In this post I want to show you how to always have money for your tax bills.
I created a six week course and one of the key topics is aimed at helping you to understand how to always have money for tax.
When I’m on a call with a potential client, there’s about a 30% chance that this issue comes up. It’s super common and really a big problem for a lot of people.
Most people who’ve been in business have probably experienced this, usually their first tax bill! Sometimes they get the bill and they say “how on earth am I going to pay this?” Or “where am I even going to get the money from?”
In a lot of countries, you can just get a payment arrangement with the tax authority, and they’ll let you pay it off over time. But sometimes, there’s interest and there’s penalties. Sometimes they want you to pay future tax obligations, which might be only three months away, and they want you to pay those on time. So you’re not really solving the problem by being able to take on a payment arrangement.
Really, for a lot of people they are afraid of the tax department. So if you can solve this problem, then it makes everything a little bit easier!
Let me show you a quick system that’s been around in various forms for thousands of years. There are two things we need to talk about.
1: The ideal
We need to talk about the ideal and what we’re aiming for, and then how do we get there.
So the ideal we’re aiming for is for money to come in to your business (via the business bank account), and then every day or once a week, you split some of it off into a savings account.
The reason why this works is simple. People can look at the bank account, they can see how much has been deposited since the last time they did this, and then they can put a percentage of it away to savings, and then the rest just stays in the bank account.
That percentage is the bit that makes this thing simple. So there’s no willpower, like “how much can I afford?” or “no, I’ll pay a little less this week, because I want to buy this shiny object”. None of that! The percentage is just like, “this is what I do, I do this all the time, and whatever is left over, that’s just what I have to use”.
I can’t give you the percentages, you will have to go to your tax accountant for a percentage. But when you do, here is the simple way to say it (because I know some of you have tax accountants that bill by the hour still). Go to your tax accountant and give them your background and say something like:
“Hi, I want a percentage that I can apply to the income that comes into my business. That percentage needs to be enough to cover my tax bill for the year.”
Then you can say to them:
“Can you look at my tax bill for last year, and divide it by my income for last year (my income on my profit & loss or income statement), and can you tell me what that percentage is? And can you just check for me that I can use that percentage again this year, given that I’m probably going to earn $X?”
For estimating the amount that you’re going to earn, you could just take whatever you’ve earned so far for the year and then extrapolate that out. For example, if it’s been five months and you’ve earned $50,000, then you can probably guess that you’re going to be at least $120,000 when the year is done.
Give that amount to the tax accountant as well, just in case you’re about to go up a tax bracket. That piece is why we need your tax accountant to do this, and why you can’t just do this. Because if you look at last year, you could look at your tax bill, you can look at your income and you could come up with that percentage yourself. But we want your tax accountant to do it because this year you’re not going to earn the same amount; no business earns the same thing year in and year out. So we need to get the tax accountant to give you that figure.
The tax accountant will need to take into account income taxes. There may be state and federal income taxes, particularly for those of you in the US, income taxes, but also the sales taxes, GST, VAT, whatever your equivalent is, that needs to be taken into account as well. We want anything that’s considered a tax bill, not just your annual income tax return, any kind of tax bill we want put into this savings account.
When you do this, that means that you’ll always have the money there. You will always also have a buffer that you can potentially tap into in an emergency; I stress the ’emergency’ there (and wanting something expensive is not an emergency!).
2: Getting there
Let’s move on now, and talk a bit about how we get there. Because for most people, if I said take a big chunk out of the money that goes into your bank account and put it away, they would just panic, and then potentially it will be a problem as they’ve already committed to expenses and debts that they need to pay.
We want to start with a small percentage, and over time gradually increase it. Starting with something is important because it gets the habit going. Then the next thing you can do (not really my favourite option) is you can transfer amounts whenever you can afford them. Or, to make it a bit more of a habit and to keep reminding you that you can’t just spend everything that is in your bank account, do it once a week.
Look at how much money you have, what bills you have coming up, and put some tax savings money aside. I definitely suggest that you get that percentage, because at the very least you could transfer a smaller amount than that percentage and you’ll better off than nothing.
The priority is using that percentage system. That way, it keeps things simple and you always make sure that you have money for your tax bills.
This by the way works for other infrequent bills that you have. Although for other bills, usually you can estimate what they’ll be. Normally they are a fixed dollar figure, whereas tax rates are percentages in most countries, so for that you might instead come up with a weekly fixed dollar amount that you transfer into a savings account, just to make sure that you have it.
Another thing that people sometimes do is, they will sometimes pay the money straight to their tax department, instead of into their savings account. They’ll pay an amount every week and then when the tax bill comes there’s not as big an amount of money to find. Personally, I don’t like letting the tax office have more of my money than they’re entitled to. I would rather have it in my business, at the very least earning interest for me. But that’s another option as well.
So there you have it, a simple system to make sure that you always have money for tax. I hope that was helpful.
If you’re in the position where you actually have a tax bill and you need to find some money, or you would like to do this percentage thing but don’t know how you can manage it, then I suggest you check out my Quick Profit Hunt; it’s a simple way to find some extra money now (and ongoing!) for your business.