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Estimated Quarterly Taxes Are Around the Corner Again

I can’t believe we’re thisclose to June already!  This year is just flying by!  I felt like we just paid April’s taxes yesterday, but nope, there is that estimated quarterly taxes due date of June 17, 2013 staring at me on my white board.  Poop.

Our Way of Handling Estimated Quarterly Taxes

There is an official way you can work your numbers and make sure to cover your butt from penalty fees by paying as little each quarter as possible.  But that takes time without tax help and we don’t generally mind maybe overpaying a tiny bit compared to possibly underpaying by a ton.  So we follow the secondary rule – as long as you pay in at least what you owed for last year’s taxes, then you won’t have any penalties even if you owe double in the upcoming year.

So we are taking what we owed in total in 2012, dividing that by four, and sending in that amount by each due date.  For us, that comes to about $8000 each quarter (covering the employer’s part of taxes along with the regular part hurts, lol).

Making Sure We Have It

In order to send off $8000 four times this tax year, we make sure to religiously fund an account just for our taxes.  We have a blog income account that receives all of our withdrawals from Paypal and pays us $4000 automatically every two weeks.  From that $4000, $1250 is automatically moved over every two weeks to our tax account to cover ourselves there too.  That means a minimum of $7500 is being placed in there every 3 months (more if there is a three paycheck month).

The key is that we treat our tax account like it isn’t even our money.  We don’t touch it at all unless we are adding to the total, making withdrawals to send to the IRS, or making a one-time withdrawal after April’s taxes when we take out any extra that we ended up not needing to use for the year (our own personal tax refund, lol).

Covering Extra Money Too

If we ever make way more than we ended up paying ourselves AND our blog income account already has the padding amount we want ($20,000 is our goal right now), then we disburse the extra based on our priorities but take taxes into account first.  For example, if we ever end a month at $21,000 after our last monthly paycheck, then we would send a third of that extra $1000 to our tax account and divide the rest up between our priorities like Roth IRA investments or the new car fund.  That way our tax fund is always healthy enough for us to pay the quarterly amounts without dipping into the emergency fund.

So there you have it, the wonderful world of handling taxes when you are self-employed.  :-)

Do you do something similar (for all of the self-employed readers)?  Or for my non-self employed, aren’t you glad you don’t have to worry about this?  :-D

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11 comments to Estimated Quarterly Taxes Are Around the Corner Again

  • My business income and money is separate and I don’t make any distributions until after tax time each quarter. I keep everything in Quicken Home and Business, so it is easy to see (on a high level) how much tax I’ll owe. I always overpay a little because I don’t figure in things such as the mileage deduction, etc. I have reminders set up in my calendar so I don’t forget too!

  • I have been trying to get a side hustle going and to generate some taxable income but no such luck.

    Can’t wait to have to worry about taxes.

  • I have a similar strategy for handling my taxes as a self-employed writer. Every paycheck that comes in gets split up into four categories: 35% goes into a taxes savings account (through Capital One 360, formerly ING Direct), 20% goes towards my retirement, 3% goes towards my son’s 529, and the remaining 42% goes into my “kitty” for bills and spending/etc.

    I don’t touch the taxes savings account until taxes are due, and anything left over at the end of the year I consider my “tax refund.”

    This system works really well for me, even though I’ve had people express surprise at how much finagling I need to do with each paycheck. But I really like the finagling, and I even enjoy figuring out the percentages in my head (although I always do the math on calculator, as well).

  • I admire your precision! That takes real planning. I’m not entirely self-employed, but will most likely move in that direction soon.

  • Although I do not have quarterly taxes to pay, I set up monthly savings for the annual payments such as property taxes, insurance premiums etc.

  • Because we live off our regular incomes and my husband brings in freelance on the side, we treat his freelance money as long term savings and taxes. For us that means that we don’t touch any of that money until the end of the year, after taxes are paid and then we have some sizeable savings left over to allocate towards our goals (currently we’re saving for a house). The tax money has to be untouchable, otherwise it makes life messy.

  • @Lance, yeah, setting a reminder is smart!

    @Jane, what are you trying to get into? Ghost writing and staff writing seem to be the easiest niche I could find for $15-$25 a post.

    @Emily, I love the finagling too!

    @Mike, good luck! Make sure to have some padding set aside before making the leap.

    @krantcents, me too. :-)

    @Sheryl, nice! Sounds like you have a system that works great for you!

  • What a great system! Congrats on your discipline, Crystal – not enough people have that when it comes to tax payments, and they get in trouble pretty fast.

    Anything that comes in the door I take 10% and put it out of site and mind before anything else is split up and paid out. I can tell after spending a few hours monthly updating my business books what I need to set aside for the gubmint :-)

    Once that is done, then the bills get paid.

  • I’m not self employed, but my partner used to be. He estimated his taxes, divided them by 12 and put away that number each month. He wouldn’t touch the account. It worked well for him but we were always sad to see the money go!

  • That IS very precise! I know of people who use the same tactic that Daisy mentioned — they estimate taxes, divide by 12, and put that amount aside. It’s a little imprecise because the quarterly payments aren’t due at evenly-spaced intervals, but its good enough. That said, I also know people who just keep a “cushion” in their account that’s at least the next estimated quarterly tax payment, and they don’t let their balance drop below that amount.

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