Hello Reader!

During a coaching call I was participating in the other day, a business owner talked about how she was hesitant to meet her growth goal of $500k because she was afraid of having to pay taxes on those earnings. She can see that she is holding herself back. She was concerned because she didn't know how much taxes would be owed, and that she would be surprised and unprepared when the tax bill came. This is such a familiar fear! Most of us feel this way to some degree. These thoughts were also inhibiting her growth. As long as she remained afraid to earn $500k, she was not going to earn, or exceed it. Our thoughts create our reality. Her scarcity mindset (it's my money, not the government's. If I give it to them, it'll be gone and I won't have it to meet my needs or wants. I want to keep as much as possible) is currently holding her back, in a self-fulfilling prophesy.

After some coaching, she came to realize that all she needed to do was ask her accountant how much would be owed in taxes based on her specific income levels. Tax laws are complicated and she does not need to be an expert in them. That's why we hire professionals to support us in our business.

That solution, however, did not specifically address where the money would come from. Without a plan, company profits can quickly be spent on operations, growth and expansion, leaving nothing for taxes.

I have two schools of thought on this, that are not what you normally hear from a CPA:

1. Paying taxes is a privilege. It means that you are successful. That should be celebrated!
2. Don't spend all of the business money in an effort to reduce taxes. Doing so will only create a cash flow problem that will need addressing later. I hear this all the time, especially at the end of the year when car dealerships (or worse - accountants) are encouraging businesses to buy a new vehicle for the Section 179 deduction.

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The tax law was written for your benefit. I'm serious, it was. Ensuring that you take advantage of every tax credit and deduction you are entitled to is good tax planning.

And also, save money for taxes so that it's available when they're due.

I recommend setting up a no service charge savings account in the company name specifically for the purpose of holding funds for taxes. Name it "Income Tax Holding". 15% of income, straight off the top, goes into this account on a regular basis. You can do it with each deposit, weekly, or on the 10th and 20th of each month. No matter your choice, it should be done no less than twice per month. This ensures that the money isn't inadvertently spent on operations. Do not comingle this account with any other funds, like payroll or sales tax. This account is exclusively for income tax.

Definition of Income: If you have cost of goods sold, use Gross Profit. If not, use Gross Receipts. Essentially, you'll want to use total deposits, less any materials used in the production of income, if any, as the base for the calculation. This calculation is performed on the cash basis - money deposited in the bank.

When it comes time to make an estimated tax payment (April 15, June 15, September 15 and January 15), pay 2/3 of the account balance to the IRS and 1/3 to the State. The business is generating this tax obligation, therefore it's appropriate that the business pay the taxes.

Disclosure: If you have an accountant that has provided estimated tax vouchers for you, have a conversation with them to ensure they are aware of your current business finances and that the estimates calculated are appropriate based on current earnings. They may recommend paying more or less depending on other taxable financial activity you report.

By pulling money off the top, you're ensuring two things:

1. That the funds are available to make the tax payment when it comes due
2. The business is generating a profit. We tend to look at the bank balance when making financial decision for the business. If the money is not in the account, it's not available for spending.

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If due to the current financial situation of your business, pulling 15% off the top would cause significant financial strain, start with a lower percentage. The key is to do something to establish the habit and start the shift in your mindset. It's going to feel stupid to put $15 in a separate account. Do it anyway. Then begin the work to develop a cash forecast and budget to reduce expenses and increase income. Each month increase the percentage saved by 1-2% until you reach 15%.

Start today, using today's deposit. Unless you have the funds available, it is not necessary to "catch up" for all deposits made year to date. You may fall short at the end of the year, but it will be far less of an emergency if you hadn't started today.

Questions, comments? Think this couldn't possibly work for your business? I can help. Hit reply and I am more than happy to meet with you and talk about it, strategizing a way to implement it for you. The peace of mind that comes from knowing your taxes are accounted for is incredible. I promise.
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Grateful for you,
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Diane

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PS Whenever you’re ready, here are 4 ways I can help you:

1. Get weekly group coaching, accountability and support as you grow your business. Click here to join the Amplify Program

2. Get weekly one-on-one coaching (business and/or personal) from me for six months. Click here to schedule a consultation.

3. Expand your team by hiring me as your virtual CFO. As the virtual CFO I would only be wearing the financial matters hat - not the marketing hat, salesperson hat or the HR hat. My expertise is focused solely on financial matters, allowing me to be the main financial strategist for the business and a strategic business partner for you. Click here to schedule a consultation.

4. Achieve piece of mind that your accounting books and records, and tax returns are prepared properly. Click here to schedule a consultation.

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