"I'm making a profit, but I can't pay my taxes"—How to determine how much money you can actually spend
You've been told, "You're making a profit." But you can't pay your taxes.
For anyone who has experienced this situation even once, I think you can immediately recall that feeling. It's that sense that the numbers in your ledger and the balance in your bank account just don't seem to match up.
This isn't anything unusual.
In the year you first make a significant profit, or in the first few years after incorporating, almost everyone experiences this feeling at least once.
If you've been thinking, "Maybe I'm the only one who can't manage money well," that might not be quite right. In most cases, it's not a problem of management ability, but simply that you were operating without knowing the mechanics.
In this article, I will organize in order why "making a profit but being unable to pay taxes" happens, and how you can adjust your sense of how much money is safe to spend.
The balance in your bank account is not "all your money"
First, there is one premise I want to confirm.
The money in your bank account is not all your money.
You might think, "Isn't that obvious?" But there are more people than you'd think who don't grasp this intuitively. It's a common story: even if you understand it in your head, you end up spending it anyway.
The reason this happens is that many taxes in Japan are structured as "post-payment."
Taxes aren't deducted the moment sales come in; instead, you pay them in a lump sum after filing your return. That's why it looks like money is accumulating in your account. But that balance already includes "money scheduled to be handed over to the government."
If you keep spending without knowing this, you will find yourself "short" when it comes time to file.
"Profit" still contains taxes
Let's break this down a bit more concretely.
When money comes in from your business, you tend to calculate in your head: "Sales - Expenses = Profit (= my share)."
But in reality, you still need to pay the following out of that profit:
Income tax (or corporate tax)
Resident tax and business tax
Consumption tax (if you are a taxable business entity)
Estimated tax payments and interim tax returns (incurred based on the previous year's tax amount)
It is more accurate to think of these not as things to be paid from the "remaining" profit, but as things that are "already included" within the profit.
In other words, the structure is not "Profit = Your own money," but rather "Profit = Taxes + Actual take-home pay."
If this perception is off, you will end up spending money that you shouldn't be using.
Consumption tax is not your money from the start
Consumption tax requires special attention.
Reconfirming the mechanism of consumption tax, a taxable business entity is in the position of "holding" consumption tax on behalf of the customer. You are only temporarily holding money that will eventually be paid to the government.
However, the amount including consumption tax is deposited into your bank account.
For example, suppose you issue an invoice for 1.1 million yen. When 1.1 million yen enters your account, 100,000 yen is money scheduled to be paid later as consumption tax. But it looks like you have 1.1 million yen.
If you spend it all, including that 100,000 yen, you will run short when it comes time to pay taxes.
The reason why people often say "the taxes were higher than I thought" in the first year of becoming a taxable entity for consumption tax is that they act before experiencing this mechanism.
The mechanism of estimated tax payments that comes suddenly after filing
Another thing you should know about is estimated tax payments.
For income tax and consumption tax, you may be required to "prepay a portion of this year's amount" based on the previous year's tax amount. This is called estimated tax payment, or interim tax return in the case of consumption tax.
The year after you made a large profit the previous year, this amount becomes large.
"I made a profit last year. This year is just okay. But the tax bill is higher than last year." This kind of case actually happens. Because it is calculated based on the previous year's profit, the bill comes regardless of this year's situation.
If you don't know this in advance, you will wonder, "Why?"
How to change your sense of "money you can spend"
So, what should you do specifically?
One commonly suggested method is to separate your bank accounts.
Create a tax-specific account separate from your business account and transfer a certain percentage every time you receive revenue. This allows you to create a situation where "the money remaining in your bank book is money you can truly spend."
The percentage you should transfer depends on your tax rate and the type of business you run. As a rough guideline, if you are a taxable entity for consumption tax, a good starting point is to set aside 10% of your revenue for consumption tax, and then add the amounts for income tax and resident tax.
However, this is just a guideline, and the actual tax amount won't be finalized until you file your return. If you are concerned, having a tax accountant run a simulation for you will help you determine the percentage that fits your specific case.
Cases where "just separating accounts" doesn't solve the problem
Separating accounts is an effective method, but there are cases where that alone is not enough.
There are two methods for calculating consumption tax: "general taxation" and "simplified taxation," and your tax liability changes significantly depending on which one you use. Since the advantageous method varies by industry, you cannot simply say, "It's fine to just set aside 10% of revenue."
Also, in industries with high accounts receivable, a situation where "a profit is being made" often arises before the money is actually received. Even if there is a profit on the books, the actual cash on hand is low—in such situations, you need to be even more cautious when thinking about the money to set aside for taxes.
While separating accounts is an effective entry point, designing "how much to keep" based on an understanding of your business structure leads to more accurate management.
Why just copying the method doesn't work
There are cases where just copying the methods of separating accounts or setting aside consumption tax doesn't work. This is because if you don't see the big picture of your "money flow" in the first place, you won't even know where you are making mistakes in your judgment.
Taxes, insurance, investments, savings—if you try to deal with these separately, you will always be confused about "what to do." It is faster in the long run to organize the big picture first before making individual decisions.
In that sense, Ryogakucho's (Liberal Arts University) "Money University" is worth reading as a foundation. It is a book that systematically organizes the basics of money, from tax mechanisms to insurance and investments.
For those at the stage where they "didn't understand the difference between profit and take-home pay" or "don't know where to start," please consider this as a book to help you grasp the big picture before thinking about tax savings or investments.
To avoid using up your entire bank balance
Finally, here are three things you can change starting today.
When revenue comes in, create a rule for yourself not to "touch" the tax portion (a rough percentage is fine).
If you are a taxable entity for consumption tax, be conscious of transferring the consumption tax portion to a separate account.
Understand the schedule for estimated tax payments at the beginning of the year.
All of these can be done right now. However, the difference between knowing and not knowing them makes a huge difference in the stress you feel every time you file your taxes.
"I should have made a profit, but I have no money" is not a problem of ability, but a problem of whether or not you know the system. Let's organize things one by one.