Cash Flow Mistake: Sales Tax is Not Income

Ah, paying taxes. How you manage your taxes will impact your cash flow in a small business. Many small businesses have to pay sales tax to taxing agencies. In WA state, this agency is the Department of Revenue. Your state may have a different taxing agency, but they likely operate similarly. Our article today is about avoiding a typical cash flow mistake in how you handle sales tax on customer invoices.

We had a client who faced challenges with paying sales tax. It was this experience, among other factors, that eventually led to business failure. Essentially, his business accrued several thousand dollars in sales taxes each quarter. Let’s say that he accrued $30,000 in sales tax. The quarter is a long time to sit on that money in the regular business checking account. We had advised him to be sure and place the sales tax money into a separate business savings account. Thus, as each invoice was paid, move the sales tax into the savings account. By the end of the quarter, he could pay the sales tax from the savings account. In addition, all of the funds for operating the business were left in the checking account. 

The sales tax money you collect on an invoice is not your money to spend. If you have a process by which you manage that money, by moving it into a separate account, you can earn some money on it while you are holding it before it is paid to the state or other municipalities. At least in our experience, sometimes a small business can be on varying time frames for paying taxes – the more common are quarterly and monthly. For cash flow, make sure you do not spend the sales tax money – it can lead you into a cash flow hole that can be very difficult to get out of and fix!

Many accounting software tools will have a sales tax report that you can run to determine the amount that should be moved out of the operating account at the bank to a sales tax savings account. In addition, any taxes you owe could be moved to this “tax” savings account. For example, here in Washington State, we have a gross receipts tax called a “B&O” (Business and Occupancy) tax. It is a flat rate applied to gross revenue and is easy to estimate. That amount can also be moved to this tax account for payment to the state government. 

This should be a simple process to set up with your accountant or bookkeeper. If you need any assistance with it, please get in touch with us. We would love to help!

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