As a business owner, it is very tempting to utilise every dollar that comes into your account.

You work hard, so why shouldn’t you make the most of the money you earn?

Well, there is a simple reason why you can’t.

Not all of the money you earn is actually yours.

If your business is turning a profit, a portion will always need to go to the IRD as a tax payment. Don’t let this payment be a surprise that penalises your business!

Let’s look at how you can ensure your tax gets paid on time without hamstringing your business.

The Tax Payment Pandemic

Do you have trouble keeping up with your payments to the IRD? You are not alone! Many Kiwi business owners get a nasty surprise when their tax bill rolls around and have to scramble to find the funds needed.

Why is that?

Often, it’s not that the business isn’t making money; it’s because tax is treated as an afterthought.

This is a danger for any business, even the successful ones. You work hard, the business is growing, the cash is flowing in, and you are likely turning a bit of a profit. But when the tax bill arrives, there isn’t enough money in your account to pay it.

If this sounds like you, it’s time to shift your perspective. Yes, you are earning the dollars that come into your business, but not all of them belong to you!

Shifting Your Perspective

Successful and profitable businesses attract tax bills. Depending on the circumstances of your business, these bills can be for a significant sum. That means you need a significant amount of funds available in your account!

And that’s just for your income tax; that doesn’t even take into account any GST payments. If you are GST registered, you are basically collecting money on behalf of the government when you charge your customers. That money is not additional income for your business; it needs to be paid on accordingly.

It is easy to glance at a $100k bank balance and be excited by the funds sitting there. But you need to keep in mind that a portion of that money is actually destined for the IRD.

How Can You Keep Track?

It’s time to start budgeting for your tax in the same way that you budget for things like stock, wages, rent, marketing, and other common business expenses. You know a tax bill will be coming, so don’t wait for your accountant to tell you about it!

Start making provisions now. Tax considerations should be part of your normal cash flow management. The easiest thing to do is put money aside every time it comes into your business. If you find it hard to be disciplined in managing your tax provisions by using just your main business account, open a separate account for holding your tax money in.

For GST, you know you need to keep 15% of every payment. Sure, there will be some variation in the GST cost to your business depending on your purchases for the month, but holding aside 15% is a safe practice.

Your accountant or financial adviser will be able to give you an indication of how much you should be reserving for your income tax payments. Take a look at what your tax bills have been in the past and how your business income has changed in the last year. That should give you a ballpark indication of what to expect for this year’s tax bill. Remember, it’s better to save too much than not enough!

Every business is different, so now is the time to get educated on what your numbers look like. That way, you will never be caught off guard at tax time.

Tax Planning Should Be A Priority

Your business bank balance is one thing, but your available cash can be a very different amount. That’s why it’s vital to understand the difference between the two figures.

A highly profitable business can quickly find itself in trouble because of poor tax planning. All those hard earned dollars can disappear if you have not accounted for your tax obligations!

So, would you be able to pay a tax bill immediately if one landed in your inbox today?

If the answer is no, tax planning should be your priority.

Now is the best time to have a conversation with your financial adviser or accountant. Then, you can gain an understanding of your upcoming obligations and ensure tax provisions become a regular part of your business cash flow. The very best time to ensure you have your tax bill sorted is before you receive it.

Avoid tax panic by having a chat with our friendly team now. We can help you understand your numbers and how you can best prepare your business for those upcoming tax payments.