For freelancers, independent contractors, and self-employed individuals, taxes aren’t automatically deducted from your income like they are for traditional employees. Instead, you’re responsible for setting aside money and making quarterly estimated tax payments to the IRS. Waiting until tax season can result in a large tax bill—and possibly penalties.
A smart strategy to stay ahead is to use a dedicated account to save for taxes. Below, we’ll walk you through the step-by-step process of using your savings account to pay your taxes quarterly, along with tips to reduce your overall tax bill.
Step 1: Open a Dedicated Savings Account for Taxes
Keeping your tax savings in a separate account helps you avoid spending the money and makes it easier to track your progress. Here’s how to set it up properly:
Look for a high-yield savings account (HYSA) so your tax savings can earn some interest. While you won’t make a fortune, every little bit helps. You should also ensure that the account has no fees and easy online access so you can transfer funds and make tax payments when needed.
Consider using a separate business savings account if you own a business, to help with bookkeeping and tax reporting.
A dedicated account is a good idea for several reasons:
- It keeps your tax money separate from everyday expenses.
- It prevents the temptation to spend funds earmarked for taxes.
- It simplifies tracking how much you’ve saved for taxes versus other financial goals.
Once the account is open, label it clearly in your online banking (e.g., “Tax Savings”) to remind yourself of its purpose.
Step 2: Estimate Your Quarterly Tax Payments
Since you don’t have an employer withholding taxes for you, it’s crucial to estimate how much you owe and set aside funds accordingly.
Here are a few ways to estimate your taxes:
- Use IRS Form 1040-ES to calculate your estimated tax liability for the year.
- A common rule of thumb is to save 25–30% of your net income (after business expenses) for federal and state taxes.
- If you had a tax bill last year, you can base your quarterly payments on that amount to avoid penalties.
The IRS requires estimated tax payments four times a year:
- April 15 (for income earned January–March)
- June 15 (for income earned April–May)
- September 15 (for income earned June–August)
- January 15 (for income earned September–December)
Some states also require quarterly estimated payments. Check with your state’s tax agency to see if you owe additional payments.
If your income fluctuates, revisit your tax estimates every quarter and adjust your savings accordingly. If you earn more than expected, set aside a higher percentage of your income to avoid underpayment penalties.
Step 3: Automate Your Tax Savings
Setting aside money manually can be difficult, especially if you’re juggling multiple expenses. Automating your savings helps ensure you’re always prepared for tax time.
Set up automatic transfers
Schedule a weekly or biweekly automatic transfer from your main account to your tax savings account. If you receive irregular income, transfer a percentage, such as 25-30%, from every payment you receive.
Use percentage-based saving
Each time you receive payment from a client, immediately transfer a percentage to your tax savings account before spending anything else. Some banks offer tools that automatically move a percentage of each deposit to a savings account.
Leverage accounting software
Use apps like QuickBooks Self-Employed, Wave, or FreshBooks to estimate taxes and automate savings. Many of these tools allow you to track income, expenses, and estimated taxes in real time.
Use a separate business bank account (if applicable)
If you’re self-employed or run a small business, pay yourself a salary and automatically move a portion to your tax savings account.
Step 4: Pay Your Taxes Quarterly
Now that you’ve saved up for taxes, it’s time to actually make your payments to the IRS. Here’s how to make those quarterly payments.
- Pay online: Use IRS Direct Pay to pay directly from your bank account. You can also use the Electronic Federal Tax Payment System (EFTPS) to schedule payments in advance.
- Pay by mail (if necessary): If you prefer, you can mail a check or money order along with IRS Form 1040-ES. Ensure your payment is postmarked by the due date to avoid penalties.
- Set up reminders: Mark tax deadlines on your calendar or use reminders on your phone to avoid late payments. Late or insufficient payments can result in IRS penalties, so always pay on time.
- Keep records of payments: Save confirmation emails or receipts for each tax payment. If using accounting software, link your payments to tax categories for easy tracking.
Making timely quarterly payments ensures you avoid penalties and prevent a large lump-sum tax bill at year-end.
Other Ways to Reduce Your Tax Bill
While saving for taxes is crucial, finding ways to lower your tax liability is just as important. Here are some key strategies:
Maximize tax deductions
Deductions reduce your taxable income, lowering the amount of tax you owe. Common deductions include:
- Home office deduction (if you work from home)
- Mileage and vehicle expenses (for business use)
- Health insurance premiums (if self-employed)
- Business expenses (software, equipment, advertising, etc.)
Contribute to retirement accounts
Contributions to tax-advantaged retirement accounts can reduce your taxable income:
- Traditional IRA (tax-deductible contributions)
- SEP IRA or Solo 401(k) (for self-employed individuals)
Take advantage of tax credits
Tax credits directly reduce the amount of tax you owe. Some valuable ones include:
- Self-Employed Health Insurance Credit
- Earned Income Tax Credit (EITC)
- Child and Dependent Care Credit
- Education Tax Credits (for tuition and fees)
Track and write off business expenses
Keep receipts and records of any business-related purchases to ensure you claim all possible deductions.
Work with a tax professional
A CPA or tax advisor can help you maximize deductions, ensure you comply with tax laws, and avoid penalties.
Let AZCCU Help You Manage Your Financial Future
By using a dedicated savings account, automating your tax savings, and making quarterly payments, you can stay ahead of tax season stress. Pair this with smart tax planning, and you’ll not only be prepared for tax time but also reduce your overall tax bill.
Arizona Central Credit Union is here to help you with your banking and loan needs. We even have calculators that can help you understand your debt, your budget, and what you need to do for your retirement. If you have any questions, contact us online or call (866) 264-6421.
Information in this article is not meant to be taken as tax advice. A tax professional should be contacted for specific situational advice.
