Make Money Off Your Estimated Tax Payments

So you are a responsible business owner right? You are tucking away money each and every month to make sure you can pay your federal estimated taxes, state estimated taxes and sales tax. However if you are holding that money in your business checking, personal checking or low interest savings account you are passing up free money and should move that money over to a high interest account.

There are many choices however I think the best choice is a Money Market Checking Account, I use GMAC Bank since when I opened my account it had the highest MMA rate I could find.

I recommend you use a MMA account because you get check writing capability. This means you can write your tax checks and send them off rather than have to transfer money to a checking account and then write checks (and lose a few days interest due to the transfer time).

The only problem with a MMA is you are limited to 3 checks and 6 withdraws a month. So once a year in April I have 4 checks to write (2 federal, 2 state) and have to transfer some money out of the account and pay one of the bills with another checking account. The rest of the year there are just two checks every three months (state and federal estimated taxes).

Note: Depending on when your states sales tax is due and your account statement date you may have a fifth check in April and 3 checks the rest of the year. Fortunately I don't have this problem since California's sales tax due date is in the next statement cycle and ends up being the only check I need to write that month.

So how much can you earn?

Example:

You save $950 a month to pay your estimated federal and state taxes and your quarterly sales taxes. Your interest Rate is 4.97% (GMAC's current rate).

Using the numbers you get (950 * .0497)/12 = $3.9345 or a montly earnings of $3.93 for the month. This is of course the only the first month, in month two the interest income will be $7.89 and in the third month $11.85. Yeah it is not much but since its money you need to keep around anyway you might as well earn something on it.

This is of course a simple example if you are interested in a more complicated example here is a Microsoft Excel spreadsheet (screenshot below) that expands on the example and recreates what I do. These are not my actual numbers and were chosen to make the monthly savings and tax payments whole numbers. You can plug your own numbers into column B and get monthly savings rates and earning that match your taxes.



Finally I don't recommend you keep your estimated tax money in your PayPal account.

First you are mingling the money you must have to pay taxes with your regular business money. If you accidentally (or purposefully) use the money to purchase inventory or make some other mistake you may not have enough money to pay your tax obligations.

Second if you are like many eBay sellers you already rely on PayPal heavily for for your business and personal life using the debit card to earn cash back and the money market to pick up a little extra each month. Relying on PayPal to sock away your tax savings is just putting another egg into a already overflowing basket.