[00:00:00] If your tax payment every year is catching you off guard, you're not alone. So many business owners wait until it's too late to plan and end up draining their cash reserves before having to make their tax payment. You've made the money, you've got a solid net income, but now the IRS wants a chunk of your money and you didn't plan for it.
[00:00:24] It. Last week I had a conversation with a business owner who said, I've got a lot of net income in my business. [00:00:30] I've made a lot of money this year, but where's the cash? Because their tax advisor said, well, now you owe thousands and thousands of dollars in taxes on the net income that you made, and they weren't ready for it.
[00:00:42] They didn't expect to have this bill. Maybe it's not that they didn't expect it, they just weren't ready for it because they didn't set aside the cash required to make their tax payments and had not been making estimated quarterly tax payments. So today on Full Send CFO, we're gonna walk through how to create [00:01:00] a proactive and repeatable tax saving system that gives you peace of mind year round.
[00:01:06] So why, why do we need to plan for taxes year round? It's, it's obnoxious, right? You pay taxes on money that you earn. You pay taxes on things that you own. You pay taxes on things that you buy. It's gonna be one of your life's biggest expense. It's just a matter of fact, death and taxes. The only two things that are certain in business owners are responsible for paying [00:01:30] estimated taxes.
[00:01:31] It's a necessity, so we need to be making estimated tax payments quarterly, That's assuming that we're self-employed here. No, W2. If you wait until the end of tax season, you're making decisions with incomplete data and you're putting a lot of pressure on your cash. You know, there's a study done by Intuit that said that 73% of business owners say that they're unprepared for tax season.
[00:01:56] Shocker. They weren't planning appropriately. So how do we [00:02:00] start to calculate what to set aside every single month if that's a strategy we wanna move forward with? Yes, your payments are on a quarterly basis. However, your earnings are coming in on a daily, weekly, monthly basis. So step one, in this process, you gotta know your tax type.
[00:02:16] If you're a sole proprietor or an LLC owner, you've gotta pay self-employment tax. Plus your income tax. If you're an S corp, you're likely paying yourself via payroll, which means that withholdings are coming out on your W2 income. Plus, you need to file a business [00:02:30] return and pay taxes. On the income C Corp's a little bit different.
[00:02:33] You put the corporate tax rate applies plus possible dividend taxes. Once you have an idea as to like what types of taxes that you owe in your particular. Point in life, a general safe starting point to think about an effective tax rate, is that a sole proprietor LLC, about 25 to 30% of your net income and an S corp owner about 15 to 20% of your total net income you can use your prior [00:03:00] year's tax return.
[00:03:01] If it's available as a benchmark to understand what that effective tax rate for you is, there's a lot of factors that go into that. We're not gonna go into detail on that today, but rather put a plan in place to be able to be prepared for that tax payment. So once we have an idea as to what our effective tax rate is, what taxes we owe relative to our business structure.
[00:03:21] We want to start to set aside a fixed percentage of your net income or your revenue into a completely separate tax [00:03:30] savings account. Now when I say net income relative to revenue, revenue is the total dollars that your business brings in based on the service that you're providing or the product that you are selling.
[00:03:42] The net income is what's left over after all expenses. So your total revenue minus total expenses is your net income, and that's the number that you're being taxed on. So when you build a monthly savings routine, you wanna set aside a fixed percentage based on one of those two numbers. Your total [00:04:00] revenue.
[00:04:00] Or your net income. So for instance, if you earned, if you had a net income of $50,000 this month, perhaps you wanna set aside 25% of that net income, 12 and a half thousand dollars in your tax reserve account. I. Now what we wanna do is build a habit of that calculation, moving that cash into a completely separate account, set a calendar reminder, a to do whatever keeps you in.
[00:04:27] Check on making sure this happens, set [00:04:30] aside the time to make that transfer. Or you could set up automated transfers if you have a bank that allows for it.
[00:04:36] For me personally, I like taking a percentage of top line revenue and then upon. Calculating net income, I have a fixed percentage of the total net income that is shared with partners of the business in order to cover taxes. So one cash from total revenue, let's call it 10% goes into a tax account. A percentage of the net income [00:05:00] is distributed from the tax account in order to cover taxes for the partners.
