However, if you think writing that $30k+ check every three months is bad, try writing a bunch of little $10k checks because you think you’ll go back to normal employment or the money will dry up soon. If you’re fortunate enough to make it through the year fairly consistently, January 15 starts to look pretty scary.

My first year, I did a $10k first quarter payment, because I expected to be unbillable much of the year, then a $15k second quarter payment, because how much longer could this go on, really? $25k third quarter, because I could see that I was going to be in trouble soon and shouldn’t have pushed everything into less liquid investments, and I basically worked October and November (paid around 20 days after invoice) for nothing other than my Q4 payment in January.

This wasn’t strictly necessary, because I could have gotten away with a much lower payment (see the 110% figure above) but I really didn’t want to write an even bigger check on April 15th.

Since then, whenever the quarterly withholding is due, I just write a check for whatever my most recent invoice is. That may be a bit high, but it also seems to cover capital gains and interest income, so there’s less of a surprise when I get my returns back from the accountant.

I didn’t do this last year, and this year’s tax day was a nightmare.

1. I made a whole bunch of money last year, about twice what I was making at a permanent job.

2. I didn’t withhold a single dime in 2005.

3. I had to make up the difference this year. I had to make my taxes back from Jan to Apr of ‘06. It sucked – I’m talking 80 (no exaggeration) – 80 hour weeks for about 3 months.

I finally made up the difference, but not without aging a few years in the process.

Set it aside, you’ll be happier in the long run.

LLC rules appear vary from state to state. I’m based in Austin, Texas. I had to apply for a retail tax permit in order to charge sales tax on income derived from labor towards the creation of a web site. This only applies to my Texas for-profit clients, although the state does request a report of my earnings elsewhere.

I’d recommend looking into your specific state/province laws to see what privileges and restrictions are put on an LLC.

There are two main reasons to consider forming a business entity (LLC, Corporation, etc.): tax benefits and legal protection. These reasons apply in vastly different ways depending on the number of principals, number of employees, nature of the business, location of the business, and so forth.

Hypothetically speaking, if one were to start a business, consulting a lawyer and an accountant ought to be among the first two things on the “to-do” list. Budget for them and plan accordingly.

Also, why sole proprietorship and not LLC? A lot of folks seem to think the LLC is a good idea for a people wanting to start their own design business.

I’ve been successfully self-employed for over 20 years. I pay quarterly taxes. They’re an estimate based on what I earned the year before and I can increase or decrease them each quarter according to my books for the actual quarter. Yes, I give up the money earlier than paying it all at the end (and potentially some interest) but quarterlies take care of at least some of your forced discipline and spread it out throughout the year.

In twenty years of doing it this way the worst that has happened to me is that I mistakenly underestimated and had to pay a bit on April 15th but it wasn’t the whole year’s worth, just a small amount. These days I’m doing much better at money management (and earning) and overpay a bit and get a bit back. Just got the check today in fact.

I have several checking/savings accounts that help me keep my personal finances organized.

I have one that’s just for Household expenses: mortgage, utilities, phone, insurance, medical, etc. Whatever comes in on a regular basis each month.

Another for Gas, Groceries and misc. expenses.

One for Savings.

I pay a little bit in service charges on one or two of the accounts but I save big time in bookkeeping time!

I haven’t bounced a check or balanced my checkbook in years, yet I know to the penny what’s in each account because I do everything online as much as possible.

Works great for me, but drives the wife nuts.

The nice part is I don’t even think of the money in that extra bank account as my own money. I used to mix these funds up in one account and I always hated paying taxes etc out of that one account.

Although I don’t have my own business, I do the same thing to save up for our property taxes twice a year. Anyone owning a home in the California Bay Area knows my pain. My average yield these days is 4.26%, which I believe is much better than what you can get your average walk-in bank to offer you.

Most banks here offer existing customers special Internet-only savings accounts that earn high(-er) interest, which is perfect for this sort of thing.