What’s your favorite day of the year? There are a lot of options to enjoy across the annual calendar, but one in particular often goes unheralded: Tax Freedom Day.
Each year, the Tax Foundation calculates how many days the average American has to work in order to cover their tax liability. This year, Tax Freedom Day occurred on April 19th. So from that point forward, every dollar, on average, you earn as profit is for yourself, not Uncle Sam.
Or is it? Tax is just one of the obligations a business has to meet. If you are going to work out when you’ve worked off your tax bill, why not some of your other costs?
The Tax Foundation has worked out the Tax Freedom Day based on an approximate average tax rate of 29 percent. That gets you to around the 107th day of the year, or early- to mid-April. As a business owner, we would want to look at our costs relative to income, not relative to profit — after all, some expenses may be greater than the amount the business owner takes home, so it’s not the best way to apportion your costs.
Let’s say your net profit is normally 10 percent of your total income. This would mean that tax would represent 2.9 percent of your total sales or income, rather than 29 percent of your profit. So your tax would be covered by income after 2.9 percent of the year, which means approximately 11 days of average annual income.
If you achieve a 50 percent gross profit, then it will take you half a year to earn enough average annual income to cover the cost of the goods you sell. Depending on what percentage of your costs are attributable to different aspects of your business, you can work out how long you need to work to meet some of your other business obligations.
For example; if wages represent 16 percent of your total income, then you will need 58 days of average annual income (365 days x 16 percent) to meet your staffing costs. If rent is 10 percent, then you’d be looking at around 36 days to meet this obligation. Of course, this is an extremely simplistic guideline, but it’s an interesting scenario to see who gets your money each day!
Of course at 10 percent profitability, and assuming an average income that is consistent each day, you would have to work until around Nov. 24. You can do the real exercise yourself and determine just when your profitability arrives. Given the proportion of income that skews toward December, it’s more likely that your Profit Freedom Day will be sometime after the middle of December.
So focus on cutting your costs and raising your margin — the sooner you can start keeping that income for yourself, the better it will be!