How to categorize money reserved for quarterly tax payments?

wmuench

Hi everyone,
I'm relatively new to Wave, and to being an entrepreneur in general. I have Wave connected to my business bank account, and I'm trying to figure out how to categorize the money in Wave that I have reserved for quarterly tax payments. So for example, if I receive a payment for $1000 for services rendered, as an single member LLC, I'm setting 35% of that aside for estimated tax payments. To keep it separate in my bank account, I'm transferring 35% to my savings and keeping the remainder in my checking.

How can I categorize the 35% in savings to reflect that it is reserved for future tax payments?

Thanks,
Bill

JamieD

@wmuench Hey Bill! In this situation, it sounds like you will want to create a holding account to allocate those specific funds (it could, technically be a money in transit account or a 'short term asset' account). From there, you will simply just categorize those particular transactions under that, for example, short term asset account. You will want to label this account with something along the lines of 'future tax payment' to easily track this as well.

Mikeg

@wmuench,
If you have a separate account then you would create a cash account under your chart of accounts - Tax Savings. Then record transfers between your checking and savings as you would any other transfer. The category is "transfer to/from" as the transaction is neither income nor expense, merely a movement from account to another.

wmuench

Thanks for the advice, that makes sense! I'll try it out.

All the best,
Bill

thee_demps

Hi, just came across this because I had the same question. However I am confused by the methods described a bit.. I also found a "Taxes Payable" category and the ability to split the deposit, which makes more sense to me than what you've described. But I seemingly can't get back to find my "taxes payable" account to view it. I also don't have my bank account connected, for what it's worth. I am keeping this separate. But I don't think it should matter, should it?

Thanks

Mikeg

Are you a LLC or S Corp?

thee_demps

@Mikeg I'm a Sole Proprietor... thanks

Mikeg

@thee_demps,
Any payment of income taxes are an owners draw. Income taxes are not a deduction for sole proprietors. Your state taxes would go on Schedule A of 1040 if you are able to itemize. Federal taxes are not a deduction for any type of entity.

thee_demps

@Mikeg I'm not looking to deduct my taxes, I just want to account for taking money out of each invoice in order to keep track of quarterly income tax payments.

Mikeg

@thee_demps,
If you are trying to segregate to save for taxes, then I would set up a separate savings account with your bank and transfer money there. You would need to devise a system to determine the amount to transfer. The accounting would be in the physical transfer of the funds from one cash account to another. I would not try and automate a system where for every invoice, X dollars are posted to a payable account. That is because the entry needs another side such as tax expense. Which would not be appropriate. If you tried using taxes payable - the journal entry is debit to tax expense and credit to taxes payable.

Faith

I have a slightly different scenario, I am already making estimated tax payments for Fed and state. What is the best way to categorize these transactions in Wave?

Mikeg

@Faith,
If you are a sole proprietor, LLC, or an S-Corp, the tax payments are owner draws/distributions.

DflyAerial

I have a separate savings account that I linked to my checking account, for a dual purpose of setting aside estimated future tax payments, as well as other savings for purchases, etc. Is there a clean way to record the transfers to my savings account for estimated taxes, within that account in Wave, or am I better off using that savings account solely for taxes?

adamduro

Here is what I do. I have a savings account (in my case its a high interest baring account that unfortunately does not link to Wave, so I just have it setup as a Cash account in my Chart of Accounts. When I transfer money into it, I manually categorize the transaction as a "Transfer to Bank, Credit, Loan" and select that Cash account I created for the savings account.

Then, I also have a Short Term Liability account created in my Chart of Accounts for "Taxes Payable". Every month I create a new Expense transaction that I label something like "May - Q2 - Tax Liability" and make sure that the Account is the above mentioned "Taxes Payable" account, and the Category is "Retained Earnings / Deficit" (that part is key).

I keep this transaction entry open, and then use the P&L report filtered by the current month to keep track of my profit after expenses. Every so often (especially after I get paid, and settle up any expenses / COGS that were associated with that income, I take that after expense profit * 0.35, and make sure that I update my open Tax Liability transaction with the most up to date number.

It's a little bit of leg work, but once you get the hang of it, it becomes second nature.