Creating Your Tax Account for Your Tax ExpensesSep 16, 2021
What is a Tax Account?
A Tax Account is a savings account that is intended for the provision of your Income Tax, BAS, and Superannuation. This is different and completely distinct from your other expenses as these comply with the mandate of the government.
How much should I put in my Tax Account?
Figuring out how much money to put in your Tax Account can be tricky as it is not a fixed amount and not something that you can just guess. You need to keep track of your financial statement to know how much you should budget for your taxes. Keep in mind that there can be monthly, quarterly, and annual taxes, so replenish your Tax Account according to your tax obligations.
To know how much you need to allocate in your Tax Account, you can look at your previous tax payments and create a budget. You can also create a budget according to your budgeted profit. That way, you can be accurate with the amount you need to put in your Tax Account.
Another way would be to review your tax account liability accounts on your Balance Sheet and have an equivalent amount of funds in your Tax Account to the amounts in these liability accounts.
Why is creating a separate bank account for taxes important?
Creating a separate bank account for your taxes is important because you need to be able to monitor and not lose track of your government liabilities and obligations. To be able to do so, you need to separate your operating expenses from your tax expenses. That’s financial hygiene. That way, your expenses are not co-mingled with each other.
Additionally, you’ll be able to distinguish what each dollar is for. You’re like putting money in different envelopes, except it’s with bank accounts. With this method, you can see exactly how much expenses you’re spending on your taxes without having to look at a long list.
If you don’t know what you’re doing, managing your cash flow can be tedious and difficult. One way to make it easier is by opening multiple bank accounts for different types of savings or expenses.
Need help figuring out how to manage your cash flow through multiple bank accounts? Reach out to us at Stream Accounting!
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