5 tax tips for young black and brown entrepreneurs
For people of color in the United States, the racial wealth gap and discriminatory lending practices are unfortunate barriers to even starting a business. In 2019, the median net worth of white families was almost eight times that of black families. That’s a pretty wild statistic in a broad sense to be sure, but it gets even wilder when you consider that, according to the Federal Reserve, the average gap between black and white families median wealth in 2019 was $164,100. Yet, over the past decade, minority companies composed of more than 50% new businesses and created 4.7 million jobs. Obviously, no one can hold us back. Regardless of how difficult it is for minority-owned businesses to grow and prosper, our entrepreneurial spirit persists.
Because we cannot rely on the system to help us grow our wealth, it is important that we take care of our financial health. How we prepare to pay taxes is a big part of that. Black and brown business owners like us need to figure out how to get the best results for ourselves when filing taxes – legally, of course. Getting audited isn’t cute. Whether you started as a freelancer a few years ago or opened a small business today, here are some expert filing tips for minority-owned businesses.
Make your tax journey a learning process
According to a 2018 national survey conducted by the Financial Industry Regulatory Authority, Asian-American and white applicants tended to score higher on a financial literacy test than Hispanics and blacks. This is largely due to the unique financial literacy black challenges and Latinx folk have historically been faced. I’d love to go into too much detail about how we’ve been deliberately blocked from financial education and opportunity over the decades, but that’s a whole different story. We continue to catch up until today.
First and foremost, fear and procrastination can cost you your hard-earned money. Sometimes when we are afraid of making a mistake on their taxes, it can prevent us from taking action on what is needed until the task seems too overwhelming or complicated.
“When I started I had all the fancy apps and Excel sheets with pivot tables and frankly, it’s not necessary,” says Veronica Díaz, small business owner and former senior financial analyst. Her background in finance proved ingenious in creating and managing her hair care brand. “Keep it simple until your business grows, using one card for your business to track monthly income and expenses,” she says.
“Focus on the small steps,” says Shiloh Johnson, certified public attorney and CEO of ComplYant, a technology platform for business owners and entrepreneurs looking to manage tax rules and requirements. Start early, he recommends. “Don’t try to tackle everything at once: make a checklist for yourself and set a goal each month based on a one-year plan.”
Johnson says if you’re having trouble managing your personal money, you’re also more likely to struggle with your business finances. “As long as you’re aware of the process — and of yourself — you can get help where you need it,” he says.
Keep complete records
The foundations of our tax laws in America were written by people who had all the wealth from the beginning, and still do most of the time. When black Americans and immigrant families do their taxes for the first time, we often start from zero, because our parents are still learning the ins and outs themselves. I know I’m guilty of throwing away receipts I might have deducted during tax season in the past, and frankly, I’ve never been told that as a freelancer I’m also a business all year.
“Keep meticulous records when it comes to tracking expenses like transportation,” says Cheree Hill, a Maryland-based accountant and small business advisor, adding that if you use your car for business (like I do this to deliver finished paper crafts and paper flowers). handmade bouquets for my artistic endeavor), you may be able to deduct mileage, parking, tolls, and other expenses.
“Always keep receipts,” says Johnson, adding that there are about 169 different tax deductions available to you. The deductions you can make range from car expenses to supply costs or even a per diem you pay employees when they go on business trips. A full list can be found on the IRS webpage. “You may not always know what a tax deduction might be.” Hill also suggests applications such as MileIQ to help you keep proper records of your transportation (and other) expenses.
Divide your budget
This may seem like basic knowledge to some, but freelancers in particular tend to blur our work lives with our free time. This can lead to messy bookkeeping if you’re not careful. If you were to use the same bank account to get paid for salaried employment, side hustle, and other additional commissions, you’re setting yourself up for pure white-hot chaos in April. Don’t do it to yourself.
“Freelancers are still business owners, and that’s something we all need to remember,” Johnson says, urging independent contractors to make sure you don’t merge funds. She also suggests freelancers open a bank account for their business, keeping personal and business finances separate. Remember, she says, paid bills aren’t the same as paychecks because they usually haven’t already been deducted for taxes.
Learn the basics and master them before going any further
A 2020 T. Rowe Prize Survey discovered that black parents are more likely than their white counterparts to discuss finances with their children, “the value of a dollar” and savings goals. Yet the racial wealth gap persists. This is partly due to differences in financial literacy between cultures in America as well as fewer white people talking to their children about money, they have more to waste — a key element of the learning process.
Be resourceful and take care of your own finances instead of entrusting them to someone else if possible. “Your business is probably small enough that you can afford to take the time to learn the basics,” Johnson says, adding that this includes how to categorize your expenses, sort your income and separate your deposits. “When you’re willing to hand over your accounting to someone else, you can spot inaccuracies much faster, and that’s the best protection.”
While understanding the basics of taxation is ideal for a minority-owned business owner, you don’t have to go it alone. Johnson suggests finding professionals you trust to help you through tax season and the rest of the year, and start by confirming that they are credible. If they are one registered agent, or a person who has earned the privilege of representing taxpayers before the Internal Revenue Service, you can validate this certification through the IRS website. If they are a Certified Public Accountant (CPA), you can check their license with the state in which you are filing your taxes. “Each state makes its active licensees available to the public,” she says.
Make peace with the past and focus on the future
Business ownership and entrepreneurship are strongly influenced by an individual’s savings and the wealth of their parents. A lot of the richest people on the planet started their businesses with their family’s money, and while I’m sure it’s great to go to the countryside and ask mom and dad for a seed investment, everything the world has not had this privilege.
Be realistic about your past and hopeful and (responsible) about your future. “Contribute or start your retirement fund,” Hill says. In this country, blacks are less likely to retireand other people of color in America are even worse off for their future retirement, whether or not they save for it, according to a study in 2021 by Investopedia. As a self-employed person, there are options when it comes to saving for retirement. Hill tells me that each option offers a tax deduction and possibly a ongoing tax deferral. “Depending on the option you choose, you may be able to save up to $55,000 per year,” Johnson says.
“Many underrepresented founders come from communities that don’t always have financial resources,” says Johnson, adding that a lack of resources or information can quickly turn into a fear of money and taxes. If you’re a small business owner with these experiences, like me, she suggests that you and I start by making peace with where we are and focus on the learning process to alleviate some of that stress. in the future.