How to budget and prepare for taxes in your salon business
Did you get a big tax bill this season? If so, it probably left you feeling drained and stressed about how to afford to pay it.
As if crunching the numbers (or finding someone else to do it for you) wasn’t terrible enough, now you’re facing this bill that makes you nervous-sweat.
Trust me, I’ve been there. There’s nothing worse than hustling all year only to find out that you calculated your taxes wrong and didn’t budget correctly for your tax bill.
After today’s blog and interview, my hope is that this specific kind of stress (because honestly, you’ve got enough other things to worry about!) will be a thing of the past.
Kenesha Coleman is a certified CPA who specializes in helping beauty professionals sail through tax season easily and affordably.
Over 13 years of tax and accounting experience, Kenesha has distilled the most important lessons for all professionals to know - from how to budget properly on a daily basis, to how to find the best accountant for you.
From grad school (graduating with both a BA and an MA in accounting) Kenesha was hired by the IRS - a huge shock to her system, but also where her origin story begins.
“[I was] auditing small, mid, large size businesses. And I really, really fell in love with tax at that point. Cuz the training is really good and they throw you right in. Right. So I'm like 22 sitting right across from like the CFOs of Fortune 500s.”
She says even with all of her education, the two most valuable lessons she learned right at the beginning were about the fundamental difference between giant corporations and small businesses, and, as a result, the direction she wanted to take in her own career.
“Two big things I took away from that experience was 1) the wealthy and the multi big multinational companies fare the best when it comes to taxes, because they can hire out to tax lawyers and CPAs to get the best strategies [who] can do it for them; [and 2)] the small business owners…pay way more than they should simply because they just don't know [what they should about taxes] and they may not think they can afford to hire out for the help.”
With these two things in mind, Kenesha began to strategize her career trajectory, based on how she could be the most helpful to small businesses, and also so that she could feel more at home with what she was doing:
“[The position with the IRS was] a very confrontational job, as you can imagine, [and I thought], ‘I wanna be more on the helping side.’”
Kenesha decided to strike out on her own by starting her own accounting agency, after she tried working for a few different agencies but still couldn’t find a good fit for herself.
Kenesha has a really strong set of values and beliefs that guided her career decision, and when she shared them with me I was totally dobstopped in the best way, because they’re probably not what you’d typically hear a tax agency say about their origin story:
“I started my own accounting firm called common tax. We exclusively serve beauty entrepreneurs. I wanted to democratize that access to that information to save on taxes.”
“[It] shouldn't just be for which folks and multinational corporations - [tax help] should be for everybody. So I really wanted to…make it available for the small business owner.”
As for why Kenesha chose the beauty industry, again her reason was really thoughtful and speaks to her character (and it’s a great reminder for all of us in the beauty industry!):
“I specifically niche in beauty because I just have an organic appreciation for that industry. I know how certain beauty professionals [have] helped me along with…enhancing my beauty, self love and the fact that…when we go get a haircut or get professional makeup or…we have this glowing skin from this regimen recommended by our esthetician…we feel good. And when we feel good, we move through life a lot differently and make better choices.”
“I like to remind beauty entrepreneurs [that] what you do is not all vanity. It really does have this intangible internal effect on people.”
How to do your own taxes as a suite renter or booth renter
If you can’t afford a CPA to crunch the numbers for you, you might be hit with a wall of dread, apprehension, and nerves when it approaches tax season each year…which ultimately turns into procrastination.
Kenesha shared with me a great way to reframe taxes so that you don’t have to dread them, and it’s such good advice for everyone:
“The thing I hear all the time, especially for the clients that I have now, [is] ‘I am not a numbers person.’ Okay. That's a mindset thing. We can be whatever we want to be, whatever we choose to be. When you tell yourself that you're not a numbers person or you don't like numbers, you're gonna have…all types of preconceived notions before you even look at your own numbers. That's preventing you from taking control and really managing them.”
Kenesha says that just telling yourself, “I can do this!” helps us to jump into it - but once you’ve begun, she also shares some really practical advice for understanding what you’re looking at!
“The second biggest struggle is understanding what those [tax] numbers mean. A lot of my clients were doing bookkeeping or having someone do bookkeeping just for the sake of bookkeeping. [But no.]
“We [have to] do bookkeeping and look at those numbers to really understand what they're telling us.”
“How much are you making? Is it profitable or not? What is the tax on those numbers? Is your pricing too low? [Because] you're not heeding your money goals. [You] can control all of this. It's not happenstance at all.”
Common mistakes salon owners make at tax season
Kenesha says that most of her clients fall prey to a few common pitfalls when it comes to taxes:
Not having the proper business structure and entity set up
Not writing off home office and other expenses (when you’re definitely applicable for them!)
Not checking in about halfway through the year to see if they can make changes to their tax status, entity, or other financial decisions before it’s too late
Kenesha says that based on how much your last tax bill was, you’ll usually be able to gauge if you should still be listed as a freelancer, sole proprietor, or an S-corporation or LLC.
“Most solo entrepreneurs or small beauty salon or spa owners, [it might just be] them and a couple team members filing as a sole prop or LLC on a schedule C on that tax return. If you find that you have a really high four to five digit tax bill, you are probably very close to being ready to switch entity types to being an S corporation.”
“So think of in terms of entity structure: if you have a tax bill under this entity structure and [your tax bill] is very, very high, just think to yourself, ‘I wonder [if we] could be under a different entity structure. Could we possibly lower the tax bill in that way by switching?”
