Best way to track tax liability?

[danielz]

Hi, I receive some income for work as an independent contractor. None of this income is withheld by my employer for taxes.

I receive 100% of the income into my bank account and this registers a transaction in Tiller.

What is the best method for tracking tax liability in Tiller?

Should I just split the income transaction into 2 separate transactions?
#1. Contractor Paycheck (Type: Income)
#2. Tax (Type: Liability)

When I ultimately pay my outstanding taxes, would I classify the tax payment transaction as a negative liability?

[heather]

Hi @danielz,

If you file single and you don’t have W2 income sources or other complexities with your tax situation you could consider using the Estimated Quarterly Tax sheet to help you track how much you need to set aside.

Docs: Estimated Quarterly Tax Sheet

What is the Estimated Quarterly Tax sheet? The Estimated Quarterly Tax sheet helps freelancers, consultants, and other small businesses estimate and forecast their quarterly taxes in real time. It’s a great tool for those who are required to pay taxes quarterly and do not have a job where taxes are automatically withheld from their paycheck. The tool is not recommended for those with complex tax situations, those who may be subject to Alternative Minimum Tax, multi-member LLCs, partnerships,…

If that won’t work because you have a more complex tax situation that the tool is built for I’d recommend actually transferring money to a separate savings account if you have one to set money aside for tax payments. That way you know you’ll have the money when it’s due vs just leaving it in your business or personal checking account where it could end up being spent.

There isn’t a “liability” type for categories, only income, expense, and transfer.

I’d consider the payment to the IRS to be an expense (but not one you can write off against your business to reduce your tax liability) and any transactions associated with savings/transferring money as a “transfer”

Set aside money in savings account from checking account = transfer
Move money back to checking when tax payment is due so it’s available to pay via ACH transfer = transfer
Money going to IRS = expense

Hopefully that makes sense.

[danielz]

Thanks Heather.

I file jointly with a combination of W2 & contractor income, so the Estimated Quarterly Tax sheet is off the table.

It sounds like I may want to open up a separate savings account to hold on to unpaid taxes.

[heather]

If not, I would recommend just paying close attention to the balance of the account that you plan to pay the tax out of to ensure it never dips below X amount with X being the estimated amount you need to pay in taxes.

Here’s another thread on estimated tax liability categorization you want to review or chime in on

How to categorize Estimated Quarterly Tax Payments?

Hi @hbwilliams22, Here’s some thoughts on your question. I’m not a tax accountant, but I’ve had the same issue. The simple way would be to create 1 Estimated Tax Payment expense category. Or you could create two, one for Federal Tax Payments one for State Tax Payments. Since these expenses require cost outlays like food and gas, you probably want to budget for them and include them in your reports. But, these estimated tax payments are not like ordinary expenses in some ways. You owe a certai…

[jono]

Hi @danielz,
I would recommend using two transactions.

The contractor paycheck would be Income type, which would probably be an increase to your checking account. This transaction would happen automatically via Tiller’s feed.

You would also make a manual transaction to add to a Tax Liability Account. This transaction would not be the same amount as the paycheck, since it is unlikely that the whole paycheck would be paid to taxes. I hope not!

When you pay your taxes, you would add a manual transaction to reduce the Tax Liability account, since the tax is no longer due.

This method would give you a quick way to see how much Contractor income you have and an estimate on how much tax is due from that income.

Perhaps the accountant experts on these boards can provide more details.

Jon