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(Clarify any tax moves you make with your trusted tax advisor.)
As more business owners are using YNAB to manage their cash flow, I think it’s important to specifically address how to handle one of the largest infrequent expenses you have: taxes. It can literally bankrupt you if you don’t handle your taxes appropriately. Let’s not have that happen.
Earlier, I outlined all of YNAB’s categories, as they’re set up to run the YNAB business. One in particular is called Quarterlies, and it sits in the “non-YNAB” master category. The reason it’s under “non-YNAB” is because the business doesn’t pay the taxes; I, Jesse the individual, do. So a tax payment outflow is not an expense, it’s a distribution to me, that goes directly to the Tax Man.
When you earn a paycheck, your taxes are withheld and sent to the Tax Man automatically. You file your return and end up getting a refund, or owing some more, based on how your tax liability calculates.
Some of you earn money in lieu of, or in addition to, a paycheck. Your taxes on that income aren’t withheld automatically. You need to do the withholding yourself, estimating what you’ll owe, and paying the Tax Man once each quarter.
I’ll call these payments quarterlies, or estimated taxes, throughout this article.
This is a question for your tax advisor. They’ll basically give you a set percentage of your profits to withhold. You could look back at prior tax returns to get an idea, but if your business income has changed significantly from one year to the next, your estimate may be off. A quick rule of thumb: if the business is doing better, you’ll want to withhold a higher percentage. Again though, this percentage can’t be from the hip (been there, done that, no thanks on doing it again).
For our example, let’s say our agreed upon percentage is 25 percent. (I’m purposely avoiding going complex with the percentage calculation, because every single reader of this post will have a different, very specific scenario.)
Armed with a percentage of profits to be withheld for taxes, it’d look something like this.
Let’s say you just wrapped up your books for the month, have reconciled your accounts, and want to see how profits shook out. You’d click on Reports -> Income v. Expense, find the month column, and look at the “Net Income” number at the very bottom. You see that profits for the month were $8,000.
You’d pop over to the Budget, and in your Quarterlies/Estimated Payments budgeted cell, you’d click in there so the cursor is flashing, and type:
8000 * .25 [Enter]
That would populate your Quarterlies budgeted cell with $2,000 (25% * $8,000 in profits).
You’d see the Quarterlies category balance increase by the $2,000 you just budgeted, and your Available to budget would decrease by the $2,000 budgeted.
In the US, your quarterly payments are due April 15, June 15, September 15, and January 15 (of the following year).
Let’s say it’s September 1st, and we just finished doing the books for August. We had profits of $8,000 so we budgeted $2,000 into the Quarterlies category for September. In fact, we’ve done that for three months now:
|Month||Profits||Percentage||Budgeted to Quarterlies||Quarterlies Balance|
So our Quarterlies balance is now $6,000 ($2,500 from June, $1,500 from July, and $2,000 from August).Now we simply cut a check, or use EFTPS.gov if you’re in the US, to pay the $6,000 to the tax man.Because you’re following Rule Two, you don’t feel the big payment. That’s what Rule Two is for. And applying it to your taxes will make your life MUCH less stressful.
Because you’ll forget that the money is spoken for, and you’ll have budgeted and spent it on something else. You need to make sure you budget for your taxes on a regular basis. Don’t kid yourself, and think that the money will just magically be there. Too many business owners do just that, and then when the tax bill actually comes due, they’re stressed, scrambling, and scared.
Let me know if you guys have any questions on this! I’m happy to answer in the comments.
Photo credit: Source: bit.ly/1l2cj9Z
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