How Much Should You Set Aside for Taxes as a Self-Employed Business Owner?
- Aaron Engleman, Two Teachers' Tax Service
- 1 day ago
- 2 min read
One of the most common (and costly) mistakes new business owners make is not setting aside enough for taxes.
Unlike a traditional job, nothing is automatically withheld from your income. That means it’s up to you to plan ahead—or risk a stressful (and expensive) surprise at tax time.
This guide will help you estimate what you should be saving based on your income.
The Simple Rule of Thumb
A good starting point for most self-employed individuals:
Set aside 25% to 35% of your net income for taxes
Where you fall in that range depends on:
Your total income
Your filing status
Your state
Your deductions
Step 1: Know Your Net Income (Not Revenue)
Taxes are based on profit, not total sales.
Example:
Revenue: $80,000
Expenses: $30,000
Net Income: $50,000
You should only be setting aside a percentage of the $50,000, not the full $80,000.
Step 2: Understand the Two Main Taxes
As a self-employed person, you’re typically dealing with:
1. Self-Employment Tax (15.3%)
Covers Social Security and Medicare
Applies to ~92.35% of your net income
2. Federal Income Tax
Based on tax brackets
Rates typically range from 10% to 24%+ for many small business owners
You may also owe state income tax, depending on where you live.
Step 3: A Practical Estimation Method
Here’s a quick way to estimate:
If your net income is:
These ranges account for both self-employment tax and income tax.
Step 4: Example Calculation
Let’s say:
Net Income: $60,000
Recommended savings rate: 25%–30%
25% = $15,000
30% = $18,000
A safe approach would be to set aside about $1,250–$1,500 per month.
Step 5: Adjust for Your Situation
You may need to save more or less depending on:
Save MORE if you:
Have few deductions
Are in a higher tax bracket
Live in a high-tax state
Save LESS if you:
Have significant business deductions
Qualify for credits
Have other income with withholding
A Smarter System: Percentage-Based Saving
Instead of guessing, build a habit:
Open a separate savings account
Every time you get paid, transfer 25%–35% immediately
This keeps your tax money from being accidentally spent.
Don’t Forget Quarterly Taxes
The Internal Revenue Service requires most self-employed individuals to make quarterly estimated payments.
Typical due dates:
Paying throughout the year helps you:
Avoid penalties
Manage cash flow
Stay financially organized
What Happens If You Don’t Save Enough?
If you under-save, you may face:
A large tax bill in April
Penalties for underpayment
Interest on unpaid taxes
This can create a cycle where you're always catching up.
Final Thoughts
Estimating taxes doesn’t have to be perfect—it just needs to be intentional.
If you remember one thing: Always set aside a percentage of your profit, not what’s left over.
Starting with 25%–35% puts you in a strong position, and you can refine your estimate as you better understand your numbers.
Questions? Call, text or email me for more information.
Aaron Engleman, Enrolled Agent
Two Teachers’ Tax Service
269-449-8277
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