During tax time each year, you find that are usually stressed. You want to save for taxes, but you are struggling to do so. If this is your situation, you are far from alone. 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 this really impacted my life in a positive way. By applying this tip, you can set yourself up so that next year you will not need to be stressed out about paying your taxes.
Drumroll please…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. 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. When I did withdraw funds for paying taxes, it felt like I was spending my savings to pay my taxes.
Having a separate bank account was key for me. 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.
Now when I do withdraw funds from my tax savings account for 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 fund the account.
Set 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. 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 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.
Why a percentage approach works
Let’s examine why I think this approach works with an example. Let’s say you determine that 15% of your business deposits received is a realistic amount to save 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. You may determine that a different schedule would work better for you, such as once or twice 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 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!