A few months ago, I quit my 9-5 to take my business, Her First $100K, full time. I had spent the previous three years building my business to the point where I felt confident enough to become a full-time entrepreneur.
It has been, by far, the riskiest move I've ever made - and it also means I need to keep my ducks in a row, especially when it comes to covering my financial obligations (read: taxes.)
To ensure that I have enough to cover my taxes and make sure my money is working for me, I set aside a portion of my tax money in a high-yield savings account before "paying myself" an income. If you're an entrepreneur or have a side hustle, it may be worth it to do the same.
I keep my money in a high-yield savings account from CIT Bank
If you know me at all, you know I talk incessantly about high-yield savings accounts. Your typical savings account earns you just 0.09% at your local bank - literal pennies. A high-yield savings account, on the other hand, can earn you 20 times more.
The longer you wait to open up a high-yield savings account, the more money you lose. If your money is going to sit there - might as well have it work harder for you.
I keep my money at CIT Bank. It currently offers 1.80% interest on its Savings Builder account. In order to receive that rate, you need to have either a $25,000 balance or make monthly deposits of at least $100 (the more doable option). In addition, CIT is FDIC-insured, which means I know that my money is guaranteed up to $250,000.
Open your own Savings Builder account today and start earning more on your money »
As an entrepreneur, I am responsible for withholding my own taxes
Using a high-yield savings account works out great for me as an entrepreneur because, unlike W2 employees, I am responsible for paying my own taxes manually. Because of my income threshold, I pay forecasted taxes quarterly throughout the year.
The IRS self-employment tax applies to all individuals who gross $400 or more from earnings outside a W2 employer. The 2020 self-employed tax rate is 15.3% on the first $137,700 worth of net income followed by an additional 2.9% on earnings greater than that.
I automate 30-40% of my gross earnings into my high-yield savings account
I know I just said the self-employed tax rate is 15.3%, but when you're self-employed, you're responsible for both the employee and employer portions of Social Security and Medicare. Those are shared between traditional W2 employees and their employers, but because I'm responsible for both, I set aside extra money to cover those amounts at tax time.
To make sure I'm on track to pay my quarterly taxes, I simply put aside 30-40% of my pay into my tax-designated savings account. That way, I have enough money to pay my quarterly estimated taxes - and my money is earning interest throughout the year.
Staying ahead of the game by automating a portion of my earnings to a high-yield savings account means I don't have to worry about quarterly or annual taxes sneaking up on me - why not make some interest off it at the same time?
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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