Setting Up Your Consulting Practice

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Topic: Making Quarterly Tax Payments

As an independent consultant in the U.S., you need to pay estimated taxes quarterly to the federal, state, and local governments. A good thumbrule is to set aside half of your firm’s revenue for taxes. If you’ve worked outside your home state, you may owe taxes in that state as well. We recommend independent consultants […]

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Quarterly tax payments. In the virtual team section, we talked about finding a tax accountant to be on your team and I definitely recommend getting that professional. That professional will help you figure out and navigate the filing of quarterly tax payments. When you were a W-2 employee, you were used to having taxes withheld from your monthly pay. And then April 15th rolls around. Usually, we’re not hit too hard. Sometimes, we’ll even get some money back.

But as an independent professional, you have to make quarterly tax payments to the government: state, federal, local. And they better be estimated correctly. Because if you pay too little, the following year you may get a fine. So a good rule of thumb is, especially as you’re starting out, is all of the revenue that you receive from clients, take 50% of it and sock it away in a savings account that you designate solely for tax purposes.

And then when the quarterly tax payment rolls around, you should be pretty safe if you’re putting away 50%. You may get to have a little bit of that come back to you.

In your first year of business, you’ll work with your accountant to figure out what is your actual profit, what your revenues minus your expenses are and file taxes based on that. In future years, you can continue doing those actual tax payments.

Or you can use a safe haven where you’ll take some percentage, I think it’s 110% of your previous year’s tax payments and pay that each quarter and then, even if you’ve underpaid your taxes, you won’t be subject to a fine if you choose that safe haven. So be prepared for quarterly tax payments, put away 50% of all your revenue, so that you don’t get hit at the end of the year.