How Much Should I Set Aside for Taxes?

The short answer: set aside 30% of your net profit if you live in a state with income tax, 25% if you do not. Net profit means what is left after business expenses, not what lands in your account.

At around $60,000 of net profit, 30% is $18,000. That is almost certainly more than you will owe. That is the point. Over-saving by two or three thousand dollars is a good outcome you get to spend in April. Under-saving by two or three thousand dollars is a payment plan and a penalty.

The rest of this article is how to make that number more accurate, where to put the money, and the specific mistakes that turn a manageable bill into a crisis.

Why 30%, specifically

Three separate taxes hit self-employment income. Most people who get blindsided only knew about one of them.

Self-employment tax is the one that surprises people, and it is the one that does not care about your bracket. It starts at the first dollar of profit above $400. There is no standard deduction shielding it. A W-2 employee at $60,000 pays 7.65% and never sees it, because the employer pays the other half quietly. You pay both halves visibly.

The one piece of good news: half of your self-employment tax is deductible against your income tax, and most self-employed people qualify for the qualified business income deduction, which knocks 20% off qualifying business income before income tax is calculated. Those two together are why 30% is usually a cushion rather than a squeeze.

What $60,000 of net profit actually looks like

Approximate, single filer, no other income, no dependents, standard deduction, no state tax:

That is about 20–22% of net profit in a no-income-tax state. Add a state at 4–5% and you are near 26%. Setting aside 30% leaves you a few thousand dollars ahead, which is exactly where you want to be the first year, when you do not yet know your own numbers.

Treat that table as a shape, not a quote. Your filing status, a spouse's W-2 withholding, health insurance premiums, a retirement contribution and your state can each move it by thousands. Run your real numbers through the IRS withholding estimator or a tax pro before you trust a specific dollar figure.

Pick your percentage in ninety seconds

Find your row. Write the number down somewhere you will see it.

States with no personal income tax as of the 2026 tax year: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Washington taxes some capital gains; New Hampshire finished phasing out its interest and dividends tax. If you are in any other state, assume you owe something and look up your rate, because state rules move.

Gross or net — this is the decision that matters most

Two businesses both collect $120,000 this year.

A consultant has almost no cost of delivery. Software, a laptop, some coffee. Net profit is around $110,000. Gross and net are close enough that setting aside from every deposit works fine.

A contractor buys $55,000 of materials and pays a subcontractor. Net profit is $45,000. If they set aside 30% of every deposit, they move $36,000 into a tax account against a bill closer to $12,000. They spend the year unable to buy materials, feeling broke on a perfectly healthy business, and probably raid the account anyway — which destroys the habit that was supposed to protect them.

The rule:

• Real material costs — parts, inventory, subcontractors, ad spend, merchant fees over a few percent — set aside from net. Estimate net as a fixed fraction of each deposit. If materials run about 45% of revenue, treat 55% of each payment as net and take 30% of that. Effective rate: about 16.5% of the deposit.
• Almost no cost of delivery — set aside from gross at 20–25%. Simpler, and the gap between gross and net is small enough that the lower percentage lands in the right place.

Getting this wrong in either direction is expensive. Over-saving starves the business and breaks the system. Under-saving is the April problem you came here to avoid. If you are still working out what your delivery actually costs you, that same math is the backbone of pricing your services properly — the two problems share a spreadsheet.

The account and the trigger

The percentage is arithmetic. The system is what makes it happen.

Open a second account at the bank you already use. A plain checking or savings account named "Taxes." Not a new bank, not a new app, not a high-yield account you have to wait three days to move money out of. Friction is the enemy here — you want the transfer to take four taps. Some business banking apps, like Novo or Relay, let you split deposits into named sub-accounts automatically, which removes the decision entirely. If yours does that, use it.

Then pick one trigger, and only one:

Pick the one you will actually do, not the one that sounds most disciplined. A weekly transfer you make 50 times beats a per-deposit rule you abandon in March. Put it in your existing weekly routine if you have one — this is the kind of thing that belongs in a written procedure, the same way your other repeatable processes should be.

