Diane GardnerFounder, Adept Business Solutions · Profit First Professional

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

10 Oct 2019 · 2 min

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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. Speaker B explains the common 15 % rule‑of‑thumb, showing that it is derived by matching a typical 30 % tax rate on the profit left after expenses (e.g., $10,000 revenue, $5,000 expenses, $5,000 profit → 30 % of $5,000 = $1,500, which is 15 % of the top‑line revenue). The conversation notes that the 15 % figure is a baseline; businesses with higher profitability may need to increase the reserve to 16‑20 %, while low‑margin businesses might be able to lower it. The hosts then address payroll for owners of S‑corp or C‑corp entities, clarifying that payroll taxes are withheld from the paycheck, but the business should still set aside the 15 % in a tax account and later reimburse the owner via a distribution check to cover the payroll‑withheld taxes.

Chapters

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, 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 or 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 we'll get taxed on. So 15% of the top line $10,000 will be $1,500 set aside. Now, the tax rate in the US depends, but let's say it's 30%. 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 $5,000, so 30% times $5,000 is $1,500. 15% of $10,000, $1,500, so it covers it. Now, your business, as the profitability increases, would take more money. That 15% taxes may have to go up to 16 or 20%, and a business that's running 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.
Good job. Follow-up question.
No thanks.
What if I pay myself through payroll? They're already taking out the taxes. Do I, 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. Mm-hmm. 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 gonna reserve money, that 15% in 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.
I know. Thank you.