Are You Ready to Pay the Taxman?
Everything is so expensive right now. This week alone I got notifications from two software companies and my business insurance agency that their prices were going up. Not to mention the extra costs for gas and groceries. As if that’s not enough to manage, we have to be ready to pay our tax bill in the coming weeks. Are you prepared to make that payment?
Profit First Can Help
Profit First is magical this time of year. The dreaded call from your tax preparer turns into a moment of celebration when you write that check without scrambling to come up with the money. How does this work? It’s actually pretty easy.
How to Get Started
First, create a bank account for taxes. This is either a checking or savings account specifically for federal and state income taxes. Your property taxes and sales taxes will come out of your regular operating expenses checking account. As you receive your amazon settlement, you will carve out the dollars needed for taxes and move them into their own bank account. You will leave that money alone and won’t touch it until time to make estimated payments (quarterly) or at year-end.
The next question is: how much should you be setting aside in this account? I recommend looking at your last year’s tax return and determine the percentage of tax to your revenue. This is a good baseline figure. As the year unfolds, you’ll want to test this number to be sure it still makes sense. Perhaps last year was extremely profitable and you’re not meeting those same numbers for the current year. You may also need to recalibrate if your profits are growing rapidly. Do a reality check and talk with your CPA, if you need to recalibrate. September is usually a great time to do this check-in.
What Not to Do
It’s so easy to get caught in the trap of spending all your money on inventory or advertising. Or perhaps you take owner draws and aren’t realizing the impact it is having on your bank account. As business owners we want to grow, and money sitting idly by appears to be available and easy to access. Don’t fall into this trap. While you only must “settle up” with the IRS once a year, taxes are a true cost of doing business. Put the money aside to cover this cost. If you redeploy it in your business, you are in effect propping up your business with someone else’s money and they will call the loan come April 15.
The End Result
My clients that use Profit First and create tax bank accounts, along with the other bank accounts that have specific uses such as, Inventory, Owner Pay, Profit, and Operating Expenses, love that feeling of paying taxes with the money they have set aside. They love surprising their accountants with this response; “So I need to write a check for X dollars, no problem.”
Through Profit First, you can decrease worry and stress when it comes to not only tax time, but everyday operations as well. If you need help getting started, reach out to the bookskeep team. We would love to help!