How to Set Aside Money for Taxes

Co-authored by Darron Kendrick, CPA, MA

Last Updated: December 19, 2020 References

Saving money for taxes can be confusing. If you're self-employed, though, putting aside money is a necessity because you don't have an employer to withhold taxes. When you set aside money, you need to know how much to save and have a place to put it. Then when the quarterly payment rolls around, you need to send in your estimated payments.

Method 1

Method 1 of 3:

Calculating What You Owe

1
Use Form 1040-ES to estimate your taxes if you know this year's salary. This form helps you figure out what you owe in taxes. It is the most accurate way to make this estimation if you know exactly what you're going to make this year. Find the form at https://www.irs.gov/pub/irs-pdf/f1040es.pdf.
- Fill in your expected income, and follow the instructions line-by-line. You'll need a calculator to figure out percentages, but the form walks you through it.
- Have last year's taxes nearby so you know what deductions you normally take.
- The form will give you one large number and have you divide it into 4 payments. One payment is how much you need to save and send each quarter.
2
Have an accountant estimate your taxes for accuracy. If you have an accountant do your taxes each year, they can also help you estimate your quarterly payments. That way, you don't have to figure out what you need to save. Your accountant will tell you.^{[1]
X
Research source}

Advertisement
3
Look at last year's taxes as an easy way to figure out what you owe. This method will give you a general figure for how much you'll owe this year, though not exact. Nonetheless, using this figure will keep you from paying a penalty. Use the final amount you paid to figure out this year's estimated payments.^{[2]
X
Research source}
- The IRS may require you to pay a penalty if you don't pay in enough taxes in your quarterly payments. However, if you pay in 100% (or in some cases 90%) of your prior year estimate, the IRS won't penalize you for underpayment.
4
Take out 25% if your income varies from year to year. If you don't want to do the math, then use 25% as the amount you need to save. It's just an estimate, but it should cover the bulk of the taxes you need to pay. This method works well if you have a variable income since you just take out an even percentage.^{[3]
X
Research source}
- Keep in mind, though, that this number is only an estimate. You may still owe money or be due a refund depending on what you make.
- 30% may be a safer bet if you live in a state that has high income taxes.^{[4]
  X
  Research source}
5
Check your state's website to figure out your tax bracket. If you live in a state that collects state income tax, look that up as well. Usually, the state will have a bracket system where you can look up the percentage of income you owe.
- In some states, you may also owe city and county income taxes.

Method 2

Method 2 of 3:

Setting Aside Money

1
Open a new savings account for your tax money. You may be tempted to just drop the money you save for taxes into your regular savings account. While you can do it that way, you're more likely to spend it if it's easily accessible. Putting it in a separate savings account makes it less tempting.^{[5]
X
Research source}
- Consider opening a new savings account with a separate bank so it takes more time to transfer money back to your regular account. The time difference will act as a deterrent against you taking money out when you shouldn't.
- Try to choose an account with a high interest rate so you make money while you're saving.
2
Take out money when your checks come in. When you get a check, automatically put aside the percentage you decided on above. Take it out before you do anything else, so you don't accidentally spend it on something else.
- For instance, say you get a check for $1,000 USD. If you determined your percentage to set aside is 25%, you'd put $250 USD in your special savings account.
- If you figured out what you owe quarterly instead of a percentage, estimate how much you'll need to take out of each check to make that payment.
- For instance, if you normally make $15,000 USD over 4 months and your estimated payment needs to be $4,000 USD, then make sure you're saving $1,000 USD per month.
3
Leave the money alone until you want to make a payment. It can be tempting to spend the money you're setting aside. However, do not think of it as part of your paycheck. That's why you take it out immediately. This money is tax money, and you don't want to be short when it comes time to pay.^{[6]
X
Research source}

Method 3

Method 3 of 3:

Sending in Payments

1
Send in your estimated tax payment 4 times a year. The due dates for estimated taxes are 4 times a year, mid-April, mid-June, mid-Sept, and mid-January. Check the current year schedule to find the exact dates.^{[7]
X
Trustworthy Source
Internal Revenue Service
U.S. government agency in charge of managing the Federal Tax Code
Go to source}
2
Pay online at https://www.irs.gov/payments. The easiest way to make a payment is through the IRS website. Pay using your bank account for free or with a credit or debit card for an extra fee.^{[8]
X
Trustworthy Source
Internal Revenue Service
U.S. government agency in charge of managing the Federal Tax Code
Go to source}
- Choose between 3 websites to make a payment by credit or debit card. Each site has different fees for both types of cards.^{[9]
  X
  Trustworthy Source
  Internal Revenue Service
  U.S. government agency in charge of managing the Federal Tax Code
  Go to source}
- You can also use the phone numbers to pay phone on this page: https://www.irs.gov/payments/pay-taxes-by-credit-or-debit-card.
3
Use the Estimated Tax Payment Voucher to pay by mail. This voucher is included in the 1040-ES form. Tear off the section for each payment, and place the amount you're paying at the top. Fill in your name, Social Security number, address, and spouse's information.^{[10]
X
Trustworthy Source
Internal Revenue Service
U.S. government agency in charge of managing the Federal Tax Code
Go to source}
- Include a check or money order with the amount you owe.
- Mail the voucher to the address listed on this page: https://www.irs.gov/filing/where-to-file-addresses-for-taxpayers-and-tax-professionals-filing-form-1040-es.
4
Pay when you file your taxes with a penalty. You can wait to pay all your taxes when you file them in the following year. However, if you owe more than $1,000 USD, the IRS will likely charge you a penalty that will be added on to your tax bill. You can pay your tax bill using the same methods as above.^{[11]
X
Trustworthy Source
Internal Revenue Service
U.S. government agency in charge of managing the Federal Tax Code
Go to source}