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When you run your own business, you need to save up to pay your taxes. What type of savings account should you use for your tax savings? Does it even matter?
Saving up for tax time* is a must. When I lived in the UK, I had to pay all my self-employment taxes by the end of January each year. In Canada, I have to pay them in quarterly installments.
Is one better than the other? I prefer saving for the year and paying in one, purely because of the interest that I gain on that money. However, paying quarterly does help me figure out how much I’m saving each month and means that I pay less at tax time. In fact, there’s a chance that I paid too throughout the year and I get a refund.
Making sure I save for my tax payments is still a must. After all, they’re quarterly, and that means I need to pay a little out of my paycheck each time. I save 30% of my income for taxes. Yes, really!
Have your tax savings easy to access
Is there a right or wrong savings account to use for your tax savings? Well, yes, when it comes to ease of access. You need to be able to grab your money as soon as possible.
Remember that when the taxman says that your money is due, it’s due. You’ll only end up with interest and penalties if you don’t pay it off right away. So, you want to make sure you can spend the money as soon as you get that bill in.
I use a high interest savings account. This is separate from my regular bank account, and I only have two savings accounts connected to this bank: taxes and vacation. I want to make sure that everything I don’t need on a daily basis is away from my general spending. It’s an out of sight, out of mind situation for me.
It’s still a regular bank account, though. I can make the payments to the CRA (Canada’s version of the IRS) directly from it, which is useful for bill payments.
There are some people who will say to put the money into an investment account. This is great as long as that money is accessible right away—I get a month’s notice for the first installment of the year, so I need to be able to access that money within a month. If you can’t get quick access or there is a fee attached to it because you haven’t had the money in there long enough, then you need to rethink that strategy. Is the investment worth it if you spend more money getting the money out?
Look out for high interest savings accounts
I looked around for the best high interest savings accounts for my money. Personally, I use Equitable Bank for my tax savings*. This wasn’t the highest interest at the time, but the highest interest rates were with a banking company that I personally hate. I won’t put my money in them for just 1-2% extra in interest rate.
Shop around where you are. There are sure to be great deals, and you don’t need to stick to your regular bank for this.
Do shop around, and keep shopping around. There is nothing wrong with having a couple of savings accounts. You can always use the older one for other types of savings if you want as you see something better coming along. Do watch out for opening too many accounts, though!
The downsides of using investments for your tax savings
If you are going for an investment account, keep in mind that you can lose the money that you put in. This is money that you need access to immediately.
Don’t get me wrong; I am a big believer in investments. I do have long-term and even mid-term savings within investment accounts that I keep an eye on constantly. I want to make sure my money is growing for me, but my tax fund needs to be in a lower-risk environment. Some people may look down on me for that, but we all need to do what’s right for our own financial situation. If you know that you can’t risk a loss if the stock market goes down, don’t put your tax savings into an investment account. Stick to savings only.
MORE: How much should you save for your taxes?
Where are you considering saving for your taxes? Let me know in the comments below.