Never spend from the tax account. Not for a slow month, not for a good opportunity, not for a client who paid late. If you must — and people do — write down the amount and the date it goes back before you move a dollar. A withdrawal with a written repayment date is a loan. Without one it is just gone.

The four dates

Estimated taxes are not optional if you expect to owe $1,000 or more for the year. Federal deadlines, in a normal year:

Yes, the quarters are uneven. Q2 covers two months and Q3 covers three. It is a quirk of the calendar, not a mistake. When a due date lands on a weekend or federal holiday it moves to the next business day.

Pay at IRS Direct Pay from a bank account with no fee, or through EFTPS if you prefer to schedule payments in advance. Card payments work and cost roughly 1.8–2% in processor fees, which on a $3,000 payment is about $55 you did not need to spend.

Put all four in your calendar right now as all-day events, with the payment link pasted in the notes field. Do it while you are thinking about it. The failure mode is never "I did not know the date existed" — it is "the date arrived on a Tuesday when three things were on fire."

Check your state separately. Many states mirror the federal dates. Several do not. Some have different thresholds for when you must pay at all. Look up your state's department of revenue once, put those dates in the same calendar, and never think about it again.

The safe harbor that ends the guessing

There is a rule that removes most of the anxiety: if you pay in at least 100% of last year's total tax (110% if your prior-year adjusted gross income was over $150,000), you generally owe no underpayment penalty, no matter how much more you make this year.

This is the single most useful thing to know about quarterly taxes. If last year's return shows total tax of $9,200, paying $2,300 per quarter protects you from penalties even if you double your income. You still owe the difference in April — safe harbor prevents the penalty, not the bill — but the surprise becomes a number you can plan for instead of a cliff.

If you did not file last year, or last year was your first year of self-employment, safe harbor is not available to you. Estimate forward and use the 90% rule instead: pay at least 90% of what you will owe this year.

What actually moves your number

Your set-aside percentage is only as good as your expense tracking. Deductions you forget are deductions you do not get, and each one changes the bill.

The four that move the number most for a typical solo business:

1. Mileage. The standard mileage rate is set annually by the IRS — check the current-year figure, as it changes every January. At 8,000 business miles a year it is a four-figure deduction. It requires a contemporaneous log, which in practice means an app like MileIQ or Everlance running in the background, not a reconstruction in March.
2. Home office. The simplified method is $5 per square foot up to 300 square feet, so a maximum of $1,500. The regular method — actual percentage of rent, utilities, insurance — is often larger but requires records. The space must be used regularly and exclusively for business.
3. Self-employed health insurance. Premiums for you, your spouse and dependents are deductible above the line, meaning you get it even without itemizing. For someone paying $600 a month, that is $7,200 off taxable income.
4. Equipment and software. Section 179 and bonus depreciation let you deduct most equipment purchases in the year you buy them rather than over several years. A $2,400 laptop is usually a $2,400 deduction this year.

Then there is the deduction most people miss entirely: a retirement contribution. A SEP-IRA or solo 401(k) can absorb a substantial share of net profit as a deduction against income tax. It does not reduce self-employment tax, and the money is locked up, but it is the largest lever most solo owners have and nobody mentions it in a search result.

Track these from January in one place. A spreadsheet is enough at first. When receipts start outnumbering your patience, Wave is free, and QuickBooks Self-Employed or FreshBooks run roughly $15–$30 a month and auto-categorize card transactions. Any of them beats a shoebox.

If you want to be walked through this — the fill-in worksheet for your three buckets, the exact percentage decision tree, the transfer rule wording, and the quarterly reconciliation sheet — that is what The Tax Set-Aside System is. It is a $10 guide that turns this article into a filled-out page and a calendar you can stop thinking about, including the recovery path for when you have already spent the money.

Reconcile every 90 days

A percentage picked in January is a guess. A percentage checked in April is a number.

Once a quarter, sit down for twenty minutes and do exactly this:

1. Add up the revenue that actually landed in the last 90 days.
2. Subtract the business expenses you recorded. That is your real net profit for the quarter.
3. Multiply by your set-aside percentage. Compare it to what is actually sitting in the tax account.
4. If the account is short, transfer the gap now, before you pay the quarterly estimate.
5. Adjust the percentage by one or two points, not five. Small corrections, often.
6. Write down the new percentage and the date. Keeping the history is what lets you trust the number by year two.

