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
By July, Evan had stopped being surprised when someone paid him.
That felt like progress.
The consulting work had settled into something almost predictable.
Not predictable enough to call stable.
Predictable enough that he had stopped wondering whether every project would be the last one.
There were three active clients now.
One called every few weeks.
One sent work in bursts.
The third had started with a small project and then kept finding new things for Evan to look at.
Evan tracked all of it.
Revenue.
Expenses.
Invoices.
Payments.
Hours.
He had also started moving twenty-five percent of every payment into a separate savings account.
Taxes.
That was the name of the account.
It made him feel responsible.
A client paid $6,400.
Evan moved $1,600.
Another paid $3,200.
He moved $800.
The money accumulated quietly.
He didn’t touch it.
That also made him feel responsible.
One Saturday morning, Daisy walked into the kitchen and found Evan looking at the account on his phone.
“What’s wrong?”
“Nothing.”
She waited.
“I have more money in the tax account than I expected.”
“That sounds good.”
“I think so.”
“How much?”
Evan showed her.
Daisy looked at the number.
“Did you spend it?”
“No.”
“So you still have it.”
“Yes.”
“That seems better than not having it.”
Evan looked at her.
“That’s not really the question.”
“I know.”
She poured coffee.
“What’s the question?”
“I don’t know if it’s enough.”
Daisy leaned against the counter.
“Can Arthur tell you?”
“Probably.”
“Then ask Arthur.”
Evan looked back at the account.
It was an annoyingly simple suggestion.
He emailed Arthur that afternoon.
Arthur called the next day.
“You have the numbers?”
“They’re open.”
“Good. First thing: twenty-five percent is a useful habit. I just don’t want you treating it as the calculation.”
Evan looked at the spreadsheet.
“Is it too low?”
“For your current projection, probably as a cash reserve.”
“How much should I be holding?”
“I need one more assumption. How much consulting work do you expect for the rest of the year?”
Evan gave him a number.
“How confident are you?”
“Maybe sixty percent.”
“Let’s use that.”
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.”
“So I need to move the difference?”
“Probably some of it. But I want to separate two things first.”
Evan waited.
“One is how much cash you should reserve for the tax bill.”
“Okay.”
“The other is whether enough tax is being paid during the year to avoid an underpayment problem.”
“I thought those were the same thing.”
“They’re related. They’re just not the same calculation.”
Evan looked at the balance in the tax account.
“So what have I been missing?”
“You’ve been watching twenty-five percent of your consulting receipts.”
Arthur paused.
“I’m looking at the whole return. Your wages. Daisy’s wages. Withholding. The consulting profit. Everything else that ends up on the return.”
Evan leaned back.
“That makes more sense.”
“It usually does once we stop treating the business like it has its own personal tax bill.”
Evan looked at the spreadsheet again.
“Do I need to start making quarterly payments?”
“Not necessarily.”
“Why not?”
“You already have W-2 wages. For you, increasing federal withholding may be simpler than sending separate estimated payments.”
“From my regular paycheck?”
“Yes. Federal withholding counts toward the tax paid on your overall return. It isn’t limited to the tax generated by your salary.”
Evan wrote that down.
“That seems easier.”
“For you, I think it is.”
“And California?”
“Separate calculation. I’ll send you the state number and what I recommend.”
After the call, Evan stayed at the table.
The tax account was still there.
The same balance.
Nothing had happened to the money.
But it looked smaller now.
Daisy walked past and stopped.
“Well?”
“Twenty-five percent isn’t the number.”
“What is?”
“It depends.”
Daisy smiled.
“That sounds more like taxes.”
Evan turned the laptop toward her.
“Arthur gave me a projection.”
She looked at the number.
“That’s more.”
“Yeah.”
“Can we cover it?”
Evan looked at their accounts.
“Yes.”
Daisy nodded.
“Okay.”
Evan looked at her.
“That’s it?”
“What else?”
“I thought you’d be more concerned.”
“Did you spend it?”
Evan smiled.
“No.”
“Then we have somewhere to start.”
She went back toward the living room.
Evan looked at the spreadsheet again.
For months, twenty-five percent had felt like a rule.
Now it looked more like a placeholder.
He changed the label on the row.
Tax reserve — 25%
became:
Tax reserve — update with projection
Then he opened his payroll portal.
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.