The simple way to save for business taxes

certIntroduction

As a Profit First Professional helping our clients to increase profitability, I educate the business owner / self-employed contractor that like all other business expenses, taxes must be saved for. In Profit First methodology, regarding saving for taxes, we encourage clients to have a minimum of three bank accounts: –

  • Their current operating account which is normally a cheque account which we ask them to rename as the Income Received Account,
  • A savings account named Operating Expenses Account, and
  • A savings account named Tax Account.

For the purpose of this discussion I will keep the explanation simple as to what I require you to do:-

If you are GST Registered

  • Ensure all funds received from customers/clients are deposited into the Income Received Account.
  • Either daily or weekly, most probably weekly you will look at the balance in your Income Received Bank Account and transfer 25% of the Balance to your Tax Account. Refer Note 1below.
  • Then transfer the balance, less say $50, of the Income Received Account to the Operating Expenses Account.
    • Example: –
      • Customers have paid you $1,150.00 (GST incl.),
      • Transfer $287.50 ($1,150.00 * 25 % or $1,150.00 / 4) to the Tax Account, and Refer Note 2 below.
      • Transfer $812.50 ($862.50 less $50.00) to the Operating Expenses Account. Refer Note 3 below.

If you are not GST Registered

  • Ensure all funds received from customers/clients are deposited into the Income Received Account.
  • Either daily or weekly, most probably weekly you will look at the balance in your Income Received Bank Account and transfer 15% of the Balance to your Tax Account. Refer Note 1below.
  • Then transfer the balance, less say $50, of the Income Received Account to the Operating Expenses Account.
    • Example: –
      • Customers have paid you $1,000.00,
      • Transfer $150.00 ($1,000.00 * 15 %) to the Tax Account, and Refer Note 2 below.
      • Transfer $800.00 ($850.00 less $50.00) to the Operating Expenses Account. Refer Note 3 below.

Note 1: The 25% if you are GST registered and the 15% if you are not GST registered is a starting percentage. You must monitor it regularly and increase it if required.

Note 2: The funds in the Tax Account must NEVER BE TOUCHED except for you to pay your GST and Income Tax as they become due.

Note 3: The funds in the Operating Expenses Account are for you to pay expenses including drawings. The balance remaining is your profit so if you spend everything out of this account guess what? That’s right you are left with “NO PROFIT”.

Finally, thank you for taking the time to read this. I trust it has been of benefit to you. If you want help or have any questions in regards to the above then please contact us or find out more about Profit First.

Disclaimer: This publication has been carefully prepared, but it has been written in general terms only. The publication should not be relied upon to provide specific information without also obtaining appropriate professional advice after detailed examination of your particular situation.

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