Money
Tax reserve
Money set aside as it is earned to cover a tax bill that is not yet due.
Nothing is withheld from what a client pays you, so the money that arrives is larger than the money that is yours. A reserve is the ordinary answer: a separate account, funded by a share of each deposit.
The share depends on your actual situation rather than a rule of thumb. Wages from a job, a spouse’s withholding, deductions and the state you live in all move it.
The reserve is a cash-flow practice, not a tax rule. The IRS does not require one and does not care where the money sits; you care, in April.
In Contha
Contha holds what you owe so far against what the account you named actually holds, and names the share of each deposit to set aside.
Related
Terms that come up beside this one
Quarterly estimated tax
Tax paid in four instalments during the year by people whose income is not subject to withholding.
Safe harbor
A payment level that protects you from an underpayment penalty even if you end up owing more.
Safe to draw
Business cash that is genuinely yours to move to personal, after tax owed and known commitments.