Mike Michalowicz says business owners act as government tax collectors. Set up a separate bank account and automatically move a percentage of every dollar earned into it based on your tax bracket. This removes the shock of a big tax bill and follows the Profit First method of pre-allocating cash.
with taxes, what I tell people is we all as business owners effectively have been recruited by the government as agents for them to collect money. And, uh, we may have not wanted to do this, but the government says, as a result of earning income, you are going to be responsible to collect money on our behalf and then turn it over to us. So every dollar we earn, 15, 20, 30, 45, depends on your bracket, you're responsible to give back to them. So what we do to avoid this loss aversion component is we set up an account called tax. And regardless of the formation of your business, your business can reserve your tax liabilities. As money flows in, that predicted percentage is allocated toward tax, is reserved, and then when the tax bill is due, the business can in certain cases pay it directly. So you don't feel that loss aversion. So the essence of this is set up a dedicated account called tax. When money flows in, we're going to pre-allocate the appropriate percentage to cover those taxes to avoid loss aversion.
