In this instructional video, Ryan Vaughn explains how to manage the tax account within the Profit First cash‑flow system. He first outlines the purpose of the tax account among the seven core accounts and notes that it is meant solely for income‑tax liabilities. He then walks through two scenarios: (1) a year‑end surplus, where the balance as of December 31 can either be transferred to the owner’s personal account or held in the tax account until the exact tax bill is known, with a detailed example showing how to allocate the December 31 balance between tax payment and distribution; (2) a shortfall, where the tax bill exceeds the saved amount, and he advises a hierarchy of funding sources—first the tax account, then the profit account, followed by operating cash, owner’s pay, and finally personal funds—to cover the gap. After resolving the immediate payment, he recommends increasing the tax‑allocation percentage for the remainder of the year, possibly reducing the profit‑allocation, cutting expenses, and reviewing team‑member costs. He stresses the importance of forecasting and consulting tax professionals (e.g., Insight Tax) to better predict future liabilities and avoid repeat shortfalls. Throughout, he emphasizes practical, no‑frills actions and the need to stay compliant with the April 15 tax deadline.
Chapters
What do I do with my tax account? Whether you have money left over or you didn't have enough. So let's start with the money left over. And just as a reminder, in the Profit First system, we recommend you have the essential 7 bank accounts. The top one is an income account, and the purpose of that account is to receive income. One of the other 7 is the tax account. The purpose of the tax account is to save for your income taxes. The tax account is purely for the income tax burden. The other taxes that you have as as a business are related to operating. Okay, so with that being said, throughout the year you're taking a percentage from the income account, you put into this tax account. December 31st happens, the year's over, there's a balance. There should be a balance unless you're not running at a profit, so you didn't save any money. But most of us, there's at least a balance in the tax account. You probably won't know what you owe in taxes until, you know, March or April if you're like most people, because that's when your taxes are done, the income tax burden is calculated, and now you have the exact Number that you need. There are a couple ways to do this, and really it comes down to your preference. On one hand, you can just take the balance on December 31st, whatever that balance is, and transfer it to your personal account, because that tax money was set aside for the purpose of paying income taxes, and you're going to pay your income taxes out of your personal account, unless you're a C corporation. So that's a number one suggestion. I'm gonna give you other suggestions. To summarize, you could take the balance in your tax account on December 31st and put it Into your personal account. And then however the chips fall, hopefully you have some money left over. It would stay in your personal account. You would not transfer it back. The other way you could do it is you hold the money in the tax account. And then as you find out what your tax bill is, hopefully no later than April 15th, because that's when taxes are due. Even if you extend, taxes are always due April 15th. You can then transfer the amount of tax owed out of your business account, the tax account, into your personal account and pay the tax bill. And then if there's any money left over, as of the December 31st balance, you would take that out. And I emphasize as of the December 31st balance, because you will still be putting money into tax account for the current year. So as an example, let's say I am waiting till the last moment and I'm gonna pay my tax bill on April 15th. I finally know the number. And let's say I owe $6,000 in taxes, but I have $10,000 in my tax account As of December 31st. Over the course of January, February, March, and probably one allocation in April, the balance in my tax account is actually $20,000. I'm not gonna pay the $6,000 tax that I owe and then take the other $14,000 as a distribution because there's a chunk of money in that account that is there for the purpose of the current tax year. That's why we look at the December 31st balance. So let's say the balance was 10 grand. As of December 31st, I take $6,000 out to pay the tax bill. I take the other $4,000 out as a distribution. So that's what happens if you have money left over. Let's say you don't have money left over, which means you're short and you're going to have to figure out how to come up with the additional tax burden. So let's say I owe $6,000 in taxes, but there's only $3,000 on my tax account. Well, obviously I'm going to take the $3,000 and pay it towards my tax bill. What do I do with the difference? So there's a couple of things to do here, because at the end of the day, we have to first solve the immediate short-term problem, which is we have to pay the taxes because they're due April 15th. And we don't want to be on the IRS's radar any more than we have to be. So I really would prefer to pay that. In this case, I would probably first take any balance in my tax account, including money I may have set aside for the purpose of the current tax year. So if it's April and I had $3,000 in my account as of December, but I owe $6,000, but through January February, March of allocating money into the tax account, there's actually $6,000 in the account, even though part of it should be for the current year, I'm still going to take that. I'm going to take that money. I'm going to pay off the tax bill. The other way is if you owe more in taxes than what you have saved, I would probably first take out of my profit account because we leave half the balance there on purpose. This to me would be enough of a reason once, not a habitual problem, to save myself by taking some money out of the profit account to pay the difference. If that isn't enough, then You need to look at your owner's pay or your personal money. Certainly you can use your operating expenses wherever there's cash, right? You're just trying to fix and solve the immediate problem, which is you owe taxes and you didn't save enough money in your tax account. Now, if that happens, the immediate fix or the immediate step after this short-term fix is we're going to increase your tax percentage. And so if I took all the money out of my tax account, even though some of it was supposed to be for the current year, that means now I need to oversave for the rest of the year, not to mention I also need to catch up the months that I missed. This isn't a scenario where I'm like, oh, I loaned this money to myself and now I'm trying to do crazy— no, we're just gonna change the percentage. That's it. No fancy other sort of techniques are needed. We're just gonna increase the percentage. Likely I'm gonna decrease my profit percentage. Gonna see if I can cut back on expenses second. Last, then I'm gonna look at team member expense. You know, just normal, healthy business analysis of how do I free up some cash flow? The last place I want to take away from is my owner's pay. And hopefully that's not needed, but if it is needed, It's needed. And then of course, I'm going to meet with tax geniuses such as Insight Tax to make sure— figure out how do I get my tax bill down in future years? How can I plan? Let's do some forecasting and let's maybe estimate what we think your tax bill is going to be by the end of the year so that we can get ahead of it. The IRS sucks with a cold steel grip. Every dime they squeeze.
