How much should I set aside for taxes as a self-employed owner?
The starting point is 15.3 percent. That’s self-employment tax, which covers Social Security and Medicare. As a self-employed owner, you pay both the employer and employee portions, so it’s double what a W-2 employee sees withheld from their check. This tax applies to your net profit from the business, not gross revenue.
Federal income tax stacks on top of that. Your rate depends on your total taxable income and filing status. If you’re in the 22 percent bracket, you’re now at roughly 37 percent combined. If you’re in the 24 percent bracket, you’re closer to 39 percent. And if you live in a state with income tax, like Massachusetts, add another 5 percent or so.
This is why most self-employed owners set aside somewhere between 25 and 35 percent of their net profit for taxes. The lower end works if you have significant deductions, if a spouse’s income already pushes you through lower brackets, or if you’re claiming the qualified business income deduction. The higher end applies if you’re a high earner in a state with income tax.
The practical number for your situation comes from a real projection. Take your expected net profit, subtract the deductible half of self-employment tax, apply your tax brackets, add state taxes, and you get an actual figure rather than a guess. This is what tax planning does. Without it, you’re either setting aside too much and tying up cash you could use in the business, or setting aside too little and facing a surprise bill in April.
The money should go out quarterly. The IRS expects estimated tax payments four times a year on April 15, June 15, September 15, and January 15 of the following year. Miss these payments or underpay significantly, and you’ll owe penalties on top of what you already owe. Quarterly payments also keep you from facing one huge bill at year end.
Accurate books make this work. If your bookkeeping is sloppy or months behind, you’re guessing at profit instead of calculating it. Clean monthly numbers give you something real to base the projection on, and that projection drives the quarterly payments. Good bookkeeping and tax services work together here.
If you’re using a rough percentage because you haven’t had time to figure out the real number, that’s understandable. But at some point it’s worth getting a proper projection done so you know where you actually stand. If you’d like help with that, reach out for a consultation.
New England's CPA-Led Bookkeeping Partner
The Next Step:
A Quick Conversation
We'll listen, ask a few questions, and show you exactly how we can help.
More Questions
Can you help me catch up on several years of unfiled tax returns?
Yes. We can reconstruct your books for the missing years, prepare the back personal returns, and work with the IRS on any notices or penalties as an Enrolled Agent. Getting compliant is better than waiting.
Read answerI owe back taxes I cannot pay all at once. What are my options?
The IRS offers installment agreements that let you pay over time, and in qualifying hardship cases, an offer in compromise that settles for less. An Enrolled Agent can request and negotiate these options on your behalf, though eligibility depends on your specific financial situation.
Read answerYou are based in Massachusetts. Can you work with my business if I am in another state?
Yes. The firm works remotely with clients across New England and nationwide, all in QuickBooks Online. Massachusetts is home base, but bookkeeping, payroll, and federal tax work travel anywhere.
Read answerWhat does Smart Outsourced Solutions do, and who is it for?
Smart Outsourced Solutions provides bookkeeping, payroll, sales tax, 1099s, personal tax returns, tax planning, and IRS representation for owner-operated service businesses. The firm is run by Simona Leppala, a CPA and Enrolled Agent, so tax expertise is built into the bookkeeping from day one.
Read answerCan I pay my cleaners as 1099 contractors in Massachusetts?
In most cases, no. Massachusetts uses the ABC test for worker classification, and cleaners performing a cleaning company's core work almost always fail Prong B, which requires the work to be outside the company's usual business.
Read answerHow do I handle project-based billing and see profit by project?
Tag every invoice and expense to its project so you can see real profitability by engagement. The key is tracking labor time accurately since that's most of your cost. Monthly reviews show you which work is worth pursuing and which clients actually make you money.
Read answer