Own Your Own Business: How Much Should You Put Away for Taxes?
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Many self-employed individuals are surprised by their first tax season. Unlike traditional employees who have taxes withheld from every paycheck, business owners must take full responsibility for saving and submitting their taxes. Without a clear savings strategy, you could end up underprepared — facing penalties, and a large tax bill.
Understanding Your Tax Responsibilities as a Business Owner
Running your own business means more than just making sales and managing expenses. You’re also responsible for handling all your tax obligations. Knowing what to expect can help you plan effectively.
Self-Employment Tax Covers Social Security and Medicare
When you’re self-employed, you pay both the employer and employee portions of payroll taxes. This is known as self-employment tax, totaling 15.3%. Of that amount, 12.4% is for Social Security and 2.9% for Medicare.
Unlike W-2 employees who split this cost with their employer, business owners cover the full amount themselves. This tax applies to your net earnings, which means you can reduce your tax bill by subtracting business expenses before calculating what you owe.
Income Tax Depends on Your Tax Bracket
In addition to self-employment tax, you’ll also owe federal income tax. This rate depends on your total taxable income and filing status. For 2024, federal rates range from 10% to 37%.
Your business profits are added to any other income you report, including investment earnings, rental income, or your spouse’s wages, so it’s essential to estimate your total income accurately.
State and Local Taxes Can Add Up Fast
Many states also impose income taxes, and some cities or municipalities also tack on their own local taxes. Depending on where you live, these rates can be minimal or significant.
For example, states like Florida and Texas have no income tax, while others like California and New York have higher brackets that can impact your overall tax planning.
A Good Rule of Thumb for Setting Aside Taxes
Without an employer handling withholding, it’s up to you to set aside a percentage of your income for taxes. This can be tricky, especially if your income varies each month. Still, some general rules can keep you on track.
The 25%–30% Rule for Federal and Self-Employment Taxes
A widely used guideline is setting aside 25% to 30% of your net income (revenue minus expenses) for federal and self-employment taxes. This range typically covers most self-employed individuals, though those with higher incomes may need to set aside more. Aim for the higher end of the range to give yourself a buffer if you’re just starting out.
Add 5%–10% for State and Local Taxes
If you live in a state with income tax, don’t forget to account for it. An additional 5% to 10% is usually sufficient, but you’ll want to check your state’s specific rate. Business owners in high-tax states should save even more to stay ahead.
Use a Tax Estimator or Pro for Personalized Planning
Every business is different, so a generic rule may not always apply. Tax calculators and estimators can help you figure out a more accurate savings rate based on your location, deductions, and total income.
Better yet, work with a tax professional who can help you adjust your plan as your income grows or shifts.
Quarterly Estimated Taxes: What You Need to Know
The IRS expects you to pay taxes as you earn income, not just when you file your return. That’s where quarterly estimated payments come in.
When Estimated Payments Are Required
If you expect to owe at least $1,000 in taxes for the year, you must make estimated payments four times per year. This includes income, self-employment tax, and any other tax you expect to owe. Failing to make these payments—or paying too little—can lead to underpayment penalties.
Due Dates for Quarterly Tax Payments
Estimated tax payments are due quarterly:
- April 15 for income earned January–March
- June 15 for income earned April–May
- September 15 for income earned June–August
- January 15 of the following year for income earned September–December
Mark these dates in your calendar and plan to move money to your tax savings account in advance.
How to Calculate and Submit Your Payments
Use IRS Form 1040-ES to calculate your estimated tax payments. You’ll need to estimate your annual income and tax liability, then divide it into four equal payments. You can pay online through IRS Direct Pay or by mail with a check or money order.
How to Separate and Save for Taxes Throughout the Year
Consistently saving for taxes is key to avoiding a surprise bill at year-end. The best way to do that is to set up systems that separate your tax money from your business operating funds.
Open a Dedicated Tax Savings Account
A separate tax savings account allows you to isolate the funds you need to pay the IRS. Every time you get paid, transfer a set percentage to this account. This prevents you from accidentally spending money you’ll need later.
Automate Your Savings with Banking Tools
Some business checking accounts offer automatic transfers to other accounts based on rules you set. You can schedule a recurring transfer or trigger one whenever you receive income. This automation helps make saving a habit, not a task.
Track Income and Expenses in Real Time
Use accounting software or apps like QuickBooks, Wave, or FreshBooks to monitor your net income. Knowing how much profit you’re earning allows you to calculate the correct amount to save for taxes and ensures you stay on top of changing income patterns.
Tax Deductions Can Lower What You Owe
Tax planning isn’t just about saving money for payments—it’s also about reducing what you owe in the first place. Business deductions help you do just that.
Common Write-Offs for Self-Employed Individuals
As a business owner, you can deduct many expenses, including:
- Office supplies and equipment
- Business use of your home or vehicle
- Marketing and advertising costs
- Professional services like legal or accounting fees
- Business meals and travel
These deductions reduce your taxable income, lowering your tax bill.
Keep Receipts and Detailed Records Year-Round
The IRS expects you to back up your deductions with documentation. Keep receipts, invoices, mileage logs, and any records that support your claims. Cloud-based apps like Expensify or Shoeboxed can help you store everything in one place.
Work With a Tax Professional to Maximize Deductions
An accountant or tax preparer can spot deductions you may miss and help you avoid audit triggers. They’ll also ensure you follow IRS rules, especially if you claim larger or less common deductions.
What Happens If You Don’t Save Enough for Taxes?
It’s easy to underestimate how much you’ll owe, especially in a high-earning year. But falling short on taxes can create a ripple effect that harms your finances.
IRS Penalties and Interest Add Up Quickly
If you underpay your taxes, the IRS may charge penalties and interest starting from the payment due date. The longer you wait, the more expensive your tax bill becomes. Underpayment penalties can be hundreds or even thousands of dollars, depending on your situation.
Options If You Can’t Pay Your Full Tax Bill
The IRS offers payment plans and hardship-based relief if you owe more than you can afford to pay immediately. You can apply for an installment agreement that lets you pay over time. In more serious cases, you may qualify for an Offer in Compromise, which allows you to settle your tax debt for less than the full amount.
Learn from the Experience and Adjust Next Year
If you found yourself short this year, use it as a learning opportunity. Increase your savings rate, adjust your quarterly estimates, and build a better buffer. The goal is to make next year easier and more predictable.
Tips to Stay Ahead of Business Tax Obligations
Proactive tax planning helps you avoid stress and build long-term financial stability. These habits make tax season smoother every year.
Set a Monthly Tax Review Date
Pick one day each month to review your income, expenses, and tax savings. This keeps you on top of trends and allows you to make mid-year adjustments. Monthly check-ins are far easier than scrambling at the end of the year.
Stay Updated on Tax Law Changes
Tax rules change often, especially for small businesses. Deductions, credits, and thresholds may shift from year to year. Subscribe to IRS updates or follow a trusted financial publication to stay informed about changes that could affect your business.
Don’t Wait Until April to Get Help
Many small business owners wait too long to bring in a tax professional. However, working with a CPA or enrolled agent early in the year can help you spot opportunities and avoid mistakes. They can assist with quarterly planning, deductions, and retirement tax strategies.
Smart Tax Planning Builds Business Confidence
Running your own business comes with freedom—and responsibility. It’s easy to get behind when you don’t have an employer withholding taxes for you. But you’ll avoid surprises and penalties by setting aside the right percentage of your income, tracking expenses, and making regular estimated payments.
Getting your tax strategy right isn’t just about avoiding problems—it’s about building a strong financial foundation for your business. Start now, and make it part of your routine going forward.
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