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Taxes don’t have to be overwhelming. With Profit First, you can make sure you’re paying the right amount of taxes and staying on top of them throughout the year. As an entrepreneur, you need to understand the different types of taxes and how to deal with them.

First, you need to differentiate the types of taxes that may affect your business. Depending on the type of business you own, you may be subject to income taxes, payroll taxes, self-employment taxes, or other taxes. You’ll also need to know how to file your taxes and when you’re required to make payments.

Once you know the types of taxes you’re required to pay, you need to figure out how to pay them. You may be able to pay them online, by mail, or in person. You should also look into tax deductions that can help reduce your tax bill. Business expenses, such as office supplies and travel expenses, may be deductible.

Finally, you need to know how to stay on top of your taxes. This means setting up a system for tracking income and expenses, making sure you file your taxes on time, and paying taxes when they’re due. If you’re not sure about any aspect of taxes, you should consult a professional.

Here’s what you need to know:

1. Paying taxes is actually a GOOD thing.

It is proof that your business is profitable. Paying taxes is only problematic if you don’t have the cash on hand to pay them. That’s where Profit First comes in. The Profit First system helps you proactively set aside money to pay your taxes, so you don’t have to dread tax day anymore.

2. Profit First recommends setting aside 15% of your Real Revenue (Total Revenue minus Materials and Subcontractors costs) for taxes.

If your tax professional is not a Profit First Professional, they might tell you 15% isn’t enough. Why? Because your tax professional is looking at the “bottom line” on your Profit and Loss statement, or your “profit on paper” after all business expenses have been deducted. But with Profit First, you don’t run your business based solely on your P&L. This is one reason why working with a Profit First tax professional is so important.

3. Following Profit First and creating a tax account does NOT negate the need to work with a tax professional. 

A qualified tax professional can help you legally reduce your tax liability with strategies that allow most of your cash to stay with your business (or flow through to you, the business owner.) Beware of tax professionals whose primary strategy is running up expenses to avoid paying taxes.

The Framework

The standard Profit First bank account known as the Tax account is specifically designated for income tax purposes. Twice a month, you allocate 15% of your real revenue to this account. Real revenue refers to cash receipts minus any cash spent on inventory or other cost of goods sold activities. By following this percentage-based approach, you can ensure you have sufficient funds set aside for tax obligations.

I want to be sure you hear me say that you need to confirm your tax percentage with your tax accountant. The industry standard for income tax is 30% of net profit (your profit after you’ve subtracted your deductible expenses). When looking at gross income (which is what we’re doing with this method), most creative businesses will likely need to save 20-25% for taxes, but you must confirm this with a tax professional. 

If you pay quarterly estimated taxes for your business, the funds in the Tax account will be utilized for those payments. However, there are important considerations to keep in mind. When your sales exceed the previous year’s figures, the allocated funds should cover your current-year tax liability. It’s crucial not to view these excess funds as surplus for other purposes. They are intended to account for the increased tax liability resulting from higher sales.

It is important to note that this is only covering income tax, not sales tax. You should be charging your customers sales tax for each of their purchases and setting that amount aside for when you make that quarterly payment. We’ll cover that in the next section.

When setting your tax percentage, I can’t say enough… Always, always, always estimate high; it’s better to have more tax savings set aside than you need than to not have enough.

How to Handle Sales Tax

It’s crucial to note that the Tax bank account discussed in Profit First is not intended for sales tax. The 15% allocation mentioned earlier is specifically for state and federal income tax and does not include a portion for sales tax.

Sales tax regulations vary by state, and businesses may be required to collect and remit sales tax for multiple states. The remittance frequency is typically quarterly or annually. To ensure that you have funds set aside for future sales tax remittance, it is recommended to create a separate bank account specifically designated for sales tax. 

These funds collected for sales tax are not your funds; they are to be remitted to the respective state governments. It’s essential to avoid the temptation of using these funds for other purposes, as it may lead to a shortage when it’s time to fulfill your sales tax obligations, potentially requiring you to borrow money to meet those payment requirements.

What About Other Tax Types?

There are several other types of taxes you may encounter — property tax, franchise tax, etc. These taxes are paid from the Operating Expense bank account in your Profit First structure. They are not included in the 15% that is set aside for the Tax bank account. Taxes are no one’s favorite subject, but they are much less stressful when you are prepared to make the payments.


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