“If you are covering between 30 to 40k of net profit, you should definitely run an analysis or have someone run an analysis for you to see if you can save on self employment tax by switching to an S corporation.”
As well, Kenesha says that you’re most likely applicable for home office and mileage deductions that you’re simply not applying for, and you definitely should!
“For whatever reason, beauty-preneurs are still not taking home office deductions. Mm-hmm And they can! Someone told 'em they couldn't, but you definitely can. Secondly, because you can take a home office [deduction,] you also can deduct your commuting miles between your home office and your workspace. Those are two very easy ways to [write off] some personal expenses that you're gonna incur anyway.”
Finally, Kenesha says that in the United States, 2022 is the last year that small business owners can write off the total cost of equipment and other costs, so now is the time to do that (once again, for American citizens only.)
“This is the last year that you can buy things that you can use for your business, like equipment, furniture, maybe even a vehicle. This is the last year you can buy it and completely write the entire thing off. Next year that rate is gonna dwindle to 80% then to 60% then to 40% and so on and so forth.”
How to plan ahead for your future retirement as a beauty professional (and make the right tax decisions, too!)
Kenesha says that often, her clients are so focused on making all the right business decisions right now that they neglect to plan for their futures.
“[You] can't forget [your] self care. Contribute to your retirement plan. If [you] don't have one already, please set it up. Because instead of giving those tax dollars to the IRS, you can make the contribution to your future self for retirement and get a tax benefit from it. Same thing with health insurance. You are making premium payments. You can deduct the cost of that policy through your business and get a tax benefit that way as well. Those are by far the easiest [ways] to get a tax benefit from what you have to do anyway.”
Best practices for budgeting as a beauty professional
Often, we learn how to budget when we have to put out a financial fire, but Kenesha has some sage advice to share on how to prevent that by writing yourself a personal and professional budget, and staying within it whenever possible.
“I always say [that] when it comes to money, it's not by happenstance. You cannot manage what you aren't tracking. That's where the budget and the bookkeeping comes in.”
“Before [you] can even [start] budgeting for a business, you have to have one set for your personal life. I always get the question from beauty entrepreneurs, ‘What can I pay myself?’
“I throw that question back at them. What do you need to take care of yourself? [Because] those have to be aligned. So before you try to think, ‘What is the money I could pull out of my business for myself? [It] has to be based on what you actually need. And you don't know that until you do your personal budget.”
If you’ve never written a personal budget before, Kenesha says that the obvious place to start is to look at your daily, weekly, monthly cost of living, and then figure out how you can save money for your future, as well - both for a rainy day, and also to enjoy your life.
“[Your] personal budget obviously should include all the bills and things that cost to sustain yourself. I want folks to remember two things: add on a layer for savings, and add on a layer for play money. We're human. We wanna work hard, play hard. So don't forget that part either.”
Kenesha says that once you’ve calculated your personal budget plus your savings goal, you can move onto your business budget.
“Once you have that amount, that's gonna be the beginning of your net profit goal from your business. [You want to ask yourself, based on your net revenue,] ‘How much of that do I wanna bring home for myself? And if that percentage is 50%, 40%, that's how you're going to build your business budget, working backwards.”
If you want to figure out if you’re budgeting properly based on averages, Kenesha shares some benchmarks for measuring your beauty business against.
“Salon benchmarks are small. The average salon makes under a million, [and] their net profit percentage is 15%. The gross profit and the gross profit formula is all the revenue you make, minus all of the expenses directly related to what it takes for you to provide the service or the product. That percentage for the beauty industry is 40%. Use those as benchmarks to just compare how you're doing to your peers in the industry. But if your goals exceed that, (which they should) great. Stick to [your] goal if it exceeds that, but those are the minimums. If you're falling below that you've got some work to do. If you're performing above that, good for you. Lean in, lean more into what's working.”
Depending on what entity you’re under, which country or state you live in, and how much you make every month, you will have different goals in terms of tax deductions, but in general, Kenesha says that you should plan to deduct 20-25% of your net profit for taxes.
But above all, Kenesha says that the single best practice you can do on a monthly basis to set yourself up well when it comes to tax season is to do your own bookkeeping.
“I get new clients [that have] never done bookkeeping before. And [the] first time they see a financial statement for their business, they [realize] they're spending…2000 a month on meals, on Starbucks or Panera or something. Or they realize they're spending so much money in certain areas - they forgot that they subscribe to [something] and they don't even use it, but they're still subscribed. So we are able to cut expenses really quickly, because they can see it on paper and they know it is there and they know they don't need it. So we cut it. That is a very simple and easy way to boost profit by double digits. It's by analyzing the financial statement and cutting costs where you don't need it or aren't using it.”
Setting yourself up for success come tax season as a hairstylist or esthetician
Kenesha says that regardless of what entity your beauty business falls under, whether you’re in a high or low tax state, and whether you’ve never filed a tax report or you’re a seasoned pro, there are a few things you can always do to have the best chance of keeping your tax bill low, and your profits higher:
Do your own bookkeeping every single month to manage your expenses vs profits
Use fin-tech software like Quickbooks to keep track of deductions
Have a separate account for savings and other deductions that you can’t touch (“out of sight, of mind”)
Set up automatic transfers for both savings and tax deductions
If you’re in the US, be sure to pay your taxes quarterly to avoid any big surprises later on
Kenesha can be contacted at www.beautycpa.com, and she’d love to hear from you!
“I really, I really love to give value. And so I promise every call I have, I will at least give them some takeaways that they can use in their business right away for quick wins. Even if they don't decide to work for me, I think this information just should be available for everybody.”
