This question is in regards to proper accounting of money that is set aside regularly for estimated quarterly tax payments. First, a little background:
- business entity is structured as a sole proprietorship: a tutoring business only providing services
- Currently using QBO plus as a trial (probably going to downgrade to essentials once the trial is over)
- Working in the Accrual basis of accounting
- I have worked out with my CPA the best estimate of quarterly tax payments.
Each week, I take 10% of my current accumulated revenue and transfer it from my business checking into a savings account. Both accounts are linked to QBO with bank feeds, and both have an account in the COA.
1. The balance sheet: should I actually have an asset account for this estimated tax savings? Should I also/instead have an equity account for this tax savings? What should the be the amount recorded in that equity account, the amount saved up currently or the amount I am planning to pay the IRS each quarter?
2. When the bank feed records that the transfer has been completed, I have been recording as transfer in one of the bank registers, and then matching it in the other bank register. Is this a valid action?
3. The actual transaction: This is where I am really struggling. I've heard quite a few different ways to go about this. Should I have a special expense account for estimated tax withholding, where I debit each transfer amount as an expense (expense is debited, estimated tax equity account is credited?)? Should I instead just complete a two part journal entry (debit tax savings asset account, credit business checking asset account; then debit owner's equity, credit estimated tax equity), then match the transfer from the bank feed to that journal entry?
Ugh, I want to understand how to do this properly, it is just a challenge for me to wrap my head around right now. Any help would be greatly appreciated!
