As a freelancer, taxes are complicated, but a high-yield savings account makes them easier - and earns me money
- I'm self-employed, so I pay my taxes quarterly. To ensure I have enough money, I set aside 30-40% of my income in a high-yield savings account.
- I use CIT Bank, where I earn 1.80% on my savings.
- It makes sense to keep my money in an account where it's earning 20 times more than it would in a traditional bank savings account.
- Open an account with CIT Bank today and start earning 1.80% interest »
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.
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?
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