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If you run your own business, you’ll need to be prepared for tax time. It’s important to save for tax each paycheque.
Those who are employed can pretty much ignore this. However, if you may any more that isn’t pre-taxed before you get your paycheque, you’ll need to start saving money.
But how much do you put away?
This is going to depend on your state. You’ll need to save for tax season based on the state (or province, or country) you’re in.
I’m in Ontario, Canada, and based on my income, I find putting 30% away works best. This is also how much I put away in the UK. My tax is actually a little less than this, but if I go up another income bracket one year without realizing, then I’ll need the extra. 30% is a nice round percentage number for me to work out my tax savings.
My savings cover both provincial and federal. Like I said, you’ll need to work it out for your own location.
I do take off tax deductibles first
Before I put the money into my tax savings account, I will take off my tax deductibles from my income first. This is worked out in a spreadsheet each month, making it super easy for when it comes to tax time. I’m ready before April to have my taxes filed, and even paid right away!
I need to make sure the tax deductibles are paid.
If you’re not sure about tax deductibles or how to do this, then I’d suggest putting a straight percentage into your tax savings account right away.
I also highly recommend getting an accountant to help with all this. Their fees are a tax deductible for you.
You’ll need to work out what your tax deductibles are. An accountant is great for this to make sure you cover everything. And I mean everything!
Know if you have other taxes to pay
For most people working from home, you’ll likely only pay state and federal taxes (or whatever your local taxes are). However, there are some other taxes that you may need to pay depending on the type and size of your business.
You may need to pay sales tax, excise tax, or even property tax—and not just your personal property tax. It’s important to save for these each paycheque, which means another percentage to save for tax.
Where should you save for tax each paycheque?
Where should you put your money? This can be just a savings account.
I always recommend creating a separate savings account for this. You don’t want to mix up with your long-term savings goals or any other savings that you have going. At no point do you accidentally want to take ou the money you’ve saved so you’re in a bind for paying your taxes.
Your bank should let you set up multiple savings accounts. And in most cases, you won’t be charged for having that account open. You may just be charged for taking money out each month, usually after the first payment or two. This shouldn’t be a problem for your tax savings account, where you take the money out once a year to pay your taxes. Or however frequent you pay taxes.
You’ll want a separate account if you want to save up for business expenses. This could be if you’re saving up for a new computer or if you’re saving money for some software or your hosting. This is separate from tax savings. You also won’t take this as a deductible until you pay for whatever it is and you have your receipts.
What to do if you save too much for taxes
There are times that you may end up saving too much for your taxes. Your deductibles may have ended up higher than you initially thought. Or you may have rounded up or overestimated the percentage you needed to save.
Saving too much is a good thing. You end up having a little bit of extra money at the end of the year.
Now you have a few choices. You could:
- Keep the money in your tax savings account for a buffer
- Put the money into your business savings account for a purchase
- Put the money back into your spending account
Personally, I keep the money in the tax savings account for now for the buffer. Eventually, I’ll probably start putting it into the business savings account if the amount ends up too much.
The main focus right now is to not under save.
How do you save for tax? What business questions do you have? Share your thoughts in the comments below.
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