Setting Aside Taxes in a Savings Account
Taxes are usually a top pain point for new small business owners. The concept can be a little allusive and if you have a company that is taking off faster than you can keep up, the tax obligation can be a scary springtime surprise.
Without a history of your income and previously paid taxes, it’s difficult to estimate just how much you’ll owe. It can also be tempting to overspend your income and then be left in a tough spot come tax time.
Usually after your first tax season as a business owner, you begin seeing the value in setting aside a piece of your income for taxes throughout the year. Whether you’re paying estimated taxes quarterly or not, it’s still a good idea to keep your tax funds in a separate savings account.
Out of Sight
We’re all apt to get a little spend-y from time to time. Spending your income doesn’t mean you’re being reckless. In all likelihood you’re investing back into the business. But when your usable income is mixed in with your tax payment, it’s hard to make calculated, accurate financial decisions.
Any method that involves busy business owners holding information in their brains is an area of opportunity for mistakes.
So get your tax money out of sight. Whether it is through automatic transfers from your checking to savings or a manual effort to keep you engaged in your accounts, there should be a clear line between money that can be used for expenses and money you owe for taxes.
Make Your Money Work
A high-yield savings account can offer your money a chance to do a little more for you besides sitting there waiting to go to the government. In a checking account it’s earning no interest. In an average savings account, it’s typically earning less than .1%. In a high-yield savings account, however, it might actually make you a little money as it sits there.
Even if it’s a relatively small number, why not take the free money? Any opportunity where your income can work in your favor should be considered. And it just might help ease the pain of paying taxes ever so slightly.
Getting Into A Savings Mindset
While it’s a good idea to set your tax payments aside so that you don’t have a false impression of what your income is, having a savings account for your business is about more than just covering your tax bill.
Getting into a savings mindset as a business owner can be a crucial move. As important as it is in your personal life to save, it’s also a skill to build on the business side.
Consider your business a year or five years from now. What does it look like? How will expansion take place? What sort of assets will you need to get to the next level?
It’s easy to get into the habit of pouring all your income back into people, products and improvements, but if the 2020 shutdown taught us anything it’s that we can’t plan for everything. Having a cushion where you could make payroll or cover emergency costs is vital to small businesses.
So as you set an estimated amount aside for taxes, consider upping that amount to start building a savings cushion. That way, it’s there in the event of a rainy day, but it can also be there to contribute to the cost of a future expense that might improve your company.
How much should I put into a business savings account?
When it comes to taxes, the answer for how much of your profit will be taxed varies depending on many factors. As a general rule of thumb, most recommend setting aside 25-30% of your income.
If you have owned your business for a while you can use historical data to help estimate your quarterly payment with the understanding that it may be under or over depending on the currentyear’s activity.
Furthermore, a trained CPA can help with this estimation by basing it on your current trajectory, historical data, and ample knowledge of the tax system in your area.
As for putting money aside beyond your tax savings, that is also something a professional can help you craft a strategy around. If you have extra, some of it should go towards savings while other income may go to investing in marketing, building new products or hiring an employee. Only you know the needs of your business, but a qualified professional can help you find areas of opportunity for your income.
The reality of tax season doesn’t disappear when someone becomes self-employed. In fact, that demand just becomes a lot more intense. As an employee for someone else, taxes are basically taken care of. As a business owner, you have to think through how you’ll manage it. And while you do that, why not also make it work for you as a benefit to your finances?