(First year business tax – 5 minute read)
Did you just start your first business?
Congratulations!
Starting a new company or self-employed venture is always daunting. You’ll be so busy working out on your products, honing your unique selling point and setting up your systems. Tax is the last thing on your mind.
‘I’ll deal with it at financial year end’- you tell yourself.
And then you get an unexpected tax bill at the end of your first year in business. Ouch.
Here are some tips on dealing with tax in your first year of business:
Understand how taxes work
Taxes are complicated. I’ve been in accounting for almost 20 years now and tax still frustrates me. Rules change every year and different countries have different rules. However, there are some universal concepts:
Income minus expenses equals taxable income (or profit)
If you are in business, you are allowed to deduct business expenses. Business expenses are things that you spend on to generate income in the business. If you make sales of $100,000 and you have business expenses of $50,000 – you have a profit of $50,000. Tax gets calculated on this profit.
Tax is a percentage of your profit
Company tax is a different rate from personal tax. Find out how much tax you have to pay on your profit. Check the website for your country’s tax authority to find out what your tax rate is. (Aotearoans – click here!). Once you know what this is, tax becomes easier to plan for.
Always put aside money for first year business tax
Before you pay yourself from your business, always put aside money for tax. The simplest way to do this is to calculate your average tax rate (see previous section) and multiply it by your current profit. Do this every time you pay yourself throughout the year. For more details, check out our article on how to pay yourself.
Too hard? Try this instead- when a client pays you, put aside 30% of the amount away for taxes in a separate account. You are putting away more than you need, but you won’t be short of money come tax time! This way you can even get a nice bonus of having ‘extra money’ (which you put away) after paying taxes.
Making a LOT of money in your first year?
How much is a lot? If you’re making more than $200,000 profit – that’s a lot. Please note that advice contained in this section is usable only in NZ Aotearoa. Here’s the most important thing to know:
You may be liable for provisional income tax
Provisional income tax is tax that you pay ahead of time, before the tax year ends. Most businesses will be paying provisional tax only in the second year onwards. However, high income first year business owners may find themselves paying provisional tax.
If you have residual income tax of $60,000 or more in your first year of business you will need to ensure that the tax payment is made, IN FULL to the IRD by 7 May of the same calendar year. Other, lower income businesses have until April the following year to pay their first year taxes.
EG: Your business made $350,000 profit for the year ending 31 March 2024. At a company rate of 28%, this translates to $98,000 worth of taxes, which is more than $60,000. This means that by 7 May 2024, you need to pay the IRD $98,000 or risk getting interest and penalties on your tax account.
What about GST?
You shouldn’t have to worry about GST unless you’re absolutely sure that you’ll make more than $60,000 turnover in your first year of business (in Aotearoa NZ). If you want to learn more about GST, check out this article we wrote here.
First year business tax shouldn’t be scary
Taxes are a way of life in many parts of the world. You should not let it stop you from starting a business. If you need more help, reach out to an accountant (like us!).
Stay informed and most importantly, Stay positive!
Sam