Ryan Vaughn walks through setting up a tax account in the Profit First system. Set aside a small percentage of revenue weekly or twice monthly to avoid tax-bill surprises. Calculate your percentage using last year's taxes divided by last year's revenue, then adjust in December based on projected liability.
Hey everyone, um, today I want to talk about tax account. So if you're not familiar with the Profit First system, we recommend setting aside money into a variety of different accounts. Now, that being said, a lot of people, when they first hear about the Profit First system or even read my book Profit First for Micro Gyms, it can be overwhelming if you're starting with no sort of cash management system in place. And so I recommend if you do nothing else, you are going to find a lot of success and happiness if you start setting aside money for your income tax liability throughout the, throughout the year. So in the Profit First system, we recommend setting aside money either once a week or twice a month. taking a percentage of your revenue and putting into these different accounts. So in this case, I'm suggesting at a bare minimum, if you're doing nothing else to save for some of these things, at least start setting aside income tax dollars. Because I can tell you, doing this for more than a decade, when us as owners get into a cash bind due to us not planning our income tax bill, um, we can make bad decisions under that type of stress, and it's easily avoidable because if you're setting aside a little percentage throughout the year, you don't miss it. So with that being said, a couple tips. First thing, if you're not sure what your tax percentage could be or should be, there's 2 things you can do. First thing you can do is look at your income— sorry, look at your tax amount owed from your income tax return from 2020. Whatever that dollar amount is, say it's $15,000, divide that by the revenue that you made in 2020. Gross line, I'm talking about top line revenue. So if you made $500,000 in 2020, And you owed $15,000 in tax, do $100,000 or $500,000 divided by 15, whatever that percentage is. I'm sorry, that's reversed. $15,000 divided by $500,000, whatever that percentage is, that's the amount that you can be setting aside. So if I have a deposit of, say, $10,000 in the month, I would take that percentage, whether maybe it's 5%, and I would set it aside for tax. So that's an easy system to follow. So the other way to do that is we're close to the end of the year. You can figure out what your taxes you owe for 2021, divide that by the income you made in 2021. Same deal, right? It's just maybe a little bit more updated. So assuming you've done that, let's say you have been setting aside money for taxes. A little trick that I like to do at the end of the year is I like to do a tax estimate now in December, because now all I have to do is predict how does my December look, because I have actual data for 2011. So I'm going to get pretty darn close to what I will eventually owe come April 15th of next year. And so I'm going to do that estimate. Let's say I do the estimate and it says I owe— I'm going to owe $20,000 in tax. And then I look at my tax account because I've been setting aside this percentage throughout the year. Let's say I have $40,000 in my tax account. So I know because I've done an estimate and I'm pretty close that I probably have about 20 grand to play with. So if there's things that I plan on doing for the business or can do to help it grow, I got $20,000 to invest in those things because that $20,000 is actually going to give me an additional tax write-off. But I'm going to hold the other $20,000 that I've saved, right? And I'm just going to use the excess, or at least let myself know that I have some excess cash available. To do some of these things that one is going to grow my business, which is always the focus. We want to grow our wealth. We want to grow our impact on the community. We want to serve our clients better. And I'm also going to be able to make enough cash to cover what my tax is while lowering what my tax will eventually be. I get to grow things and I save taxes if I have some tax left over. Now, that being said, if you started the system late or some hiccups happened throughout the year as you were setting aside percentages, maybe revenue skyrocketed and the percentages shouldn't— should have been adjusted, and you do the estimate and you find that you're a little bit short. Now's a good time to adjust that so that come April of next year, you're not in a scenario where you have to take money from operating expenses or owner's pay or other areas to cover the tax bill. But yeah, so take into consideration those things. I wanted to share those tips. It's something that I do every year. I do a tax estimate. I compare what I think I'm going to end up owing to what I've saved in tax, and I use the difference to do things to grow my business. And it has worked out pretty well for us. Um, anyways, I hope all of you enjoy your holiday seasons. Um, remember, profit is a choice. Have the courage and wisdom to choose it.