After you file your first return, do a fifth step: compare what you set aside all year to what you actually owed. If you over-saved by 20% or more, drop the percentage by three points. If you came up short, raise it by three and check again in 90 days rather than waiting for next April.

The mistakes that cost the most

Setting aside from gross when you have material costs. Covered above, and it is the most common one. It looks conservative and it quietly starves working capital.

Assuming an LLC changes the number. A single-member LLC is a disregarded entity by default. The tax is identical to being a sole proprietor. An S-corp election can genuinely reduce self-employment tax, but it adds payroll filings, a reasonable-salary requirement and roughly $1,000–$2,000 a year in extra accounting — which usually only makes sense above about $80,000–$100,000 of net profit. Do not restructure to solve a set-aside problem. Whether you need an LLC at all is a separate question.

Forgetting the 1099-K threshold changed. Payment platforms like Stripe, PayPal and Venmo now report at lower thresholds than the old $20,000. You may receive forms for income you assumed nobody was reporting. That income was always taxable; the difference is that now the IRS has a copy. Check the current threshold — Congress has moved it more than once.

Counting money you have not been paid. If you set aside from invoices rather than deposits, you are funding your tax account with other people's promises. Set aside when money arrives. If late payment is a recurring problem, that is its own thing to fix.

Waiting until you can afford a CPA. One hour with a tax professional in your first year — typically $150–$400 — usually pays for itself in a single deduction you did not know about, plus the entity question answered properly. Go with a list: your EIN or SSN, your business structure, whether you filed last year, whether any client withholds anything, and your rough revenue and expense figures. A prepared hour is worth three unprepared ones.

When the money is already spent

Sometimes you find this article in March, with a bill coming and nothing set aside. That is a solvable problem, not a catastrophe.

• File on time regardless. The failure-to-file penalty is far larger than the failure-to-pay penalty — 5% per month versus 0.5% per month. Filing without paying is much better than not filing.
• Set up an IRS payment plan. Balances under $50,000 generally qualify for a long-term installment agreement online, with a setup fee that is reduced or waived for low-income filers and for direct-debit setup. Interest still accrues, but the account stops escalating.
• Start the percentage now anyway. Setting aside for this year while paying off last year is uncomfortable and it is the only way out. Half a percentage is better than none.
• Do not borrow at 20%+ to pay a debt accruing at IRS rates. Compare the actual rates before you reach for a credit card.

What this costs you

Nothing, in dollars. A second account at your existing bank is free. IRS Direct Pay is free. A calendar reminder is free. The whole system is one page, one account and four calendar entries.

What it costs is about 20 minutes to set up and 20 minutes a quarter to maintain. Roughly 100 minutes a year to never be surprised by a tax bill again.

The version of this that fails is the one that lives in your head. Written down — the percentage, the trigger, the dates, the reconciliation — it survives a busy quarter. That is the entire difference. The Tax Set-Aside System is the written version: the one-page worksheet, the decision tree for gross versus net, the calendar entries with the payment links already in them, and the scripts for the awkward parts — what to ask a tax pro, and how to repay the tax account after you have dipped into it.

The short version

• Set aside 30% of net profit if your state has income tax, 25% if it does not. Adjust after 90 days against real numbers.
• Self-employment tax is 15.3% and starts at the first dollar of profit. It is the part people forget, and it is why the number feels high.
• Use net profit if you have real material costs, gross at 20–25% if you do not. Getting this backwards either starves the business or leaves you short.
• Open a second account at your current bank named "Taxes," pick one transfer trigger you will actually keep, and put the four federal dates plus your state's dates in the calendar with the payment links attached.
• Pay 100% of last year's total tax (110% over $150k prior-year AGI) and the underpayment penalty goes away, even if you earn far more this year.
• Reconcile every 90 days and move the percentage by a point or two. A number you check beats a number you guessed.