[00:05:04] So as a simple queue here, one thing that you can do is you can set up a, a Google sheet, an Excel document that has your net income every single month in a cell applied to your estimated tax savings target.
[00:05:17] So let's say it's 25% of your net income. Every single month, you take a look at your financial statements, your profit and loss. At the very bottom, you'll see your net income. Drop that into your Google sheet, calculate 25%, and [00:05:30] that is the amount that you can transfer over to your tax savings account. Now, once you have this account set up, we ideally want this to be a separate business savings account.
[00:05:39] That's just for taxes. Like I mentioned, you can automate transfers on a monthly basis based on those percentages, or you can use a tool that helps you automatically track this, like QuickBooks Xero or other accounting softwares. These bank rules can really help you start to create a rhythm of this in your business.
[00:05:59] Now you [00:06:00] can run these monthly and quarterly reviews alongside of your bookkeeper, your accounting partner, to adjust those estimates as your profitability changes or as you have surpluses or deficits in your tax account. Because ultimately what we're trying to do is avoid the surprise.
[00:06:16] There's a report out there actually from Xero that says that businesses that automate tax savings, though are saving for it in rhythm of their business are two times more likely to avoid underpayment penalties, and that's the last thing you wanna get [00:06:30] stuck with when you haven't planned for the tax payment is a penalty.
[00:06:33] No, we're not trying to play that game. So what are the common mistakes that often lead to tax trouble for business owners? what you can oftentimes see here in this process is that business owners could be setting aside cash based on revenue and not profit. So, uh, the mistake here that people make is that they're actually applying the total effective tax rate to the top line revenue number and not actually what they're getting taxed on, on net income. [00:07:00] So if you're utilizing the effective tax rate, make sure you're applying it to net.
[00:07:03] Income. All of your money left over after expenses are taken into consideration. That said, if you want a calculation based on revenue, you're probably gonna want to take that effective tax rate and maybe cut it in half depending on what your margins are. Now, over time, you want to make updates. To your estimates when the business grows or shrinks.
[00:07:25] If you're not profitable on any given month, you're not gonna owe taxes on the dollars that month because you didn't [00:07:30] have any income to tax. So you wanna make sure that those estimates are accurate as you move forward. one thing not to forget, state tax, payroll tax, sales tax, you're gonna get hit every which way.
[00:07:42] Now, sales tax is very complicated if you are selling products or services into a variety of states and are tripping, uh, the various hurdles that those states require, uh, taxability in. Payroll tax. Ideally, if you have employees, you have a system like Gusto set up to help manage the payroll tax burden on your [00:08:00] behalf.
[00:08:00] State taxes can also be a little bit tricky because you've got various county tax, various state taxes that could apply specifically to your business model that your friend that also runs a business does not encounter. You must be working with a professional to help advise you on understanding the various implications of these taxes to be able to plan effectively.
[00:08:20] The last problem that you see is that business owners just rely on last minute cash to cover a year long obligation. So if you're not effectively [00:08:30] planning throughout the year for these tax payments, that last minute plan of, Hey, hopefully this client pays a big deposit so we can actually cover our tax obligation.
[00:08:39] Just put you into a spin cycle of not having cash to fund ongoing operations. So make sure that you're not looking at this last minute to pay taxes with money that needs to be utilized for operations. So actionable takeaways. Choose a percentage to set aside based on last year's return, and then apply it to your net income.
[00:08:59] Then [00:09:00] start to identify how you can start to automate or create some rhythm. In that process of taking the cash and moving it to a separate taxable savings account, when you move it to a separate account, it keeps it out of sight, out of mind until that cash is due. Then on a quarterly basis, let's revisit that number.
[00:09:17] As the business grows. As the, as the business shifts as the. Complexities of your business change. Let's just make sure that we have a plan in place to be able to ensure that we have enough cash on hand to pay taxes. So review your [00:09:30] net income for the last few months, calculate what you should have set aside, then course correct this month.
[00:09:35] Go ahead and take that money and move it over to a tax account. Most modern banks allow you to spin up a new account in a matter of seconds. So by not doing this, you're already putting yourself behind the curve to ensure that you have enough cash on hand to get your taxes paid. Very calmly. I hope that's a helpful overview on how to think about set aside cash for taxes in order to help you drive a more sustainable and profitable business in [00:10:00] 2025.
