Today is Tax day in the U.S., the deadline for filing your personal income tax. For many Americans, this is nothing more than the yearly meeting with an accountant, H&R block, or an evening in front of a computer with TurboTax, but it's not so easy for business owners.
I started my first business in 1994 and have paid myself through various methods through the years. In the beginning, my bookkeeper did the payroll by hand then I transitioned to a full payroll service company. For a time during the 2001 recession, I didn't even pay myself anything; those were bad years. I've also use payroll services through my bank and even paid myself as a 1099 independent contractor.
Regardless how I was paid, I'm still responsible for the personal income tax due on April 15th every year.
I've met several small business owners that get a small paycheck, but they also take an owners' draw whenever they need extra money. Although income tax is usually withheld from the paycheck, the owners draw isn't. It's up to the business owner to pay tax on it when they claim that income at the end of the year.
In actuality, you are supposed to pay estimated taxes on that owners draw every quarter. During my financial conversations with my coaching clients, I'm often told that they couldn't afford to save any money because they already pay themselves so little.
While the size of your paycheck is, indeed, a different conversation, the owner of the company should never have to worry about paying tax out of their own savings. The business should be paying it.
That's right; your business should be paying your personal taxes. It doesn't matter if your income is reported on a W2, or a 1099, or not at all; your own business should be paying your income tax as one of your perks for being the owner.
However, many small businesses don't have a surplus of money in the bank to pay for those taxes either. It's a natural for people to spend the money they have in the bank without carefully planning for future bills, in this case taxes. Many small businesses have a difficult time managing their cash flow and find themselves stuck in the "robbing Peter to pay Paul" scenario.
If you are one of those people who tends to spend what you make just because you see cash in the bank (or it's "burning a hole in your pocket"), then perhaps it's time to think differently about how you manage your cash.
Paying income taxes requires planning ahead. Many people, not just business owners, have spent the last few weeks trying to figure out how they would scrounge enough money to pay their taxes today.
Some employees don't accurately claim their W2 exemptions, then blame their employer for not withholding enough money from their paycheck. As a business owner, you only have yourself to blame if you are financially suffering.
One way to properly plan for your tax payments is to set aside money allocated exclusively for tax payments. Unless you have an extremely disciplined method of managing money, I suggest simply opening a bank account for tax allocations.
Initially you should deposit 9% of all your gross sales from your business into this account on a regular basis, perhaps weekly, or every two weeks. That 9% might not be enough, so try to increase it to 15% over time. As this money accumulates, you can pay it out every quarter as required for your business and for your personal taxes.
By moving your required tax to a separate bank account, you help to prevent yourself from spending the money that seems like its burning a hole in your pocket, and you'll certainly prevent the tax stressing experience you have every year during tax season.