Avoid a Tax Tailspin: Open a Tax Savings Account
I’ll never forget this candid email I received from an ever-so-thankful client: “So, I am going to sound super vulnerable right now. Thank God we started a tax savings...I went from paying nothing in taxes last year to $18,483 this year...”
Wow! It’s so humbling to hear how we helped a client overcome a financial hurdle. Her appreciation for our financial foresight made my day. But I can’t take all the credit. This client started working with us because she read the book “Profit First.” She believed the author, Mike Michalowicz, when he said, “Profit is not an event. It’s a habit.” She chose Prosperity Bookkeeping not only because I read the book but also because I successfully implemented its principles in my business and the businesses of several clients.
Open a Tax Savings Account
The Profit First philosophy begins with setting up three bank accounts:
1. Income (checking)
2. Owner’s Pay (checking)
3. Operating Expenses (checking)
Next, in a different bank, set up two accounts:
1. Profit (savings)
2. Taxes (savings)
The purpose of opening these two accounts in a separate bank is to distance these accounts from your day-to-day finances. The savings accounts reduce the temptation to use this money for everyday operating expenses. As customers pay their invoices, set aside 10-15% of every deposit for taxes. Simply deposit the 10-15% in the tax savings account.
Pay Quarterly Taxes to the IRS
At the end of every quarter, estimate what you owe and use these funds to pay tax liabilities. The IRS published several documents to help business owners estimate taxes.
If you forego the quarterly payments, you’ll build a nice nest egg to pay year-end taxes, stress-free, but beware that you may pay a small (or large) penalty for not depositing quarterly. Paying taxes doesn’t sting as much when you earmarked 10-15% in a tax account.
Work With a Small Business Bookkeeper
Financial foresight is just one of the benefits we provide to our bookkeeping clients day in and day out. To learn about our proven bookkeeping processes for small businesses, contact us.
We’ll help you implement Michalowicz’s “Profit First” financial practices, including this tax account principle. Michalowicz’s business approach turns traditional cash management on its head. Michalowicz puts profit first, as described in our article “Profit Building Game Changer: Transfer 1% Into a Cash Reserve Fund.”