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Starting a business is hard enough by itself without having to worry about taxes and how much you should set aside for taxes. Here are some tips from us and our past clients.
How Much Should I Set Aside?
Income tax rates vary between states so it’s best to first look up the rate for your state. To make it a little more confusing, the rate also changes based on your income and a few other factors. The federal tax rates range from 10%, up to 37% depending on your income. The usual rate that we suggest for our clients to set aside for taxes is about 30% of their profit. We do this because most of our clients make over $100,000.
Please note: the tax is based on your profit, so you get to subtract all of your expenses for the service or product you offer before tax is calculated. Subtractable expenses may include the product itself, gas expenditure, office space rental, required subscriptions, utilities, etc.
When Do I Pay My Business Taxes?
As an employee in the past, you’re probably used to having your taxes filed once at year-end and calling it a day. When you own a business or are self-employed, and you expect that your payable tax will be over $1000, the payments are due every quarter instead. So payment for the first quarter is due before April 15, payment for the second quarter is due before June 15, payment for the third quarter is due before September 15, and payment for the fourth quarter is due before January 15 (of the next year).
In most cases, as long as you are sending your receipts and paid invoices to your bookkeeping company, they will automatically file these as they are due.
Should I Keep Taxes in My Bank?
There’s nothing wrong with putting the money you set aside for taxes in the same bank account you use for business, but make sure you are tracking it correctly. It’s very easy to accidentally spend that money, that’s why we suggest that all of our clients open a business savings account. When the money is in a different account, it’s out of sight and you can even make a little bit of interest while it sits there.
When you set up your business savings account, the bank will most likely ask you if you want a certain percentage of your regular account to be moved automatically. A lot of people use this so that they don’t have to remember to keep moving money, but we choose not to because we also deposit money that isn’t income into our regular account and we don’t want to spend time at year-end trying to figure out why there is too much in our tax savings account.
What Happens If I Don’t Save Enough and End up Paying Tax Late?
The good news is that there is a safe harbor rule in effect that will protect you from underpayment penalty given that:
- You pay at least 90% of the tax you owe for the current year or 100% of the tax you owed for the previous tax year, or
- You owe less than $1,000 in tax after subtracting withholdings and credits
The exception to this rule is if your previous year’s return was over $150,000, in which case you must pay either 90% of the current year’s tax or 110% of the previous year’s tax (whichever is the lower of the two).
If you don’t qualify for the above, then you’ll most likely be given a penalty that is usually around 0.5% of the underpaid amount.
If taxes have you confused and you just want to focus on your clients without having to worry about money, feel free to contact us and we can help you in whatever way we can.
