Taxes are no fun. No one likes the feeling of paying taxes, but for those of us who have made the jump from salaried employee to entrepreneur/independent contractor, it can feel like pulling teeth. As a salaried employee, your employer withholds your state, federal, Social Security and Medicare taxes from your gross pay, and sends that money to the government on your behalf. You never see that money, so the pain is dulled somewhat. For entrepreneurs (real estate agents included), we have to be our own tax collectors, and we have to cut the check from our bank account to the government every single quarter.
It’s painful to cut those checks. But you know what’s worse? Scrambling to scrape together money from your personal savings at the end of the year to pay your tax bill. Or worse still, paying back taxes and running a business under the weight of penalties and interest. Now that’s painful.
While I can’t take the sting out of paying taxes completely. I can help you avoid the scramble at the end of the year and sleep better at night knowing that you’ve set aside enough money to cover your tax bill.
Tax Savings Account: First, open a new savings account. It should be at the same bank where you keep your regular business checking account. Nickname it “Taxes – Don’t Touch”, or something similar, so that you know exactly why it’s there and why you shouldn’t be tempted to use the funds in it for anything but your tax bill.
Split Your Checks: Second, whenever a commission check hits your account, immediately transfer 20% of the amount to your tax savings account. For example, if you receive a $10,000 check, immediately transfer $2,000 to your tax savings account.
Hands Off: Third, don’t touch the funds in your account until it’s time to pay your estimated quarterly taxes. It will be tempting, especially if you’re going through a lean month, but please, trust me, you’ll be thankful that those funds are there when your next quarterly payment comes due.
*A note about estimated quarterly taxes. It is a good rule of thumb to use your previous year’s tax liability as the basis for your current year’s estimated tax amounts. But to get a more accurate picture of your federal tax liability, either complete IRS Form 1040-ES, or talk to a trusted tax advisor who can help you estimate your tax liability for the year. If you find that your total income tax liability (including federal, state and local) averages significantly less or significantly more than the 20% we’ve set as our rule of thumb, then adjust your percentage accordingly.
Bonus Time: Finally, when you file your taxes, and realize your total tax liability for the year, take whatever is left over in the account that was set aside for that year and distribute it to yourself as a profit bonus. You’ll immediately start the process all over again with the first check of the new year.
There it is, the super simple method that will keep you one step ahead of the tax man, and keep you focused on revenue, rather than worrying about taxes.
This simple method of saving for taxes is nothing new. Folks have been estimating and saving tax money this way since taxes were invented. But if you like this method of money management, and want to learn more about implementing it across all aspects of your business, then I recommend picking up a copy of Profit First by Mike Michalowicz.