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    What % of my Sales should I Set Aside for Tax?

    People often ask me to tell them how much money they should be putting aside to cover their GST and tax bills. I find this question difficult to answer because every business is different and I would hate for someone to be relying on something that didn’t fit for their particular business. However, it is such a common question that I’m going to take a stab at a rule of thumb answer. Please let me know whether this works for you if you try it. Please don’t shoot me if it doesn’t.

    The first thing we need to do is to work out your net profit margin and for that we need a recent Statement of Profit or Loss for your business. If you rummage around in the pile of stuff your accountant sent you when s/he told you how much tax you have to pay this year, you should come across a set of financials statements and within that will be a page headed either Statement of Profit or Loss or Statement of Financial Performance, that’s the page we need. If you don’t have one from an accountant then you should be able to print one from your accounting system.

    Near the top of the page will be the figures for your sales, possibly fees received or other income and hopefully a line saying total income. At or near the bottom will be a line saying net profit. Take the net profit amount and divide it by the total income and multiply by a 100. This is your net margin. For a service business this might be 50% or more but for a food business perhaps 10% or less. It really depends on what industry and what environment you are operating in.

    Next, find your average tax rate. Take your net profit amount, divide it by 1000 and find that number along the bottom of the graph below. Go up to the red line and the number to the left is your average tax rate. If your net profit is less than $14,000, then your average tax rate is 10.5%.

    Hang in there, we are almost there. Now multiply your net margin by your average tax rate. You should get an answer between 0 and 20%, for many small businesses it is likely to be under 5%.

    This is the % of each sale that you should set aside for income tax.

    However, as I’ve said above, this is a rule of thumb. Every business is different and even one business can vary a lot from one year to another. Please don’t throw a party with your remaining profits until your actual tax bill is worked out for the year. And do give me feedback about whether this estimate works for you or not.

    Now, for those of you who are GST registered and whose eyes have not yet glazed over, the method for working out an estimate % for GST is similar.

    Go back to your net profit and add to it any wages, bank fees and purchases/expenses from overseas. Now take your total income and subtract any interest received and export sales. Take this adjusted net profit and divide it by the adjusted total income and multiply by 100. Multiply the result by 15%.

    This is the % of each sale that you should set aside for GST.

    Please bear in mind that these figures are calculated based on your last year’s sales and profit. If your profits this year are likely to be very different then these %s will not work for you.

    Your feedback is very welcome.

    This blog was written by Julie East at www.calculated-advantage.co.nz/