Tax reserve and private withdrawals

In short: For self-employed people, tax is due only later. You therefore put part of each profit aside in a separate account. Money you take privately from the business is a private withdrawal and does not reduce the profit.

In more detail: Unlike employees, self-employed people have no tax withheld automatically. Anyone who spends the entire profit has no money for back payments at the tax return. A simple rule is to save a fixed percentage of the profit. With small profits below the basic allowance no tax reserve is needed, but a reserve for expenses still makes sense.

In detail

• Private withdrawal: money from the business to the private account. It is not a business expense and does not reduce profit.
• Private contribution: private money you put into the business. That is not income either.
• Tax reserve: put aside 20 to 30 percent of profit if tax is expected.
• Business reserve: a buffer for purchases, fees and bad months.
• Separate accounts: keep business and private accounts apart, otherwise the bookkeeping becomes confusing.

See also: Revenue and profit: the difference, Business account and bank account for minors