Taxes. They're the bane of every small business owner's existence. Whether you do them yourself or hire some help, taxes are stressful! Did I do them right? Did I save enough? Am I going to owe more?! The best way to curb that stress and avoid tax time panic is to set aside money for your taxes well in advance.
Here's how I recommend saving for small business taxes!
How to Save for Small Business Taxes
"How much should I set aside for taxes?"
The amount you should set aside for taxes varies depending on your state and the kind of business you own. A good rule of thumb is to set aside 15-30% of your profits.
Remember: that's 15-30% of your profit, not revenue. By the time you actually file your taxes and report your expenses, you'll probably owe less than this amount, but it's always better to have a small buffer than to owe more than you saved.
"How do I start a tax savings account?"
You technically don't have to keep your tax savings in a separate account as long as you keep track of them. For me, though, it's much easier to keep my hands off those savings if they're in a designated account.
Contact your bank and open a new business savings account. Then, move 15-30% of every profit each week or month into that account, and don't touch it. Some banks will help you create a 'rule' that automatically moves that percentage into your savings account. If yours doesn't, you can manually transfer those funds once a week or once a month depending on when you review your business finances.
"When should I start saving for small business taxes?"
The short answer: NOW! As a small business owner, you should always be setting aside money for taxes. If you haven't started saving but are already making money, you should go back through this year's finances and put aside as much as you can. Like I said before, it's always better to save more than you'll need!
"When do I pay small business taxes?"
If you anticipate owing at least $1000 in taxes for the year (which most small business owners do), you need to estimate and pay quarterly. Here's how that's broken down:
For income earned from January 1 to March 31, taxes are due by April 15.
For income earned from April 1 to May 31, taxes are due by June 15.
For income earned from June 1 to August 31, taxes are due by September 15.
For income earned from September 1 to December 31, taxes are due by January 15 of the following year.
"What if I save too much money for taxes?"
So what happens if the quarter ends, you pay your estimated taxes, and there's still cash sitting in your tax savings account?
First, pat yourself on the back! I've said it before, and I'll say it again: it's better to save too much than too little.
Next, you have a few options:
Keep those savings until the end of the year. If you're nervous about your estimated taxes, you can always keep those savings until your final tax payment for the year (on January 15 of the following year). If you have savings left over at that point, pocket that cash! You can also keep those savings in your account to hold a buffer for future taxes or a rainy day fund!
Give yourself a refund. If you're confident that you've paid enough, use the leftovers to give yourself a bonus! Put that money in your personal savings or treat yourself to something nice. You've earned it!
Invest in your business. If you've been eyeing a new piece of equipment or an online course, why not use your leftover savings to make that upgrade in your business? This is another great way to reward yourself for taking the proper steps to protect your business.
A word of warning, though. If you save 30% of your profit and have plenty left over after paying this quarter's taxes, that doesn't mean you should save less next quarter. Keep setting aside that 30% just in case. You never know what might happen!
Need help preparing for tax time?
Managing your business finances isn't easy. (If it were, I'd be out of a job!) Whether you're a brand new business owner or a seasoned entrepreneur, it's never a bad idea to invest in professional financial help.
I'm happy to support you in creating your financial plan, saving for taxes, managing your books, or whatever you need. Download my services guide to get started!
Want more tips like these? Be sure to subscribe to the newsletter! (and don't forget to follow along on IG @prettypennyaccounting)