How Much to Set Aside for Taxes When Self-Employed

Most self-employed owners should set aside 25% to 30% of their profit for taxes, moved into a separate savings account every time money comes in. That covers federal income tax, the 15.3% self-employment tax, and a typical state income tax, with a little cushion so April never turns into a scramble.

Quick Answer: Set aside 25% to 30% of profit, not revenue, for taxes. Use 25% if your profit is under about $100,000 and your state tax is low, and 30% if you earn more or live in a high-tax state. Move it to a separate account each time a client pays, then pay quarterly estimates from that account.

Why does self-employed tax take a bigger bite than you expect?

Self-employed tax feels bigger because you pay both halves of Social Security and Medicare yourself. An employee pays 7.65% and the employer quietly pays the other 7.65%. When you own the business, you pay the full 15.3% self-employment tax on 92.35% of your net profit, on top of regular income tax.

The 12.4% Social Security piece stops at the wage base, which is $184,500 for 2026. The 2.9% Medicare piece never stops. So for most newly profitable owners, self-employment tax alone eats about 14 cents of every profit dollar before income tax even starts. That's usually the line item that surprises people in their first profitable year, especially if they came from a W-2 job where it never showed up on a pay stub. (We walk through that gap in W-2 vs 1099: which actually pays more.)

How much is that in real dollars? A worked example

Say your LLC cleared $9,000 a month over the last year, so $108,000 in profit, and you're married filing jointly with no other income. Here's roughly what the federal side looks like for tax year 2026:

• Self-employment tax: $108,000 x 92.35% x 15.3% is about $15,260.
• Deductions: half of that SE tax (about $7,630), the 2026 standard deduction of $32,200 for joint filers, and the 20% qualified business income deduction (about $13,630 here).
• Taxable income: about $54,500.
• Income tax: 10% on the first $24,800 and 12% on the rest, per the IRS 2026 inflation adjustments, so about $6,050.

Total federal: about $21,300, or just under 20% of profit. Add a state income tax of 4% to 6% and you land at 24% to 26%. That's why 25% is the floor, and why a single filer, a higher earner, or someone in California or New York should round up to 30%.

Should you set aside a percentage of revenue or profit?

Set aside a percentage of profit, meaning what's left after business expenses. Tax is owed on profit, so setting aside a percentage of revenue overshoots badly in any business with real expenses.

In practice, though, you don't know your exact profit the day a client pays. The simple fix: each time a payment lands, estimate the expenses tied to it, then move 25% to 30% of the remainder. If a $10,000 project carried $2,000 in subcontractor and software costs, you'd move $2,000 to $2,400 into the tax account. If your expenses run a steady share of revenue, say 20%, you can shortcut it as 20% to 24% of every deposit. Revisit the shortcut every quarter, because expenses drift.

Where should the tax money live?

Keep it in its own account that you never spend from, ideally a high-yield savings account at the same bank as your business checking so transfers are instant. Separating it is the whole trick: money sitting in operating checking looks spendable, and that's how a $15,000 April bill turns into a credit card balance.

At Planned, we recommend a simple layout: business checking for operations, a business tax savings account, and the household accounts on the other side of the owner paycheck. The tax account is not your emergency fund, and it isn't a slush fund for a slow month. If you need a cushion for lean months, that's a separate business reserve, and your household has its own emergency fund sized to your real expenses.

Do you have to pay quarterly estimated taxes?

Yes, if you expect to owe $1,000 or more for the year after withholding and credits, the IRS expects estimated tax payments through the year. Skip them and you can owe an underpayment penalty even if you pay everything in April.

The fourth 2026 payment is due January 15, 2027. The 2027 payments are due April 15, June 15 and September 15, 2027, then January 15, 2028. Your set-aside account is what funds them: if you've been moving 25% of profit all quarter, the payment is a transfer, not a crisis.

The easiest way to avoid a penalty is the prior-year safe harbor on Form 1040-ES: pay in at least 100% of last year's total tax, or 110% if last year's AGI was over $150,000. Your CPA can confirm the number. Exactly what goes in each payment is a tax-prep question; how you fund it every month is a planning one.

What changes if you're an S corp or have a working spouse?

An S corp shifts part of the job to payroll. Your owner salary has income tax and payroll taxes withheld like any paycheck, so the set-aside only needs to cover the distributions you take on top. A rough rule is 20% to 25% of distributions, but the right number depends on how much your salary withholding already covers. Your CPA sets your reasonable salary; the planning question is how much of the rest is safe to bring home.

A spouse with a W-2 job opens another option: they can raise their withholding on a new W-4 to cover some of your business tax, which counts as paid evenly through the year. That can replace some quarterly payments entirely. The mechanics are the same ones we cover in adjusting your W-4, just aimed at the other direction.

What does the set-aside mean for your household budget?

It means your household budget should be built on what's left after taxes, not on what the business brings in. Going back to the $108,000 example, 25% for taxes is $27,000 a year, or $2,250 a month. If you pay yourself the rest without thinking, the household is living on money that partly belongs to the IRS.

So the order matters: profit comes in, the tax share moves first, the business keeps its reserve, and then the owner paycheck goes to the household on a steady schedule. That steady paycheck is what lets you run a normal family budget on lumpy income. It's the heart of steps 4 through 6 in our business owner's money checklist, and it's much easier to hold to when one app sees both sides, which is why we built Planned to track business and personal finances in one place.

Frequently Asked Questions

Is 30% too much to set aside for taxes?

For many owners earning under $100,000 in a low-tax state, 30% will overshoot, and that's fine. Whatever's left after you file becomes a bonus you can move to retirement savings or your emergency fund. Overshooting costs you a little interest; undershooting costs you a penalty and a stressful April. After your first full year, compare your actual tax bill to profit and tune the percentage.

What if I already spent the money I should have set aside?

Start setting aside now from every new payment, and bump the rate a few points until you catch up. If April arrives short, file on time anyway, because the failure-to-file penalty is much steeper than the failure-to-pay penalty. The IRS offers payment plans for balances you can't cover at once. Then build the separate tax account so it doesn't happen twice.

Does the set-aside cover state taxes too?

The 25% to 30% range assumes a typical state income tax of roughly 4% to 6%. If your state has no income tax, such as Texas or Florida, the low end is usually enough. If you're in a high-tax state like California, lean toward 30% or a bit more. Many states also expect their own quarterly estimates, on their own schedule.

Are health insurance premiums part of the tax math?

They can lower it. Self-employed owners can often deduct health insurance premiums for themselves and their family, which reduces income tax, though not self-employment tax. On a $1,500 monthly family premium, that's a meaningful deduction. Our guide to health insurance for a self-employed family covers how to choose the plan itself.

The number matters less than the habit: move 25% to 30% of every profit dollar into its own account the day it lands, pay the quarterly estimates from there, and build your household budget on what's left. Do that, and a tax bill stops being a surprise and becomes just another transfer.