I am not so much of a conspiracy theorist to assume an intent (nor do I think politicians are smart enough to think this far ahead), but the withholding system for income tax has had an interesting psychological impact on many Americans. They don't really pay that much attention to the taxes being taken away from them. This has become even more true now that we have electronic deposits.
But once someone becomes an entrepreneur, this all changes. Quarterly taxes become a common event for many business owners. Most entrepreneurs choose some form of pass through entity for their business, such as S-Corp, LLC or Partnership, so any profit on the business becomes their personal obligation. While this saves double taxation on profits, it also creates the need for careful tax planning. Four times a year, many of these entrepreneurs have to write a check for their taxes. And boy does that wake you up!
Also, if the entrepreneur now understands the true cost of social security. That part of the social security tax that the employer "pays" (which is not really true as that money would be available to the employee without that tax), or so-called employer match, now becomes the responsibility of the entrepreneur.
Many new entrepreneurs do not plan well enough for all of this (as this article from the Bradenton Herald points out).
This is an important reason to understand your financial statements. You do not pay taxes on the cash you have left at the end of the quarter, but rather on the income you earn. Why the difference? One of the most common example of an entry that reduces cash, but not income, is the principle portion of a loan payment. Paying off principle on a loan is a Balance Sheet issue and does nothing to your Net Income. You still owe tax on the money you use to pay down the balance on your loan.
Here is an easy rule of thumb. When your business begins to grow and has positive cash flow, set aside 40% of the cash profits every month for the taxes you will owe. Keep them in an account where you know they will be there when your taxes are due. Set aside 40% to help build up the cash reserves in your business. Use the final 20% to pay down debt.
