Projecting your tax liability can be very tricky.
First, the tax law is constantly changing, which can cause your tax liability to change, even if all other factors remain the same.
Also, the final tax bill that business owners receive often includes income from sources outside of the business, as well as deductions, credits, and penalties outside of the business.
And to complicate it further, let’s just say there’s a reason the IRS calls them “quarterly ESTIMATED taxes.” You can’t know your tax liability until you close your books at year’s end.
So how do we estimate, or project, how much a business’s taxes will be?
Proactive Tax Planning
The best and most accurate way to project your tax liability is to have tax planning sessions throughout the year with a tax professional.
Tax pros keep up with the constant tax law changes and can include business and non-business factors to provide very (but not completely) accurate projections throughout the year. A tax pro can also proactively look for tax savings opportunities to make sure you’re keeping your taxes as low as possible.
The IRS Method
First, the IRS doesn’t project your tax liability; it suggests you pay your estimated taxes for the present year, based on the tax liability of the previous year. So, if last year’s tax liability was $4000, the IRS wants you to pay $1000 in quarterly installments throughout the year.
This method (for paying estimated taxes) is better than nothing, but if you have a drastic increase in income, you could still end up with a very high tax bill using this method alone.
Profit First Method
The Profit First cash flow management system doesn’t project your tax liability either (which is very complex). But what it does really well is to make sure that you always have enough in reserves for whatever tax bills come your way.
The Profit First system works off of percentages, so you’ll have a lot of money in reserves if you did well, and not so much if you had a bad year. Either way, you’ll have enough in reserves based on the performance of your business. And you don’t have to be a tax nerd to get it right.
At Fit For Profit, we can help you with implementing Profit First into your business so you can feel secure that you’ll have enough saved for taxes. Fill out this form and book a call to get started.