How to Manage Business Estimated Taxes with YNAB

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(Clarify any tax moves you make with your trusted tax advisor.)

As more business owners are using YNAB to manage their cash flow, I think it’s important to specifically address how to handle one of the largest infrequent expenses you have: taxes. It can literally bankrupt you if you don’t handle your taxes appropriately. Let’s not have that happen.

Earlier, I outlined all of YNAB’s categories, as they’re set up to run the YNAB business. One in particular is called Quarterlies, and it sits in the “non-YNAB” master category. The reason it’s under “non-YNAB” is because the business doesn’t pay the taxes; I, Jesse the individual, do. So a tax payment outflow is not an expense, it’s a distribution to me, that goes directly to the Tax Man.

Jesse, What are You Talking About? What are Estimated Taxes?

When you earn a paycheck, your taxes are withheld and sent to the Tax Man automatically. You file your return and end up getting a refund, or owing some more, based on how your tax liability calculates.

Some of you earn money in lieu of, or in addition to, a paycheck. Your taxes on that income aren’t withheld automatically. You need to do the withholding yourself, estimating what you’ll owe, and paying the Tax Man once each quarter.

I’ll call these payments quarterlies, or estimated taxes, throughout this article.

How Do You Estimate Your Taxes?

This is a question for your tax advisor. They’ll basically give you a set percentage of your profits to withhold. You could look back at prior tax returns to get an idea, but if your business income has changed significantly from one year to the next, your estimate may be off. A quick rule of thumb: if the business is doing better, you’ll want to withhold a higher percentage. Again though, this percentage can’t be from the hip (been there, done that, no thanks on doing it again).

For our example, let’s say our agreed upon percentage is 25 percent. (I’m purposely avoiding going complex with the percentage calculation, because every single reader of this post will have a different, very specific scenario.)

Your MONTHLY Quarterlies Workflow in YNAB

Armed with a percentage of profits to be withheld for taxes, it’d look something like this.

Let’s say you just wrapped up your books for the month, have reconciled your accounts, and want to see how profits shook out. You’d click on Reports -> Income v. Expense, find the month column, and look at the “Net Income” number at the very bottom. You see that profits for the month were $8,000.

You’d pop over to the Budget, and in your Quarterlies/Estimated Payments budgeted cell, you’d click in there so the cursor is flashing, and type:

8000 * .25 [Enter]

That would populate your Quarterlies budgeted cell with $2,000 (25% * $8,000 in profits).

You’d see the Quarterlies category balance increase by the $2,000 you just budgeted, and your Available to budget would decrease by the $2,000 budgeted.

Your Quarterly Quarterlies Workflow in YNAB

In the US, your quarterly payments are due April 15, June 15, September 15, and January 15 (of the following year).

Let’s say it’s September 1st, and we just finished doing the books for August. We had profits of $8,000 so we budgeted $2,000 into the Quarterlies category for September. In fact, we’ve done that for three months now:

Month Profits Percentage Budgeted to Quarterlies Quarterlies Balance
June 10,000 25% 2,500 2,500
July 6,000 25% 1,500 4,000
August 8,000 25% 2,000 6,000

So our Quarterlies balance is now $6,000 ($2,500 from June, $1,500 from July, and $2,000 from August).Now we simply cut a check, or use EFTPS.gov if you’re in the US, to pay the $6,000 to the tax man.Because you’re following Rule Two, you don’t feel the big payment. That’s what Rule Two is for. And applying it to your taxes will make your life MUCH less stressful.

Why Not Just Do This Quarterly?

Because you’ll forget that the money is spoken for, and you’ll have budgeted and spent it on something else. You need to make sure you budget for your taxes on a regular basis. Don’t kid yourself, and think that the money will just magically be there. Too many business owners do just that, and then when the tax bill actually comes due, they’re stressed, scrambling, and scared.

Let me know if you guys have any questions on this! I’m happy to answer in the comments.

7 Responses to “How to Manage Business Estimated Taxes with YNAB”

  1. Cynthia Lee Shelton

    Thanks for this article. Taxes are the bane of my existence and I need to get a better handle on them.
    I was planning on 2015 changing my categories and headings so they would be more tax related and not mess up my current reports.
    Now I am thinking I may just have to go ahead and bite the bullet.
    I will have to see if there are any live classes coming up that address making changes and the best way to do it when one is in the middle of a tax year.
    I was not going to do separate accounts for personal and business because I am a small self employed person. This article helped clarify that I may need to change my thinking on this.

  2. CB

    Thanks for sharing, Jesse.

    My process is a slightly different means to the same end. Since I can’t project whether I’ll have higher or lower profits for 2014, I use my 2013 profits as the basis for my 2014 Estimated Tax payments. Those quarterly stubs are filled out in advance for the year.

    So, I have a category for Estimated Tax payments in the amount I’ll be cutting a check for each quarter, and I have another category for saving the surplus when profits are higher than last year’s.

    I’ll take 27% of my month’s profits, then deduct the amount of Estimated Taxes I’m already setting aside and paying based on 2013, and set the difference aside for payment due with my tax return.

    • slimfender

      This is great too. I feel like I do a hybrid of what Jesse is talking about and what CB described. I use my tax bracket percentage, and just set aside that percentage out of each paycheck into a category marked “Estimated Taxes”. Even though my pre-printed quarterly stub may have a lesser amount, I at least have some extra in that category to cover the difference if I did end up making a bit more over the year. Yay YNAB.

  3. Ben

    Thanks so much for this post. One question – does making it non-YNAB exclude it from expenses in the expense report? I found I had to manually exclude it so as not to deduct last quarter’s taxes as this quarter’s expense.

    Also, how do you handle state taxes? I have done something similar for state taxes, but state taxes are a deductible expenses from federal taxes, but not next quarter’s state taxes. Also, I find that if I don’t want to wait until next quarter to take the deduction for this quarter’s state taxes, I need to manually subtract it before calculating federal taxes. Is there a simpler way to do this?

    • jesse

      I let my tax adviser decide what my effective tax rate is, and that’s the rate at which I withhold quarterlies. So I imagine the my tax adviser is taking into account the timing of state tax withholdings.

      To answer your question specifically though, you would handle state tax payments the exact same way. The state of Utah doesn’t require you to withhold throughout the year, so I just set funds aside and pay it when taxes are due in one big, fat, hairy payment.

      And yes, on my Income v. Expense report, I check the box to exclude the non-YNAB category, so I’m not counting distributions as expenses when determining profits.

  4. Cynthia

    Do you have Quarterly as a Master Category or do you use Taxes as a Master Category.?
    What I would like is a Master Category Taxes with a Sub Master Category for the Different Quarterly Taxes

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