[00:00:24] It. Last week I had a conversation with a business owner who said, I've got a lot of net income in my business. [00:00:30] I've made a lot of money this year, but where's the cash? Because their tax advisor said, well, now you owe thousands and thousands of dollars in taxes on the net income that you made, and they weren't ready for it.
[00:00:42] They didn't expect to have this bill. Maybe it's not that they didn't expect it, they just weren't ready for it because they didn't set aside the cash required to make their tax payments and had not been making estimated quarterly tax payments. So today on Full Send CFO, we're gonna walk through how to create [00:01:00] a proactive and repeatable tax saving system that gives you peace of mind year round.
[00:01:06] So why, why do we need to plan for taxes year round? It's, it's obnoxious, right? You pay taxes on money that you earn. You pay taxes on things that you own. You pay taxes on things that you buy. It's gonna be one of your life's biggest expense. It's just a matter of fact, death and taxes. The only two things that are certain in business owners are responsible for paying [00:01:30] estimated taxes.
[00:01:31] It's a necessity, so we need to be making estimated tax payments quarterly, That's assuming that we're self-employed here. No, W2. If you wait until the end of tax season, you're making decisions with incomplete data and you're putting a lot of pressure on your cash. You know, there's a study done by Intuit that said that 73% of business owners say that they're unprepared for tax season.
[00:01:56] Shocker. They weren't planning appropriately. So how do we [00:02:00] start to calculate what to set aside every single month if that's a strategy we wanna move forward with? Yes, your payments are on a quarterly basis. However, your earnings are coming in on a daily, weekly, monthly basis. So step one, in this process, you gotta know your tax type.
[00:02:16] If you're a sole proprietor or an LLC owner, you've gotta pay self-employment tax. Plus your income tax. If you're an S corp, you're likely paying yourself via payroll, which means that withholdings are coming out on your W2 income. Plus, you need to file a business [00:02:30] return and pay taxes. On the income C Corp's a little bit different.
[00:02:33] You put the corporate tax rate applies plus possible dividend taxes. Once you have an idea as to like what types of taxes that you owe in your particular. Point in life, a general safe starting point to think about an effective tax rate, is that a sole proprietor LLC, about 25 to 30% of your net income and an S corp owner about 15 to 20% of your total net income you can use your prior [00:03:00] year's tax return.
[00:03:01] If it's available as a benchmark to understand what that effective tax rate for you is, there's a lot of factors that go into that. We're not gonna go into detail on that today, but rather put a plan in place to be able to be prepared for that tax payment. So once we have an idea as to what our effective tax rate is, what taxes we owe relative to our business structure.
[00:03:21] We want to start to set aside a fixed percentage of your net income or your revenue into a completely separate tax [00:03:30] savings account. Now when I say net income relative to revenue, revenue is the total dollars that your business brings in based on the service that you're providing or the product that you are selling.
[00:03:42] The net income is what's left over after all expenses. So your total revenue minus total expenses is your net income, and that's the number that you're being taxed on. So when you build a monthly savings routine, you wanna set aside a fixed percentage based on one of those two numbers. Your total [00:04:00] revenue.
[00:04:00] Or your net income. So for instance, if you earned, if you had a net income of $50,000 this month, perhaps you wanna set aside 25% of that net income, 12 and a half thousand dollars in your tax reserve account. I. Now what we wanna do is build a habit of that calculation, moving that cash into a completely separate account, set a calendar reminder, a to do whatever keeps you in.
[00:04:27] Check on making sure this happens, set [00:04:30] aside the time to make that transfer. Or you could set up automated transfers if you have a bank that allows for it.
[00:04:36] For me personally, I like taking a percentage of top line revenue and then upon. Calculating net income, I have a fixed percentage of the total net income that is shared with partners of the business in order to cover taxes. So one cash from total revenue, let's call it 10% goes into a tax account. A percentage of the net income [00:05:00] is distributed from the tax account in order to cover taxes for the partners.
[00:05:04] So as a simple queue here, one thing that you can do is you can set up a, a Google sheet, an Excel document that has your net income every single month in a cell applied to your estimated tax savings target.
