Should the business pay for the owner’s tax in Profit First?
If you’re implementing our Profit First Cash Management System (PFCMS) in your business, you already know the power of allocating money with purpose. You’ve set up your separate bank accounts, and you’re diligently distributing funds to Profit, Owner’s Pay, Taxes, and Operating Expenses. But one question that often comes up is: Why should the business pay for the owner’s tax?
It might feel counterintuitive at first. After all, isn’t income tax a personal responsibility? Shouldn’t the owner be setting money aside separately? Let’s break this down in a way that makes sense no matter where you’re running your business
The Purpose of the Tax Account in PFCMS
PFCMS is all about ensuring you have the right amount of cash, in the right place, at the right time. One of the biggest, and most painful, obligations business owners face is taxes. If you’re not setting aside money for taxes consistently, you risk getting hit with an unexpected (and potentially crippling) tax bill.
By allocating a percentage of revenue into a dedicated Tax Account, your business is proactively preparing for the inevitable tax bill—without disrupting cash flow when payment time rolls around.
Your Business Generates the Taxable Income—So It Should Fund the Taxes
Who generates the taxable income? YES, THE BUSINESS DOES!! The business is what creates the taxable income, so it should be the one setting aside funds for the tax obligation. If you, as the owner, are taking money out of the business to pay taxes from your personal funds, you’re effectively double-paying—first taking an Owner’s Pay allocation and then scrambling to cover taxes on it.
Instead, by setting aside a percentage of revenue into a Tax Account, your business absorbs the tax burden systematically, reducing stress and surprises.
Preventing Tax Panic and Financial Stress
Many business owners make the mistake of ignoring taxes until the bill arrives. That’s when panic sets in. If you haven’t been setting aside money, you might have to dip into operating expenses, cut into your personal finances, or (worst case) take on debt to cover taxes.
With PFCMS, you eliminate that stress. The Tax Account builds a financial buffer, ensuring that when the tax bill comes due, the money is already there. No scrambling. No stress. No unpleasant surprises.
The percentage of revenue you allocate to taxes depends on:
- Your federal, state, and local tax laws.
- Your business structure.
- Your personal tax bracket.
Here’s a general guideline:
- U.S.: 15–25% of revenue (higher for high-income earners or S Corp owners).
- Canada: 15–30% (depending on whether you take dividends or salary).
- New Zealand: 15–30% (varies based on whether you’re taxed at personal or corporate rates).
Get a Freakin’ Tax Projection!!
If your accountant is not already doing it, you should demand a year end planning meeting to assess future tax obligations and make sure you’ll have the funds to pay them as needed. We try to do that with every one of our business clients. Sometimes we even meet part way through the year to make sure we are on a good track.
What About Sales Tax?
That’s a completely different animal and should be handled differently that income taxes. We will cover that in a future article.
Final Thoughts: Pay Yourself Right
If you’re following the PFCMS, you’re already committed to ensuring your business serves you—not the other way around. The Tax Account is simply another tool to make that happen. Your business is what creates taxable income, so it makes sense for it to cover the tax obligations that come with it.
By proactively setting aside funds for taxes, you eliminate stress, avoid cash flow problems, and ensure you can actually enjoy the profits and owner’s pay you’re working so hard to earn.
That’s the Profit First way—making sure money works for you, not against you.
