Yay, your business has made a profit! You’re living the dream all business owners have and you now make more than you spend. While you’ve become an expert in making a loss, deducting expenses from your income and balancing up any profit against previous losses, things are now different. So, what happens next?
Tax is what happens next. When a business makes a profit, it is required to pay tax to the IRD. I’m not talking about GST here, but business income tax. You are required to pay income tax on the net profit you make, with the tax rate varying depending on what type of business entity you are:
- Sole trader – at individual tax rates of between 10.5-33%
- Company – 28 cents in a dollar
- Non-profit – incorporated at 28 cents in a dollar, non-incorporated at individual tax rates
How Do I Know How Much Income Tax to Pay?
Each year you are required to fill out a tax return stating the income you had and then work out how much tax you must pay. Since this will be the first time you have made a profit, you will not have paid any provisional tax before. But if in your first return you have a tax bill of over $2500, then you will need to start paying provisional tax the next year instead of your tax bill in a lump payment.
This means that you must pay your tax in advance in small bits throughout the year. It is a way of helping you make sure you have the money to pay your tax and avoid getting a late payment penalty, as well as a way of the IRD making sure they get paid! The IRD have a good introductory video on provisional tax on their website which is worth watching.
Spending Your Profits
Now that you’ve made a profit, besides paying tax, what else can you do with it? Obviously, the smartest choice is to pay off debt, but once you’ve done that, what else can you buy?
Now I’m not suggesting you go on a wild shopping spree, but it is sensible to make some of those big-ticket purchases while you have the cash. If you can invest in technology which boosts the productivity of your business or an employee who can help you grow it, then those are great investments to make! It may also be time to start paying yourself a wage if you are not already doing so.
If you are unsure about anything tax related, we offer a free consultation to help you out. Book yours today and together we’ll get you and your tax on the right path to success.