Disclaimer: I am not an accountant and this is not tax advice. There are different methods and strategies for saving for taxes. This is one I’ve found to be very simple.
If you’re tired of being totally freaked out about owing taxes because your business earned money, listen up. Instead of being unsure about how you’ll pay your tax bill, you can get ahead of the curve by saving for your taxes as you earn income.
It is very, very simple. But if you haven’t built the habit, it can seem overwhelming. Here’s what you need to do.
Open up a Tax Savings Account
The first step is to have a separate savings account strictly for your income taxes. Yes, this is annoying because you have one more account to “worry about”. But it’s totally worth the hassle. Hear me out. Having this one extra account to care about is worth the I’m-not-losing-sleep-because-I’m-saving-for-taxes feeling.
No, you can’t just pile up all your money in your business checking account because you run the risk of spending your tax money. I’ve seen it happen time and time again. Humans are crappy at this stuff, so we have to create systems that override our terrible decisions.
So march your ass to your bank and open up your income tax savings account. Once you have it open, the next step is to start saving.
Save a portion of your income into your tax savings account
Most accountants will agree with the general rule of thumb that you should save between 10-30% of your freelance/business income for taxes.
Of course there are caveats. You might not owe taxes if your business makes very little money or if you’re operating at a loss. But nonetheless, it’s a good habit to save a portion of your income.
What if you save too much? Awesome! Now you have a cash cushion or extra funds to invest in your business or money to put away for retirement.
No, really, actually do it though
The hard part is actually doing it. In order for this method to work, you have to set aside time on a regular and consistent basis and you have to know how much your business earned so you know how much to save.
How do you set aside time regularly and consistently? You prioritize it and you make time for it. I know you’re just like me wasting hours streaming Netflix and going down a social media k-hole. You can find 15 minutes a week to do this. Open up your calendar and block it off. Make it recurring. And if you can’t find the time… then, damn, maybe you have bigger problems than owing back taxes.
Ok, now that you’ve scheduled your weekly finance time, just start where you are. Look at your accounts and/or your bookkeeping software. Calculate how much income your business earned for the prior week. Then multiply that income number by how much you plan to save. And then transfer that amount from your business account to your tax savings account.
For example, let’s say Alisha runs a mobile dog washing company. Last week she earned $2,500 and she is planning to save 25% of all income into her tax savings account. $2,500 x 25% = $625 to be transferred into her tax savings account.
Go on now, be like Alisha.