A surprise about how much income tax you owe for the recently ended year is about as welcome as the flu. Constructive planning for the impact of income tax liability begins with strategic oversight long before the tax is ultimately payable. Waiting until the year has ended and your tax obligation calculated is too late to start thinking of a means for paying the tax owed.
Reducing stress about income tax demands a system that promotes reasonable assurance of having funds available when the inevitable tax bill is determined. A useful mechanism is to think about only a portion of your business income as ever belonging to you. You’re merely holding some percentage as an agent for the government, which you remit in the future.
With last year year’s income tax now identified, your accountant is likely to convey your effective tax rate. This is your total tax liability divided by your taxable income. But a better rate to know is your total income tax as a percentage of your gross income – before deductions. Assuming your deductions tend to vary with revenue, applying a tax rate to every dollar of revenue is a reasonable general estimate of future tax.
Of course, some deductions are fixed rather than variable. And rising sales could push you into a higher tax bracket this year. So a more finely formulated tax estimate can even consider these factors. Such adjustments could be applied in a quarterly checkup. Whether the tax percentage is general or keenly calculated, set aside that portion of every dollar earned this year. This technique prevents you from scrambling to pay your next tax bill plus reduces the likelihood of spending money needed for future tax remittance.
The Finance Writer 