Setting Aside Your Tax Money

As a small business owner, there’s nothing better than seeing money come into your bank account from clients. But before you celebrate with a massive stock order, it’s worth taking the time to consider the taxes and levies you might have to pay.

Firstly, income tax. At the end of each financial year Inland Revenue will require you to file an annual return. This outlines your business income minus your business expenses, and you’ll need to pay tax on any profit made. The amount of tax you’ll pay will depend on your business structure and how much profit you’ve made. Tax rates range from 10.5% to 33%.

The easiest way to make sure you’ve got the money for that tax payment is to save it up throughout the year. If you don’t already have a business savings account, ask your bank to set one up for you. Assume that you’re going to be paying 33% tax, and get into the habit of transferring 33% of your income into your savings account as soon as your client makes payment.

A second obligation you should consider is the levies payable to ACC. These payments cover the cost of injuries both at work and at home, and are paid by everyone in the workforce. ACC get their information from Inland Revenue, so you should expect an invoice from ACC a few weeks after you’ve submitted your tax return.

The amount you pay in ACC levies depends on your type of business and your total income for the financial year, but setting aside 2% of your income is usually enough to cover most people’s obligations.

Between your income tax payments and ACC levies, that’s 35% of your income that needs to be set aside. It sounds like a huge amount – and it is! However, not paying your income tax or ACC levies incurs interest (up to 20%), late payment penalties (starting from $50) and the possibility of collection agencies becoming involved. These penalties can snowball quickly, turning a small debt into a large one that can get out of control.

The good thing about setting aside 35% of all your income is that you won’t need all of that money, because you’re only paying tax on your profit, not your income. But having that money set aside means that once you’ve paid your tax and ACC bills, you’ve got a nice lump sum sitting there – enough maybe for that stock order!

  • Post category:Business