The Number Evan Wasn’t Watching
MONEY MEETS TAX · EPISODE 06
Anaheim · Summer 2024
Money & Tax in this episode
Growing consulting income · Tax reserves and cash flow · Withholding and estimated taxes
The payment came in on a Tuesday.
$7,500.
Evan moved $1,875 into savings before he answered the client’s email.
Twenty-five percent.
He had been doing it for months.
Every time a consulting payment arrived, one quarter went into a separate account labeled:
TAX
No calculation.
No decision.
Just a transfer.
Evan liked systems that removed decisions.
The business had been busier than he expected.
Not dramatically. He still had his regular job, and most of the consulting happened before work, after dinner, or on weekends.
But the projects were getting larger.
So were the invoices.
The business account had stopped feeling temporary.
Since buying the house, the extra income had also become easier to assign.
A repair.
Furniture.
Something Daisy wanted to do to the kitchen.
A little more savings after a month that seemed to contain too many people driving vans with company logos.
Evan wasn’t spending the consulting money recklessly.
It just no longer felt surprising when it arrived.
That afternoon, Arthur emailed him.
Send me your consulting income and expenses through June, plus the latest paystubs for both of you.
Evan sent everything that night.
Arthur called the next afternoon.
“You have the numbers?”
“They’re open.”
“How much are you holding back for taxes?”
“Twenty-five percent of every payment.”
“Gross?”
“Yes.”
“Why twenty-five?”
Evan looked at the spreadsheet.
“It seemed conservative.”
“Based on what?”
He paused.
“Nothing specific.”
Arthur was quiet for a second.
“So you picked it.”
“Yes.”
“Okay.”
Evan leaned back.
“Is it too low?”
“For what?”
“For taxes.”
“To cover what you’ll eventually owe?”
“Yes.”
“Probably.”
Evan frowned.
Arthur continued.
“To avoid an underpayment penalty? Different question.”
“I thought we were talking about the same thing.”
“They’re related. They’re not the same.”
Evan looked at the balance in the tax account.
It seemed smaller than it had a minute earlier.
Arthur asked how much consulting work Evan expected for the rest of the year.
Evan gave him a number.
Arthur asked how confident he was.
“Maybe sixty percent.”
“Give me the sixty-percent number.”
Evan did.
Arthur worked through the projection using their wages, withholding, and expected consulting profit.
Then he gave Evan a new number.
Evan wrote it down.
“That’s more than I have in the tax account.”
“I know.”
“How much more do I need to move?”
“Before we do that, I want to separate two things.”
Arthur paused.
“First, I want enough paid in during the year that you’re not creating an underpayment problem.”
“Okay.”
“Then we figure out how much cash you should actually reserve for the tax bill.”
Evan stared at his spreadsheet.
“I’ve been watching the twenty-five percent.”
“I know.”
Arthur paused.
“I’m looking at the whole return.”
That annoyed Evan mostly because it made sense.
He had been treating the consulting business like it had its own tax bill.
Money came into the business.
Twenty-five percent went to taxes.
Problem solved.
Except his tax return had Evan’s salary.
Daisy’s salary.
Their withholding.
Investment income.
The consulting profit.
And then taxes generated by the consulting work itself.
Twenty-five percent of one number did not answer all of that.
“So do I need to start making quarterly payments?”
“Not necessarily.”
Evan stopped writing.
“No?”
“You have W-2 withholding.”
“From my job?”
“Yes.”
“For the consulting income?”
Arthur paused.
“The IRS doesn’t have a separate bucket labeled ‘tax from Evan’s consulting.’”
“So I can just increase withholding from my paycheck?”
“You can.”
“That seems easier.”
“For you, it might be.”
Evan wrote that down.
“And California?”
“Separate calculation.”
“Of course.”
“I’ll send it to you.”
By the time they hung up, Evan had a short list.
Increase federal withholding through payroll.
Set aside more cash.
Handle California separately.
Update the projection later in the year.
None of it was particularly complicated.
He still disliked the list.
That night, Daisy was standing in the kitchen looking at two paint samples on the wall.
Evan opened the business account.
“Arthur says I haven’t been saving enough for taxes.”
Daisy turned around.
“I thought you were putting twenty-five percent away.”
“I was.”
“And that’s not enough?”
“Probably not.”
“How much more?”
“For now, a few thousand.”
She looked at him.
“Oh.”
“Yeah.”
“Did you spend it?”
“No.”
“So you still have it.”
“Yes.”
“That seems better than not having it.”
Evan looked at her.
“I’m aware.”
“I’m trying to help.”
“I know.”
He transferred more money into the tax account.
The operating balance dropped.
Nothing had actually left the bank.
It still felt like something had.
Daisy turned back to the wall.
“Which one?”
“What?”
“The paint.”
Evan looked at the two samples.
“Left.”
“You barely looked.”
“I looked.”
“For half a second.”
“Still left.”
Daisy pulled the other sample off the wall.
“Okay.”
Evan looked back at the business account.
The tax balance was healthier now.
The other balance was less interesting.
A week later, he changed his payroll withholding.
His next paycheck was smaller.
Not dramatically.
Enough that he noticed.
Evan opened the paystub and found the additional federal withholding.
For a second, his first reaction was that something had gone wrong.
Then he remembered.
He closed the paystub.
The next consulting payment arrived on Friday afternoon.
Evan opened the business account.
For months, the next step had been automatic.
Payment.
Twenty-five percent.
Transfer.
This time, he opened Arthur’s email first.
The Tax Behind the Story
Setting aside a fixed percentage of consulting receipts can be a useful cash-management habit, but it is not a tax calculation. Evan’s eventual tax depends on his net business profit, the rest of the household’s income, deductions and credits, and the federal and California tax already paid through withholding or estimated payments.
Net earnings from self-employment can also be subject to self-employment tax in addition to regular income tax. For 2024, the self-employment tax rate was 15.3%, generally applied to 92.35% of net self-employment earnings, with the Social Security portion subject to the applicable wage-base limitation.
There is also an important difference between having enough cash reserved to pay the eventual tax bill and having enough tax paid during the year to avoid an estimated-tax underpayment penalty. For federal purposes, taxpayers generally look to a safe harbor based on 90% of the current-year tax or 100% of the prior-year tax, with the prior-year percentage generally increasing to 110% for higher-income taxpayers.
Because Evan already receives W-2 wages, quarterly estimated payments are not his only option. He can also increase federal income-tax withholding from his paycheck. California has its own estimated-tax rules, which is why Arthur treats the state calculation separately.
The problem with Evan’s twenty-five percent was not that twenty-five percent is always wrong.
It was that he had never calculated what it was supposed to cover.
Want the tax rules behind the story?
Side Income and Estimated Taxes: How Much Should You Set Aside?
A deeper look at self-employment tax, tax reserves, federal safe-harbor rules, estimated payments, W-2 withholding, California estimated taxes, and how to plan for taxes as a side business grows.
Next Episode
The New Laptop
Evan’s laptop still works.
That is the strongest argument against replacing it—and increasingly, the only one.