Tax Reserve
What is a tax reserve?
A tax reserve is money a business sets aside on a regular schedule to pay future taxes. It keeps cash available when estimated payments and annual taxes come due.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that moves reserve amounts into a separate account on a schedule and tracks them against expected taxes, so tax bills are covered.
How to build one
- Estimate the tax you expect to owe with your tax professional
- Transfer a set amount to a separate account each month
- Update the amount each quarter as profit changes, see estimated tax payments
A worked example
The figures below are illustrative. A firm that expects profit to grow decides to set aside 25 percent of monthly profit in a separate account. Each quarter it compares the balance with the estimated payment its tax professional calculates and adjusts the rate.
Common mistakes
- Spending the reserve on operations
- Setting the rate once and never updating it
- Forgetting state and payroll taxes
Why it matters for service firms
Owners of pass-through firms often owe tax on profit they have not taken as cash. A reserve prevents a large bill from becoming a cash crisis. Your tax professional can suggest an amount based on your facts.
Frequently asked questions
How much should be reserved?
There is no single percentage. It depends on profit, entity type, state, and deductions, so ask your tax professional to estimate it and review the figure each quarter.
Where should the reserve be held?
In a separate account that is not used for daily spending. Some firms use a savings account at the same bank, so transfers are easy and the balance is visible.
This page is for informational purposes only and does not constitute formal legal or tax advice. Always consult a qualified tax professional about your specific situation.
Related terms and guides: estimated tax payments, tax calendar, pass-through entity, owner draw, and cash flow forecast.