Easy Cash Flow Solutions to Assist with Estimated Income and Sales Tax Payments

Today, let’s talk about a question that comes up a lot among small and medium-sized business owners, and that is the question of how to make sure that their business has enough cash for the mandatory quarterly estimated tax payments or the monthly sales / use tax deposits.

My name is Alexander Larson. I am a certified public accountant with an accounting firm called Glasgow Knight Financial. I have over 20 years of accounting and tax preparation experience helping business owners organize their finances, automate their accounting and tax compliance and help them run efficient, well-informed businesses.

First things first–let’s set the record straight–your estimated quarterly Federal and state income taxes or the sales taxes that you collect from your customers are not yours to keep. Paying your individual and business income taxes is considered a civic duty and it is also a requirement of the Federal and state law. On the sales tax side, things are even more strict—your business is the vendor who acts as an agent on behalf of the state or local governments in collecting the sales tax due.

So, how can you, a business owner, ensure that these taxes are paid accurately and timely? We have a solution for you. Let me share it with you today.

When our clients ask us this question, we recommend they reach out to their financial institution first, and open two business savings accounts. Most banks open business savings accounts without any monthly service fees. One of those accounts is designated for your business’ quarterly income taxes. The other one is for the sales tax collected from customers.

The next step is to change how you run your business’ cash flow. In the case of sales taxes, the solution is quite straightforward and that is deposit sales tax collected from customers to the business savings account earmarked for these purposes. In other words, when making a deposit at the end of the business day, do not comingle business receipts with sales tax collected from your customers. We have many cash-intensive clients who followed this advice with great success, including businesses such as restaurants, bars, movie theater operators, and even street food vendors. We recommend this solution even to businesses who collect sales tax infrequently. For example, lessors in the state of Florida collect sales tax on commercial lease payments only once a month and they deposit that sales tax to the separate, designated sales tax savings account.

In order to solve the estimated income tax deposits matter requires an additional step. 

At Glasgow Knight Financial we work with our business clients and help them determine what their combined effective Federal and state income tax rate is. In other words, we take the total amount of Federal and state income taxes paid for the previous year (which includes, where applicable, the 15.3% self-employment tax) and divide that amount by the amount of total business receipts for the year (gross receipts of the business). For most of our clients, depending on the state where they live, their overall profitability, their choice of legal entity, and their individual tax bracket, their combined effective Federal and state income tax rate may fall anywhere between 10 and 55%. However, a normal average that we see is somewhere between 22 and 29%. You can certainly give us a call and we can help you with figuring out your combined effective Federal and state income tax rate.

Then, we use an approach similar to the one used for sales taxes—we ask our clients to split their business receipts at the end of the day between their operating business checking account and their business savings account earmarked for federal and state income taxes. 

For example, if a successful real estate agent with an effective income tax rate from the previous year of 35% (she lives and works in Atlanta, Georgia) earns a sales commission of $10,000 during any time this year, we suggest that she transfers $3,500 of that commission into her income tax savings account as soon as she deposits that $10,000 commission check. 

Again, by segregating the operating account funds from income tax and sales tax funds, making the quarterly estimated tax payments or filing and paying the monthly sales taxes becomes simple. 

As always, you can reach out to us if you have additional questions about this segregation of funds solution or read more about how to calculate estimated income tax deposits in our blog on our website.

Let me share with you who we are and how you can reach us.

Glasgow Knight Financial exists to bring order to people’s financial lives, cause them to understand their finances (educate them about their finances), automate their accounting and tax compliance, savings and investments, help them generate ever-growing passive income, and transfer significant financial risks to the best insurers in the world.  

You can reach Glasgow Knight Financial by going to our website at glasgowknight.com.

Who we are in the world is solution-driven, trusted financial, accounting, tax and insurance advisors reimagining people’s financial well-being.