Those of you that are self-employed and therefore responsible for withholding your own taxes, how much of your earnings do you stash? Are there any strategies you use to earn a decent (but safe) return on the money you put aside for taxes through the year? Do you just use a “high interest” (I use that term loosely..) savings account? Has anyone tried to set up something a bit higher yielding such as a CD ladder? Is it more beneficial to pay your taxes when you file in one lump sum or do you use a payment plan in order to allow for more time to earn interest? Are there any other strategies out there for making your money work for you, but still keeping it “safe” while you wait for Uncle Sam to come calling?
Keep in mind the "withholding" you mention for self-employment are actually quarterly estimated taxes. Self-employed individuals pay their taxes each quarter. See Form 1040-ES.
As for strategies on where to keep your funds to pay taxes, that is entirely up to you. Some clients keep it in a savings account, others use their investment brokerage accounts as a cash management account and pay from there. It comes down to your level of liquidity and your comfort level. Ultimately, you need to be comfortable with your strategy.
@Megan Clancy - Talk to your CPA, this should be a service they provide. Typically they will sit down with you and do a tax projection as often as you need, monthly/quarterly annually, etc. This projection will allow you to make your quarterly tax payments for the Federal and State on time. In the mean time, I typically tell my Self Employed individuals to stash away in a savings account (away from their operating account and other spendable cash) their state rate + 15% for Self Employment Tax + XX% Bracket for Income tax that we project out. Hope that helps!
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