You may wonder, how do successful businesses like yours save money for taxes? Your business is off to a great year and you know you’re going to owe some taxes at year-end. Now is the time to consider putting some money away to pay your tax obligations.
Different methods to save for taxes
First thing – consider opening some new bank accounts for better cash flow management. We recommend a clearing account, a savings account, a tax account and a profit account. There are different methods to allocate revenues to each account – let’s go through some of the basic ways to save money for taxes.
CRA installment method – if you prepared your taxes with us last year and you owed taxes, we would have provided you with an installment schedule for the current year. This is an excellent way to fulfill your obligations, satisfy CRA and avoid interest.
30% – the simplest approach. We see lots of clients have success using a simple 30% of revenue strategy. For every dollar they receive, the put away 30% to pay for income taxes. This is usually really effective for real estate agents and small businesses.
Save your net HST percentage. Most businesses submit roughly 2/3 of the HST they collect after subtracting input tax credits so that’s a great place to start in saving the HST. Every business is different and we can help you understand your HST return and the appropriate amount to save.
Percentage Approach – based on the prior year we can help you assess the correct percentages to save from this year’s cash flows. We take each liability and calculate what percentage of revenue to allocate and transfer to each. This is also a great way to understand your margins and how increasing costs impact your profitability.
Profit First Approach – Michael Michalowicz has a number of excellent books and clinics that focus your business on paying the owner first. This is a great approach for the owner who needlessly over-invests their profits into the business or is guilty of gilding the lily. We highly recommend this book and will send a copy to any interested client. We’re big fans of PF and can help you implement this plan.
Cash Flow Budget – Sometimes a rule-based approach will not work, your revenues are lumpy, seasonal or your cash flow is feast and famine. We can help you prepare a cash flow forecast to plan minimum balances, when to pay regular bills, how to optimize cash, when to use credit and how to save for taxes.
Other main things to consider
Don’t ignore installments. Did you know that if you owe over $3000, you are required to make quarterly installments to your CRA accounts – this goes for every government tax program – personal, HST and corporate. Payroll taxes are due on the 15th of the following month unless you have received permission for quarterly installments. If installments are missed, CRA will assess interest on overdue amounts – it’s not an especially high interest rate but it’s also not deductible so its kind of double taxation. We follow the golden rule for taxes, “Pay a Little, Pay on Time and File on Time”.
A note about growth. Growth eats cash. An increase in actively ties up your cash investing in assets, in accounts receivables, expenses such as marketing and business acquisition, training and development. Profitable business faces liquidity crunches when expanding rapidly.
Do you still have questions about saving for taxes? We can help you understand the numbers and cash flows and help develop a plan to save for taxes. Get in touch with us to book a consultation on cash flows and saving for taxes.