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Tuesday, June 21, 2005

Saving to Pay the Tax Man.


When using QuickBooks basic for Mac, can I transfer money between accounts- such as transferring money form checking to savings? Can I do this as a historical transaction? As a contractor, is there a recommended method, or account, to set aside money for quarterly taxes? I currently am using a savings account. Is there a recommended method for taking money out of payments from invoices and setting it aside for tax purposes?


To transfer money between bank accounts, such as your checking account and a savings or money market account is very strait forward. Go to the "Banking" drop down menu and select "Transfer Funds". From here I think you will be able to fill out the rest.

If you are transferring funds to something other than a bank account, you can use a general journal entry. If you are unfamiliar with accounting principles, then you should probably clear this with your accountant first.

As for the second question, this is more subjective. There are usually two types of quarterly taxes...payroll taxes and corporate income tax.

If you are referring to payroll tax, and you do your payroll in QuickBooks, then you can know exactly what your payroll liability is at any given time. Go to Reports - Employees and Payroll - Payroll Liability Balances, then select the range of dates that you are concerned with. Assuming your payroll is setup and prepared properly, the total is what you should be prepared to pay.

Corporate income tax is much more complicated. That why most people pay a pro to do it for them. As for how much to set aside, much of that depends on the type of business entity you are using. For instance if you are a C corp., you are subject to a federal tax rate and a state tax rate at the corporate level. If you are a subchapter S corporation, then all the profit will flow through and is taxed at your personal federal and state rate. If on the other hand you are a sole proprietor or a partnership you may also need to prepare for self employment taxes.

As you can see there is no quick way to answer your second question. I believe that it would be well worth it to sit down for a few minutes with your accountant to get a better idea of how much you should be stashing to pay your tax bill. If you already have an accountant that prepared your taxes last year, check with them...they may offer mid-year planning as a free service. If not...they should be willing to do this on a fee basis. If you are just starting, most CPA's will give you a free initial consultation with the idea that you will allow them to prepare your taxes for you.

Finally, I applaud your discipline to save money through the year to pay your taxes. I have seen businesses nearly go out of business after some of their best years, because they didn't have the money to pay taxes. I agree with you that I think it is best to keep funds reserved for this purpose in a separate account.

Here are links to a couple of good money market accounts that I use. Their rates are pretty good.

ING Direct (Sole Proprietors Only) 3.00%

ord Money Market Account (Not FDIC Insured) 3.60-3.90%

Capital One 3.15%


QBblogger said...

Thank you for answering my question and the recomendations that you gave. Although, maybe I did not accurately describe my Quickbooks version correctly. I have Quickbooks NUE 2005 for Mac and under the Banking pull down list there does not seem to be any option for Transfering funds. In fact I cannot seem to find this option anywhere in the menus or the user guide. It seems like such a basic function. I am a contract muralist and decorative finisher. When I recieve payment for an invoice I deposit the money into a Business checking account and then I transfer out a percentage of the total into a Business savings account to be set aside for the IRS. I would like to be able to replicate this action onto my Quickbook records but maybe it is not that straitforward.

QBblogger said...

I am not familiar with the inter-workings of that version, so I don't know exactly how to tell you.

Hopefully, your version has a company drop down list and under that there should be a "Make journal entry" option. To transfer money to savings you would DEBIT your savings account and CREDIT your checking account for the amount of the transfer.

The other thing you could do is write a check for the amount of the transfer and put the savings account on the line where you normally put the expense account. Then in the field where the check number normally is just put "transfer" or something similar.

I just don't understand why that version doesn't have a transfer funds screen. Every version I have seen has it. That’s strange, because you're right that is a very basic function.