Managing Tax Reserve Accounts for Quarterly Estimated Taxes

Quarterly estimated tax payments are one of the least enjoyable parts of entrepreneurship. Making sure that they don’t cause a cash crunch is one of the keys to reducing the pain they cause. As a quick refresher on the rules around who must pay quarterly estimated taxes and when you can elect not to, the IRS established two criteria. If met, these will protect taxpayers from being penalized, even if they slightly underpay their taxes throughout the year.

1. You owe less than $1,000 in tax after subtracting withholdings and credits. If your tax liability after all deductions and credits is less than this amount, you are exempt from making estimated tax payments.
2. You're considered within the safe harbor if you expect your current year withholding and refundable credits to be equal to the smaller of one of the below:
   1. 100% of your tax liability for the previous year. However, if adjusted gross income for the year exceeds $150,000, you'll need to pay 110% of the previous year's tax liability.
   2. 90% of your actual tax liability for the current year. This means if your total tax payments (including withholding, estimated tax payments, etc.) for the year reach 90% of your actual tax bill, you won't face penalties.

Quarterly estimated tax payments are made in four installments throughout the year. The due dates for these payments are usually around the 15th of April, June, September, and the following January. In 2023, the due dates are April 18th, June 15th, September 15th, and January 16th, 2024.

If you do not meet any of the above exemptions and must make the quarterly payments, let’s outline how you can properly forecast and reserve for them. This can be as simple as creating a spreadsheet to map out known inflows and outflows sequentially throughout the year. Here are the simple steps:

1. Column A should list each month of the year.
2. Column B should be known or forecasted inflows.
3. Column C should be known or forecasted outflows.
4. Column D should be month-end cash available.
5. Put your starting capital amount below the header in cell D2.
6. Your formula should be “Month-end capital” + “Known or forecasted inflows” – “Known or forecasted outflows” to give you a running total of how your cash fluctuates throughout the year.

Now you can get a lot more granular and build in multiple rows for each individual capital event to allow you to play with the data as you move through the year. The point is, that you are taking all your known personal capital events like living expenses, debt service, major capital needs, salary, and owner distributions and integrating your tax expenses. You can now decide how much you need to set aside for tax payments and where to place that capital. I typically recommend creating a separate tax reserve account where you can set the appropriate inflows aside for estimated tax payments. The separation of personal capital and tax capital helps ensure you don’t end up short.

This process is ongoing and should be updated based on changes in your life and business and the associated cash movement and needs. Like all planning, it provides information so that you can make better decisions and not end up scrambling to make tax payments.

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DISCLOSURE: Jarrod Musick is an officer of Destiny Capital and Entrepreneur Aligned, a DBA of Destiny Capital. This article is for informational purposes only and should not be relied upon as a basis for your investment, business, or personal financial decisions. We recommend consulting with your wealth advisor, CPA/tax advisor and/or attorney, as applicable to your situation, prior to implementing any new tax, legal, or investment strategy.

ABOUT JARROD

Jarrod was born into financial planning and solving financial problems. With his financial advisor father Steve telling stories about finance around the dinner table from an early age, the idea that everyone has a different financial situation was always there. After an early professional career spent in nonprofit and government, Jarrod came back to his roots helping people plan and invest in 2011. Since then, he has worked with individual clients, led internal teams and ultimately became partner and the CEO of Destiny Capital in 2017. With a passion for helping entrepreneurs change the world, Jarrod ultimately oversaw the creation of Entrepreneur Aligned in 2020. With both Destiny Capital and Entrepreneur Aligned, Jarrod leads teams that help people live lives of abundance where money is simply a tool to let everyone be a positive force for the world around them. When he isn’t working with the talented teams for EA and DC you can find him chasing his twins, wily trout or a podium spot at an OCR race.