1. Create a Separate Bank Account for Tax Money
Setting up a dedicated bank account for your tax savings can help you keep track of how much you've set aside. This method ensures that the money is out of reach for other expenses, allowing you to view it as funds you’re holding for the government. By doing this, you avoid the risk of accidentally spending it on other things.
2. Calculate How Much Money to Set Aside
Understanding your tax rate is crucial. Taxes are charged at varying rates based on income levels, so it's essential to check your specific rate. You can do this by using tax rate charts or consulting with a tax professional.Here’s a simple formula to help you calculate your tax savings:
Identify your tax rate. This can be found on the Australian Tax Office (ATO) website or by using a tax calculator.
Estimate your annual income. Be sure to account for any potential increases.
Add a buffer. To avoid being caught short if you earn more than expected, add an extra percentage to your savings.
See the Tax Calculator I've posted on the CONTACT & RESOURCES page.
3. Commit to Consistency
Consistency is key. Make it a habit to put money aside regularly, whether monthly or weekly. This practice helps avoid the stress of scrambling to gather a large sum at the last minute.If you're self-employed or a practice owner, I often recommend setting up three separate bank accounts for your business:
Bank Account 1: Daily Operations
Use this account for receiving income and paying bills.
Bank Account 2: Tax & Superannuation
Dedicate this account to tax savings and superannuation contributions.
Bank Account 3: Emergency Fund
This account should ideally contain about three months of revenue. Use it for emergencies or to pay yourself during holidays, such as the Christmas break.
For sole traders, these can be regular personal bank accounts rather than business-specific ones
Benefits of Setting Aside Tax Money
By consistently putting aside money for taxes, you can:
Budget Effectively: Plan for business expenses with clarity, knowing your tax obligations are covered.
Maintain Cash Flow: Avoid dipping into operating funds, ensuring smooth business operations.
Avoid Penalties: Steer clear of ATO penalties and interest charges for late tax payments.
Managing taxes doesn't have to be stressful. With a separate tax savings account, regular contributions, and a solid understanding of your tax rate, you can ensure a smoother, stress-free tax season.
