If you run a small business, chances are you are familiar with paying good ol’ Uncle Sam four times a year – also known as paying your quarterly tax estimates. Your accountant will probably give you estimates of how much you owe in taxes each quarter, but that doesn’t mean you actually have the funds available to make the payments!
In this blog, we will show you our best tips for how to prepare your business for quarterly tax time (and maybe even reduce some stress along the way!).
Open a Bank Account Specifically for Taxes
We like to call this new account “The Government’s Money” – this is where you will save funds only for the purpose of paying your quarterly tax estimates. You will want to make sure that this is a new and separate account from where you receive income into your business. By moving from running your business off of one large plate of cash to using smaller plates, you give your funds their own designated place and purpose.
Take a Percentage of Your Income
If set up and allocated correctly, your business should be paying the direct tax liabilities of the business itself and the personal income taxes of the owners.
When your taxes are due and you submit your quarterlies, your business should be doing this for you. The first step in saving the right amount of funds is to determine your income tax rate.
Taxes range all over the place, depending on your amount of personal income, corporate profit, and the area you live in. Then based on what you need to save, take a percentage of your total income each month and allocate funds to your new tax account.
No matter what you may be saving money for, it can be tempting to want to draw from your stockpile when times get tough. But when it comes to your tax reserve, this is not actually your money! When setting up your tax account, you will want to make it really hard and painful to get to that money, thereby removing the temptation to “borrow” (i.e. steal) from yourself. Use an accountability mechanism to prevent access except for the right reason – to give Uncle Sam his fair share! We recommend setting up an account without access to online banking or any of the “bells and whistles.”
Enforce a Rhythm
In order to establish a habit, you need to get into a recurring rhythm. Begin by allocating to your tax account from your total income twice a month – specifically on the tenth and twenty-fifth. This method allows you to create a controlled, recurring, and frequent cash flow management system for your business (instead of crunching at tax time).
We know you started your business in part to achieve financial freedom, and we want to make sure your business takes care of you in the process. If you’ve been looking for an easy-to-follow system for how to prepare your business for quarterly tax time, schedule a free call with one of our financial planning experts today!