When clients come to me and tell me that they would like to start a
business, I try to visit with them about setting aside money for taxes.
The most common problem I see is when a business owner does not set
aside enough money to pay his or her individual income taxes, especially
when that person is used to having an employer withhold taxes from his
or her paycheck. The sticker shock of having to come up with a lot of
money to pay the taxes and a penalty the following April is one you want
Unfortunately, even in the years that your business does not make much
money, there are taxes that need to be accounted for and paid,
- Individual income taxes
- Employment/payroll taxes for your employees
- Collection of sales and use taxes on your sales
- Excise taxes
Once you decide what taxes you may need to pay, you need to make sure
you have allocated enough money to pay those taxes when they are due.
If you are taking a 'draw' from the business, I suggest that you deposit
the entire amount of the draw into a 'tax savings account' and then
transfer no more than 70% of that draw to your household account. Do not
put the money in the household account first, as the chances of the
money ever being transferred to the tax savings account are
significantly reduced once the money is in your household account.
Use the tax savings account only for taxes, and make quarterly estimated
tax payments, based on your accountant's suggestions from the amount
you have kept in the tax savings account.
If you are not taking a draw from the business, keep an eye on your net
income so you know what your net income will be, as this is what you
will be taxed on. In other words, keep enough money in the business
account to distribute taxes to you at the time they are due, and to pay
estimates along the way.
If are behind in paying your taxes, get help! Do not let it get worse
and fail to file your tax return just because you don't have the money
to pay. The penalty increases to up to 25% of the unpaid tax (plus
interest) if you do not file a return. If you file a return and do not
pay the tax that is due, the penalty is closer to 5% (plus interest).