For this reason, we recommend you open a tax bank account and always take your owed taxes out of your business  before you determine how much you have left to invest back into your business. We’ve added a tax line to the top of our Lead Cash report to make it clear. (more on that later) We like to think of it as an expense ahead of time, one that’s due the minute we make it. Ideally, we don’t even want to see it so we aren’t tempted to think we can spend or invest it.

Though you can simply ignore your taxes until the end of the tax year, we don’t recommend this, as it increases the risk that you won’t have enough money or that your tax estimates are inaccurate, without leaving you enough time to fix it. While the IRS will most likely be willing to work with you to fix this, there’s a lot of very stressful work involved and it’s easily avoided if you simply treat all of your profit as if it’s been taxed instantly, moving the money into your dedicated tax account straight away.

At the end of the tax year, if you end up with excess money in your tax budget after paying what’s owed, just roll it over or add it to your emergency fund. For almost everyone, 20% of total profit, including the Profit First money you take off the top (Mike Michalowicz’s concept), is plenty to cover estimated quarterly and end of year taxes. Ask your accountant for estimated tax coupons and regular estimates so you know you have enough come April 15th.

Payroll Tax

When you’re an employee, you don’t need to think about these taxes much because your employer takes care of it for you through payroll. When you own your own business, it becomes your responsibility to deal with. There are a couple of different types of taxes you need to think about:

  • Withholding: This is income tax that the company holds and sends off to the government on the employee’s behalf before that employee receives their paycheck.
  • Payroll tax: This is the tax that the employer pays on every dollar paid to their employees. It includes Social Security and Medicare taxes, among others.

When you first start your business, you’ll probably only have one employee, yourself. When you pay yourself through payroll, you’ll need to deal with payroll taxes. We highly recommend you use a professional payroll service to make sure that everything is done right.

Profit Tax (Income Tax)

It’s very tempting to just take all your early profits, think of them as your own, and do whatever you want with them, but a good percentage needs to go towards tax. All the profit from your business is taxed whether you distribute it, spend it, keep it in the business, or invest it, but there’s no reason to pay more tax than you legally need to. If you set up your business the way we recommend, you won’t pay income taxes for the business at all, only your personal income tax on your own tax return.

You will pay personal income tax for all of your business’s profit on your own tax return rather than your business, which might be confusing initially. But just remember that any profit made in your business is income to you personally and you need to pay income tax on your personal tax return.

As we covered previously, any money left over after you pay your expenses is considered profit and will be taxed as a distribution (otherwise known as profit or income). It also doesn’t matter if you actually take it out of your business account and put it into your personal account. Even if you keep the money in your business, it will still be taxed via your personal tax return because it will show as profit on the P&L report at the end of the year.

Pay Your Taxes

The best way to pay your taxes is to make more money.  Don’t try to get out of taxes by spending more money in your business on things. Having a big tax bill is a beautiful thing, it means you made lots of money.  I personally find it a genuine privilege to earn money and pay my share of taxes.

And also, try to save as much as you can.  The tax bill is written FOR you by the IRS to incentivize you to do certain things to save money on taxes.  You are not skirting your responsibility when you do this, you are following the law.  So do whatever you can to pay your fair share and not a dollar more.