Discovering you owe more than you thought on last year’s income taxes is about as welcome as the flu.
And the end of the year, when your tax obligation calculated, is too late to start considering how to pay it. Do yourself a favor: start planning for this year’s taxes now.
To reduce last-minute tax stress, you need a system to ensure you have funds available when your tax bill is determined. Understand that only a portion of your business income has ever actually belonged to you; basically, you’re “holding” a certain percentage for the government, which you will remit at tax time.
So now that last year’s income tax has been finalized, your accountant can provide your effective tax rate, defined as your total tax liability divided by your taxable income.
However, you may want to consider this number: total income tax as a percentage of gross income before deductions. Assuming your deductions vary with revenue, applying a tax rate to every dollar of revenue is a reasonable general estimate of future tax.
That said, some deductions are fixed, not variable, and rising sales this year may push you into a higher bracket, but a finely formulated tax estimate can consider these factors in quarterly checkups.
Whether the tax percentage is general or finely calculated, set aside that portion of every dollar earned this year to prevent last-minute scrambling to pay your next tax bill.
And you’re also less likely to spend it before you need it for 2017 taxes.