[00:05:17] So let's say it's 25% of your net income. Every single month, you take a look at your financial statements, your profit and loss. At the very bottom, you'll see your net income. Drop that into your Google sheet, calculate 25%, and [00:05:30] that is the amount that you can transfer over to your tax savings account. Now, once you have this account set up, we ideally want this to be a separate business savings account.
[00:05:39] That's just for taxes. Like I mentioned, you can automate transfers on a monthly basis based on those percentages, or you can use a tool that helps you automatically track this, like QuickBooks Xero or other accounting softwares. These bank rules can really help you start to create a rhythm of this in your business.
[00:05:59] Now you [00:06:00] can run these monthly and quarterly reviews alongside of your bookkeeper, your accounting partner, to adjust those estimates as your profitability changes or as you have surpluses or deficits in your tax account. Because ultimately what we're trying to do is avoid the surprise.
[00:06:16] There's a report out there actually from Xero that says that businesses that automate tax savings, though are saving for it in rhythm of their business are two times more likely to avoid underpayment penalties, and that's the last thing you wanna get [00:06:30] stuck with when you haven't planned for the tax payment is a penalty.
[00:06:33] No, we're not trying to play that game. So what are the common mistakes that often lead to tax trouble for business owners? what you can oftentimes see here in this process is that business owners could be setting aside cash based on revenue and not profit. So, uh, the mistake here that people make is that they're actually applying the total effective tax rate to the top line revenue number and not actually what they're getting taxed on, on net income. [00:07:00] So if you're utilizing the effective tax rate, make sure you're applying it to net.
[00:07:03] Income. All of your money left over after expenses are taken into consideration. That said, if you want a calculation based on revenue, you're probably gonna want to take that effective tax rate and maybe cut it in half depending on what your margins are. Now, over time, you want to make updates. To your estimates when the business grows or shrinks.
[00:07:25] If you're not profitable on any given month, you're not gonna owe taxes on the dollars that month because you didn't [00:07:30] have any income to tax. So you wanna make sure that those estimates are accurate as you move forward. one thing not to forget, state tax, payroll tax, sales tax, you're gonna get hit every which way.
[00:07:42] Now, sales tax is very complicated if you are selling products or services into a variety of states and are tripping, uh, the various hurdles that those states require, uh, taxability in. Payroll tax. Ideally, if you have employees, you have a system like Gusto set up to help manage the payroll tax burden on your [00:08:00] behalf.
[00:08:00] State taxes can also be a little bit tricky because you've got various county tax, various state taxes that could apply specifically to your business model that your friend that also runs a business does not encounter. You must be working with a professional to help advise you on understanding the various implications of these taxes to be able to plan effectively.
[00:08:20] The last problem that you see is that business owners just rely on last minute cash to cover a year long obligation. So if you're not effectively [00:08:30] planning throughout the year for these tax payments, that last minute plan of, Hey, hopefully this client pays a big deposit so we can actually cover our tax obligation.
[00:08:39] Just put you into a spin cycle of not having cash to fund ongoing operations. So make sure that you're not looking at this last minute to pay taxes with money that needs to be utilized for operations. So actionable takeaways. Choose a percentage to set aside based on last year's return, and then apply it to your net income.
[00:08:59] Then [00:09:00] start to identify how you can start to automate or create some rhythm. In that process of taking the cash and moving it to a separate taxable savings account, when you move it to a separate account, it keeps it out of sight, out of mind until that cash is due. Then on a quarterly basis, let's revisit that number.
[00:09:17] As the business grows. As the, as the business shifts as the. Complexities of your business change. Let's just make sure that we have a plan in place to be able to ensure that we have enough cash on hand to pay taxes. So review your [00:09:30] net income for the last few months, calculate what you should have set aside, then course correct this month.
[00:09:35] Go ahead and take that money and move it over to a tax account. Most modern banks allow you to spin up a new account in a matter of seconds. So by not doing this, you're already putting yourself behind the curve to ensure that you have enough cash on hand to get your taxes paid. Very calmly. I hope that's a helpful overview on how to think about set aside cash for taxes in order to help you drive a more sustainable and profitable business in [00:10:00] 2025.
