Paying Taxes on the Profit First Model
March 23, 2021
by Eric Johnson

One of the beautiful things about the Profit First model is always having enough in reserves to pay your taxes. But what happens when tax time rolls around and there’s simply not enough cash to pay all of the taxes?

Get Clear On Your Numbers

First, you need to know:

  1. How much do you owe in taxes (federal and state), and
  2. How much you have in reserves

The difference is the short-fall that you have to make up.

Is there enough in your profit account to make up the difference?

Look to your Profit account after the Tax account is exhausted. If there’s enough here, then use those funds to cover your taxes. The good news is that you won’t have to worry about IRS debt and unnecessary penalties and interest. But the bad news is that your Profit distribution will be short. But that’s OK because one of the functions of the Profit account is to help eliminate debt. And IRS debt is high on the list of debt we want to eradicate, even if it’s preemptively.

Is there NOT enough money in the PROFIT account to cover the difference?

If there isn’t enough in both your Profit and Tax accounts to cover the taxes, then you should:

  1. Pay off as much of your taxes as possible using your Tax and Profit accounts,
  2. File your taxes, and
  3. Request to enter into an installment agreement (fancy word for “payment plan”) for the balance owed.

Paying down as much as you can will eliminate some of the penalties and interest, especially if done before April 15. The installment agreement will allow you to pay the remaining tax debt over time. You will still need to set aside for the current year’s taxes while paying off last year’s balance.

How to Keep the Tax Debt Away

Once you’ve taken care of your tax obligations for 2020, it’s time to figure out why the Tax and Profit accounts were short on cash so you don’t run into this challenge again. Here are a few places to look:

  1. Do you need to adjust your Tax allocation percentage a little higher? This will be a recurring issue for you if your Tax percentage is too low.
  2. Did you spend money from the Tax (and/or Profit) account that wasn’t for its designated purpose? If so, set up and use these no-temptation accounts.
  3. Are you paying too much in taxes? If you are not sure, it may be worth it to consult a tax professional to verify. There may also be tax-planning opportunities to help keep them low.

You may need to adjust your budget to account for the new monthly minimum payments you’ll need to make. You’ll also want to use all of your Tax and Profit funds towards the debt until the balance is $0. But once the tax debt is gone, and you’ve set your Tax allocation percentage to the correct number, you will never have to worry about this issue again.

Let us help you! If you’re a wellness business owner, we’d love to help you get Profit First set up in your business so you don’t have to worry about those big IRS payments again! Fill out this assessment and book a call now!