How do I know if I have enough in my tax account?
If you’re involved with our Profit First Cash Management System (PFCMS) you’ll recognize why we are asking this question.
PFCMS is intended to make sure you have the right amount of cash, in the right place, at the right time. When it comes time to make tax payments, it feels GREAT to know you’re already covered by having the cash ready.
The Best Way To Eat an Elephant!!
What’s the best way to eat an elephant? Most people think it’s best done a bite at a time. And that’s why we have you set up a separate bank account to collect tax. We typically start out allocating 10% of your “Real Revenue” into this tax account. But we may need to adjust it based on when you begin making the allocations. We might also adjust it based on your actual anticipated tax burden. By using this process, you’ll be able to regulate increases or decreases in income, and scale appropriately for taxes.
These funds are then used to make required estimated tax payments as may be required by federal, state, and local tax authorities. The funds are also to be used to make final payments when the tax returns are filed.
It’s important to regularly and consistently allocate and actually move funds into this account as part of your regular PFCMS allocations. And then you need to be disciplined enough to LEAVE IT ALONE!! That money does not belong to you. It belongs to the tax authorities. We highly discourage “borrowing” from this account to cover cash shortfalls in other areas. If you find that you have cash shortages in other areas, it’s important to consider adjusting your allocation percentages appropriately.
If you’re stuck and need help doing that, give us a shout!!
Do you like Surprises?
This year we picked up a client whose “former” accountant told him on April 5th that he needed to make an extension tax payment of $120,000 by April 15th. Needless to say, they were pissed!! That should NEVER HAPPEN if you’re using our PFCMS.
Alright, so how do you know if you’re on the right track? Hey, I’m so glad you asked!! We think it’s also important to do a mid-year tax projection to check in and see if you are on point for accumulating the proper amount for tax payments.
We have special ways of making sure you will avoid unnecessary penalties and interest from underpaying your taxes. Give us a call if you have any substantial changes in income.