day without even thinking about it. We may not realize it, but we get up every morning and do certain things like clockwork.
You might get up each day, and the first thing you do is make a pot of coffee. This is a habit you have that you do without thinking about it. What if you could use that habit and pile another one on top of it?
If someone was trying to lose weight but couldn’t muster up the courage to exercise, they could use the repetitive making of their morning coffee to stack another habit on top.
Every day after they make their coffee, they will do 10 pushups and 10 situps. Simple right?
We want to apply this same logic to paying our taxes. You want to stack your taxes on top of every time you get paid in some shape or form.
See, W-2 employees are forced to do this because their taxes come out automatically at a percentage every time they get paid. You want to essentially do the same thing, but you’re responsible for taking care of it yourself.
You can stack taxes on top of:
- Guaranteed payments
- Payroll processing
- Revenue / getting paid
For example, let’s say you sell certain clients on a monthly retainer. You can say, “every time I get my retainer payments for the month, I will put 25% into a separate bank account.”
Eventually, after doing this for a few months, you’ll find that you do it without thinking about it, and it becomes a standard process in your business.
How to develop better habits
You’re likely saying, “okay, that’s easier said than done,” and you’re right. It’s easy to say that we will develop a habit, but it’s much harder to think about how we’ll do it. Things get in the way. You want to take that money and put it back into your business; maybe you struggle with discipline, and you’re not as good with money as you’d like to be.
Regardless of your tendencies, you can develop better habits through habit stacking, and you can do it in every aspect of your business.
1. Start small
The first thing you want to do is start small with your habits. Don’t try and change your life completely overnight by trying to go from 40 hours a week of work to 80, you’ll never succeed. Set small goals and make them attainable. Once you see yourself winning a little, it will make it easier to reach higher goals.
2. Find the right trigger
You want to figure out the habits you have each day that you do no matter what happens. What do you do in your day that you would feel completely lost if you missed it? For many, these are basic human habits like brushing teeth, taking a shower, or making a cup of coffee.
Next, you want to take a look at things that happen during your day that you can’t prevent. These are things like the sun rising, hearing birds chirp, and listening to a song.
Arm the new habits you want to achieve and pair them to these daily occurrences that you cannot avoid.
3. Make the habit super specific
You don’t want habits like “get more revenue” or “estimate taxes better” they need to be ultra-specific. Say things like, “when I receive $1,000 in revenue, I will put away $250 for taxes.” Now, every time you receive $1,000, you will put away 25%, and that action will eventually become a concrete habit.