Duh, what do you think? Of course it should…
Paying taxes from the business aligns with Profit First’s objective of sustainable, consistent cash flow. The business can operate smoothly while ensuring owners are covered. This method promotes a healthier financial foundation, reducing risk for the owner and making the business more resilient in the long term. Regular, designated tax allocations contribute to a proactive, forward-thinking approach to financial management, reinforcing Profit First’s focus on profitability and stability.
Our Profit First Cash Management System (PFCMS) concept is a cash management system that encourages businesses to prioritize profit by dividing revenue into separate accounts for profit, taxes, owner’s pay, and operating expenses. Within this framework, setting aside funds for the owner’s taxes becomes essential. By paying for the owner’s taxes directly through the business, the company ensures financial stability, as taxes are treated as a necessary cost rather than an afterthought. This approach avoids potential cash flow issues when tax bills come due, keeping both the business and the owner financially secure.
It doesn’t matter whether you’re a sole proprietor, a look-through entity (like an LLC or S-Corp in the US or a Look Through Company in NZ) or a tax-paying corporation paying dividends to the owner instead of salary (like most Canadian corporations) – we want the business to ensure that the owner can pay their taxes when they are due out of the income that generated the tax obligation. The approach may differ slightly between each of these scenarios, but the objective is still the same.
When taxes are managed proactively, there’s no need for last-minute scrambles to cover these expenses. Our PFCMS method promotes discipline by earmarking tax funds from revenue as they’re earned, allowing the business to meet tax obligations without affecting essential operations.
So how should you do it?
Ok, fine, I’ll give you an example… If a business generates $120,000 in annual revenue, it might allocate 10% ($12,000) specifically for taxes. By doing this, the owner has funds set aside to cover personal and business-related tax obligations. This way, the business remains financially balanced and prepared for future growth, while the owner benefits from an organized, tax-ready structure.
If you’re freaking out about taxes, give us a call so we can un-freak you…
