You just received your business tax return. You are distressed because you owe taxes. Every year tax time is stressful because you are scrambling to come up with the money for the taxes owed. You promised yourself this would not happen again, but you do not know how to change things. Let’s discuss the positive side of owing taxes and some practical tips to make tax time less stressful.
Owing taxes is not a bad thing
Owing and paying taxes is not a bad thing. It means that your business is making a profit. As a business owner, you need your business to be profitable. Paying taxes is part of running a successful business.
Of course, you do not want to pay more taxes than you legitimately need to. But most likely your business will owe taxes. You need to plan for and manage how your business will pay those taxes. What can you do?
Plan how your business will pay taxes
Since you are running a successful business that will owe taxes, you need to manage how your business will pay for them. This takes planning and some discipline. How can you start?
Instead of waiting until after your taxes have been prepared, have a meeting with your tax accountant now to determine a realistic amount or percentage of the gross or net income to work with. You will want to have your last three years of filed tax returns and a projection of your revenue and expenses for the current year available for the discussion.
Save for your taxes
We have found working with a percentage of your gross income works well. Once you have a realistic percentage to work with, you need to implement a new habit to start saving for your taxes.
This is how it works:
- Set aside a current account or open up a new bank account dedicated to tax savings.
- Transfer the determined percentage of your gross income regularly to the tax savings account
- When it is time to pay your taxes, transfer the amount needed from the tax savings account
The approach is quite simple. Executing it does require discipline, but the payoff is worth it.
How will you feel when you pay your taxes?
As a business owner myself, I implemented this approach a number of years ago. I can honestly say that paying my taxes now is not stressful and I feel great peace of mind throughout the year knowing that the funds for taxes are set aside.
When putting funds aside for your taxes on a regular basis, you will not be scrambling to come up with the money when it is time to pay your taxes. This makes tax time less stressful. You will feel more in control of your finances once you begin saving for your taxes throughout the year.
By putting the funds aside regularly in a dedicated bank account, it will not feel like you are paying out of “your business” money for paying taxes. You will feel like that money never really belonged to the business.
Want to feel in control of your business in other areas? Check out the first part of a series we wrote about cash flow management.