Navigating the world of business finances can be daunting, especially when it comes to tax obligations. One of the most common questions we often receive from small business owners, and which we received during our recent Instagram Live Q&A is: "How much money should I set aside for tax?".
While the answer isn’t as straightforward as you might hope, here are a few tips on the steps you can take to ensure you're prepared when your tax bill comes through. But remember, this is general information. For personalised advice, be sure to contact your accountant.
1. Understanding your profit
The first step in determining how much to set aside for tax is understanding your profit. Simply put, profit is your income minus your expenses. If you're unsure how to calculate this, it’s essential to get your financials in order. Ideally, you should be able to run a profit and loss statement. If you're not familiar with this process, consider reaching out to an accountant who can help you track your business’s performance.
For example, if in the first quarter of the financial year (July to September), your sales total $100,000 and your expenses are $80,000, your profit would be $20,000. Then based on what your profit you'll be able to determine a general amount for your tax, which leads us to...
2. The 30% rule of thumb
A general rule of thumb for Australian business owners is to set aside approximately 30% of your profit for tax purposes. Using the example above, if your profit is $20,000, you would want to set aside about $6,000 (30% of $20,000) into a high-interest tax savings account. This proactive approach helps you avoid any nasty surprises when it comes time to pay your tax bill, because nobody wants that!
3. Pay As You Go (PAYG) instalments
If you’ve been running your business for some time, you may already be paying Pay As You Go (PAYG) instalments. The Australian Taxation Office (ATO) often bases these instalments on your earnings from the previous year. If your business performance changes—whether you've had an exceptional year or faced a downturn—it’s crucial to revisit these instalment amounts.
For instance, if your ATO payment schedule states you owe $20,000 for a quarter but your business has recently slowed, this amount may not accurately reflect your current tax liability. Regularly reviewing and adjusting your PAYG instalments with your accountant will ensure you're not overpaying or underpaying your tax.
4. The importance of monitoring your financials
Regardless of whether you’re setting money aside or paying instalments directly, monitoring your finances throughout the year is critical. Keeping a close eye on your profit and loss statements will allow you to make informed decisions about your tax provisions. If you're unsure how to effectively track your financials, consider enrolling in a cash flow course or working with a financial advisor.
5. Sign up to one of our business courses
We go through the ins-and-outs of cashflow, tax compliance, budgeting and financial literacy in our business course. Sign up to join the waitlist to find out as soon as it's launched. Spots are strictly limited, so get in quick.
As a business owner, understanding how much money to set aside for tax can significantly alleviate stress when it comes time to settle your tax obligations. A good rule of thumb is to reserve 30% of your profit in a dedicated high-interest savings account. Additionally, if you are paying PAYG instalments, keep them aligned with your current earnings to avoid any surprises. Regularly reviewing your financial position with the help of a qualified accountant can help you stay on top of your tax responsibilities and contribute to the long-term success of your business.
By planning ahead and staying informed, you can navigate your tax obligations with confidence. You got this!
