Dave WordenTriumph Business Solutions · Founder

What Percentage To Allocate For Taxes Using Profit First System 'Under The Covers' Ep #2

10 Oct 2019 · 2 min

Watch on YouTube

1:38

In this segment of the "Under The Covers" podcast, the hosts discuss how to allocate money for taxes using the Profit First methodology. They explain the common rule of thumb to set aside 15% of total revenue as a tax reserve, illustrating the calculation with a $10,000 revenue example where $5,000 in expenses leaves $5,000 taxable profit, and a 30% tax rate results in a $1,500 tax liability—exactly the 15% reserve. They note that the 15% figure is a baseline; as a business becomes more profitable the reserve may need to increase to 16‑20%, while low‑margin businesses might be able to keep it lower. The conversation then addresses owners who pay themselves via payroll (typically S‑corp or C‑corp structures). Even though payroll taxes are withheld from the paycheck, the hosts recommend still maintaining the 15% tax account and treating any tax withheld as a distribution reimbursement to the owner, ensuring the tax reserve remains intact.

Ready?
Yes.
Okay. So in profit, first you talk about setting aside money for taxes and you say set aside 15%. Where did you get that percentage from? And is it the same for everybody?
Yeah, so it's typically the same for most people. And how it works is that we get taxed in the US Particularly specifically on the amount of money you have left over after the operations are expenses of the business. So for example, if a business makes $10,000 in revenue, but we spend $5,000 on expenses, that remains or leaves over $5,000 that will get taxed on. So 15% of the top line, 10,000 will be 1500 si. Now, the tax rate in the US depends, but let's say it's 30%. It could be 35, could be a little bit lower, could be a little bit higher. Let's say it's 30%. You're getting taxed on that leftover 5000. So 30% times 5000 is 1500. 15%. 10,000. 1500. So it covers it. Now your business, as the profitability increases, we take more money. That 15% taxes may have to go up to 16 or 20%. And a business that's running 30 thinner, meaning you're spending a lot of money, there's not as much profit left. You may be able to curtail the taxes. 15% though, is a good rule of thumb.
Follow up question. What if I pay myself through payroll? They're already taking out the taxes. Can I lessen that percentage or do I keep it the same?
Good question. So if you pay yourself through payroll, you probably have what's called an S corp or a C corp. And that means your taxes by law are required to come out of your paycheck. Even though you're the owner of the business. We are still going to reserve money at 15% of the tax account and then do what's called a distribution reimbursement. It's a distribution of money, a quick profit to the owner as a single check. But it's a reimbursement for the taxes that have been withdrawn out of your paycheck.
Perfect.
Thank you.