Ah, taxes. Who doesn’t love taxes? I don’t know about you, but every morning I pour a cup of coffee and look for ways to increase my tax bill.
Let’s face it, in life and in business, taxes stink. They are the government’s way of tapping your shoulder and reminding you with a soft whisper, “This money isn’t yours.”
How can we take away the stress and worry when it comes to taxes?
My clients have a separate bank account specifically for their taxes. Every time a dollar comes into their business, a certain percentage is allocated to the tax account.
Having a separate account not only ensures the money doesn’t get spent somewhere, it also comes with other benefits.
Before jumping in, please remember that the following tips are about managing the cash flow of your business, not managing your taxes. It’s essential you consult with a CPA who knows the specifics of your business before making any changes.
With that said, here are 3 benefits to having an account specifically for taxes:
1. It Covers Your Personal Taxes
Remember when you worked a 9-5? You were likely paid a salary or an hourly wage, but the amount you took home was less than the promised amount. This was largely due to taxes, of course.
With your tax account, you have the money set aside to cover this amount so that when you pay yourself $5,000, you actually take home $5,000.
This can be done a number of ways. If you run your wages through payroll, you can “reimburse” yourself for taxes taken out of your account by taking a distribution.
Once again, consult with a CPA when it comes to the logistics of utilizing your account.
2. Use It To Pay Quarterly Tax Estimates
There’s a good chance your business is required to pay quarterly tax estimates. If that’s the case, this account is going to be your new best friend.
If you’re consistently putting money into your tax account, then when your estimates are due you’ll have a chunk of cash in reserves. Simply use the money in the account to make your tax payment.
If you have excess, leave it in there. There’s a chance you’ll need it for future payments.
Or, there’s a chance you could…
3. Pay Yourself a Tax Refund
If you’ve built up a surplus in your tax account, it will come in handy when filing your taxes.
After your CPA files your return, there will likely be one of two outcomes: you will owe the IRS money, or you will receive a tax refund.
If you owe, you can use the excess cash in your tax account to take care of it. If there is anything left after that, or if you receive a refund from the IRS, you get to pay yourself an additional refund.
Tax refunds basically mean you paid the government too much money in taxes, so they’re refunding it back to you. The same works in your tax account- if you put too much into it, you can pay it back to yourself as a distribution.
Because I can’t stress it enough, it’s important to regularly consult with your CPA. Work with them to navigate determining the right amount to pay in taxes and how much you should be allocating to the tax account.