This is the time of year that most business owners are thinking about their taxes. Are you stressed this time of year and struggling to save money for taxes? As a business owner myself, I used to dread this time of year because of taxes.
Adopting one regular habit changed everything for me! That might sound a bit dramatic, but I must say that this really impacted my life in a positive way. I want to share this tip with you so that you can set yourself up so that next year you will not need to be stressed out about paying your taxes.
Drumroll… the tip is to open a separate bank account to save for your taxes and transfer funds to this account on a regular schedule.
Let me share with you why you should have a separate tax savings account and how you can get into a routine of transferring funds into this account.
Have a Tax Savings Account
Since taxes are inevitable, planning for your taxes can take away much of the stress at tax time. Having a separate bank account was key for me. I used to transfer money into my general savings account for taxes. But since it was comingled with my other savings, it was hard to determine quickly how much I had saved and when I did withdraw funds for paying taxes it felt like I was spending my savings to pay my taxes.
By having a separate account just for taxes, I now know that the money in this account really is not my money to spend however I want. Rather it is a holding spot for saving for that future tax bill. So now when I do withdraw funds from my tax savings account, to pay my estimated quarterly taxes and at tax time, I feel fine. In fact, I even feel happy! Knowing that the money is accumulating in an account has been a real psychological boost for me.
Of course, just opening a tax savings account is not enough. You need to have some methodology as to how you will go about funding the account.
Setting up a Routine to Save for Taxes
Under my old system, I would transfer funds periodically to my savings account and earmark them for my taxes. The problem was that I would only do this when I felt that I had “extra” money and usually in larger round amounts. This sometimes meant that if an unexpected bill came my way, the first thing that I would do is NOT save for taxes, so this method did not work well.
Now I transfer funds to my tax savings account on a regular routine and the amount is based on a percentage of the deposits received in my business. I think the key to success is to transfer funds on a regular schedule and base it on a percentage of the deposits received. This means that if the money coming into the business account is high, the transfer to the tax account will be high, but if the money coming into the business account is small, then the transfer will be small. I really like the percentage approach because it means that I do not need to think about how much to transfer since it is strictly based on a calculation.
Let’s say you determine that saving 15% of your business deposits received is a realistic amount for saving enough for your taxes. This would mean that if you received business deposits of $10,000 for the period, you would need to transfer $1,500 to your tax savings account. But if you received $500 for the period, you would only transfer $75 to your tax savings account. The mind shift of transferring funds, no matter how large or small the amount is for the period, really was a huge mind shift for me. For instance, $75 might not seem like it would make a difference, but over time the cumulation of those smaller amounts add up.
I do my transfers every week. This really works well for me. But you may determine that another schedule would work better for you, such as doing the transfers twice or once a month. You know yourself and your business best, so find a frequency that works for you and stick to it!
You may also want to evaluate your tax savings every quarter to determine if you are saving enough or if you need to adjust the percentage amount up or down. We have helped many of our clients to adopt this methodology and it has worked for them too.
So if you would like tax time to be less taxing next year, open up a separate tax savings account now and get into the routine of transferring a percentage of your business deposits on a regular basis. If you do this, next year at tax time you will be very happy!