Saving for tax as a business owner

As a business owner, managing cash flow wisely is critical—not just for growth and stability but also for ensuring you're always prepared for tax time. Unlike employees who have tax deducted automatically from their paychecks, business owners must proactively set aside tax funds. The key? Knowing exactly how much to save and consistently putting it aside so you’re never caught off guard by a hefty tax bill.

Know Your Tax Obligations

How much you need to set aside depends on your profit level and whether you're registered for GST or have a student loan. Here’s a simple breakdown:

• 20% of income → If you’re only paying income tax (for profits under $220,000).

• 30% of income → If you’re paying income tax and GST (for profits under $220,000).

• 40% of income → If your profit is over $220,000, covering both income tax and GST.

• Additional 10% → If you have a student loan, save an extra 10% on top of your tax and GST savings.

• If you make more than $350,000 profit, you may need to save different percentages. Please get in touch for specialist advice on working out the right amount to save for you.

By following these percentages, you should always have enough funds available when tax payments are due, avoiding the financial stress of scrambling to cover a large bill.

How to Save for Taxes Efficiently

1. Open a Separate Tax Savings Account

A dedicated tax savings account is an easy way to ensure your tax money remains untouched. Every time you receive income, immediately transfer the appropriate percentage into this account. Many business owners find this strategy prevents them from accidentally spending money that will be needed for tax payments later.

This bank account can be used for all income taxes, GST and student loan savings.

2. Automate Your Tax Savings

To make saving effortless, set up an automatic transfer to your tax account each time you receive a payment. Most banks allow you to automate this process, ensuring consistency and removing the temptation to skip saving. This works if you have a consistent income. If your income fluctuates, manual calculation each week or month may be more appropraite.

3. Review Your Finances Regularly

Business income can fluctuate, so it's crucial to review your financials at least quarterly. If your profits increase significantly, you may need to increase the amount you're saving. Similarly, if you're experiencing a downturn, you can adjust your savings strategy accordingly. If you need help doing this, we offer our clients a management reporting with tax estimates service so that you always know where you are at with tax!

4. Prepare for Provisional Tax

Once your tax bill exceeds $5,000, you’ll likely need to start making provisional tax payments. This means paying tax in installments rather than as a lump sum at the end of the year. Keeping on top of these payments will prevent penalties and interest charges from the IRD. If you put the recommended percentages aside, you should always have cash for making these payments as needed.

Beyond Tax: Smart Money Management for Business Owners

While tax savings are essential, effective financial management involves more than just setting aside tax payments. Here are some additional strategies to keep your business finances in top shape:

1. Track Your Cash Flow

Understanding your cash flow is crucial for making informed financial decisions. Use accounting software like Xero to track incoming payments, outgoing expenses, and upcoming tax obligations.

2. Maintain an Emergency Fund

Unexpected expenses happen—whether it's a sudden drop in revenue, equipment failure, or an unforeseen business challenge. Aim to have three to six months’ worth of operating expenses saved in a separate account for emergencies.

3. Budget for Growth

Once your tax and emergency savings are covered, consider reinvesting excess funds into marketing, training, or upgrading your business systems to drive long-term growth.

4. Work with an Accountant

Even with a solid tax-saving plan, tax laws can be complex. A good accountant will help you maximize deductions, plan for tax obligations, and structure your finances efficiently to minimize unnecessary tax payments.

Final Thoughts

Saving for tax doesn’t have to be stressful—by knowing your obligations, setting aside the right percentage, and automating your savings, you can eliminate the anxiety of unexpected tax bills.

Stick to these simple savings guidelines:
✅ 20% for income tax if profit is under $220K
✅ 30% for income tax + GST if profit is under $220K
✅ 40% for income tax + GST if profit is over $220K
✅ +10% extra if you have a student loan

By proactively managing your tax savings and overall business finances, you'll not only stay compliant but also set yourself up for financial success.

Disclaimer: The information provided in this article is general in nature and does not constitute financial or tax advice. Tax obligations vary depending on individual circumstances, business structures, and regulatory changes. It is recommended that you consult with a qualified accountant or tax professional to ensure compliance with your specific tax obligations. While every effort has been made to ensure accuracy, no responsibility is taken for any errors or omissions.