Setting money aside for tax: put some away every month

Cemal Usta the barber's month-end

Cemal Usta is a barber. Every day of the month he sees money in the cash box and spends it: razor blades, rent, household costs. At the end of the month his mali müşavir (certified public accountant) calls him: "There's this much VAT and this much SGK to pay." Cemal Usta's answer is always the same: "I have no money; where did it go?"

The money didn't go anywhere; it is just that part of it was never Cemal Usta's.

VAT: money held in trust

First a check: if you are a small trader taxed under the simplified method (basit usul), you do not add VAT (KDV, value added tax) and you do not file a VAT return (VAT Law, Katma Değer Vergisi Kanunu, art. 17/4). This section is for VAT payers. If you don't know which you are, ask your accountant.

If you are a VAT payer, there is a VAT line on the invoice you issue to the customer. This money is not your earnings. The customer left the state's money with you in trust. You will pass it on to the state (see What is VAT? (in Turkish)).

A simple example: this month Cemal Usta sold and invoiced 1,000 lira of services. For the sake of the example, let's say the VAT on the invoice is 100 lira (the real rate varies by product and service, and may also change from year to year; ask your accountant for the current one). The customer paid 1,100 lira. Cemal Usta's income is 1,000 lira; 100 lira is held in trust.

There is also the reverse: on invoices for the goods and services you buy for your business, you pay VAT too. You subtract this VAT from the VAT you collected from customers; its name in the law is "deduction" (indirim) (VAT Law art. 29). The figure your accountant gives you every month, "you'll pay this much", is the difference between these two amounts. If the VAT you paid on purchases is higher, you pay no VAT that month; the difference carries over to the next month. Not all VAT on purchases can be deducted, and to deduct it you must have an invoice or a suitable document; your accountant will tell you which can be deducted.

Income tax and the rest

Income tax (gelir vergisi) is paid on your profit (corporate tax, kurumlar vergisi, if you are a company). In a sole proprietorship, the tax is calculated through the annual return; but during the year there are also advance payments at certain periods (provisional tax, geçici vergi). The rate and the period dates vary by year and by your income; we are not giving a magic number like "set aside this percentage". Your accountant will calculate this figure for your business.

If you are under the simplified method, there is no provisional tax; the earnings from this business are also exempt from income tax, and you do not file an annual return for these earnings (Income Tax Law, Gelir Vergisi Kanunu, repeated art. 20/A, mükerrer md. 20/A). Your jar is mainly for your own Bağ-Kur premium (Bağ-Kur is the social security scheme for the self-employed) and, if you have an employee, their SGK (Social Security Institution) premium.

If you have employees, the SGK premium is also paid every month. These are the subject of a separate lesson, but the logic of putting money aside is the same.

The tax jar

Make this a habit:

1. Open a separate account. A second bank account, or a separate cash box kept to one side. Its name: "Tax jar" (vergi kumbarası).
2. With every sale, or every week, transfer a share. Find out the share from your accountant: "What percentage of my income should I put aside every week?"
3. Don't touch that account. It is not an emergency fund; it is for tax, SGK and VAT.
4. Compare at the end of the month. Compare the money in the jar with the amount your accountant says you owe. If it is short, increase the share. If it looks like too much, don't spend it straight away: provisional tax is calculated every three months, and annual income tax once a year; tax that is not paid this month may still be building up. Ask your accountant when the surplus becomes yours.

This is not saving; it is keeping someone else's money separate.

Why a separate account?

When it sits in the same account, the money gets mixed up. When Cemal Usta sees 5,000 lira in the cash box, he says "I'm doing well"; but 1,500 lira of it is the VAT and tax share. In a separate account it is both visible and not spent. Also, when the business's money and your own money are kept separate, the accounts become easier.

How do you know the tax days?

Filing and payment days vary by year and by tax; they can also shift because of a public holiday or an announcement by the Ministry. For this, ask your accountant for a tax calendar. You can also look at our article Tax calendar (in Turkish). Once you know the calendar, check the jar before those dates.

A final reminder

Paying tax is the price of making a profit; it is not a loss. But leaving tax until the last day leads to the money being spent elsewhere. Someone who sets aside a small share from every sale can go to the bank calmly on tax day.

A small example

During the month Cemal Usta saw 20,000 lira in the cash box. If he had known that the VAT, SGK and tax share his accountant would tell him about at the end of the month would total 6,000 lira, he would have put 6,000 lira into the jar from the start and spent the remaining 14,000 lira with peace of mind. The figure is an example; you will work out the real amount with your accountant. Change the order: first the jar, then the spending.

How do you do it in a small business?

• In the evening, when you do the day's accounts, transfer part of the day's sales to a separate envelope or account.
• On the day a large payment comes in, the first thing to do is put its share into the jar.
• Don't link the jar account to a credit card or to everyday spending.

In one sentence

Tax needs preparation before payment day. The jar is the simplest way to get through that day calmly.

What doesn't belong in the tax jar?

The jar's money is not used for the business's day-to-day costs. Saying "I owe a supplier this month, I'll take it from there for now" seems harmless at first, but when tax day comes, the same hole opens up again, this time with the state. If such a need arises, instead of taking from the jar, try speeding up collections or talking to the supplier about payment terms. Once you break into the jar, the habit breaks too.