How Much Should Small Business Owners Set Aside for Taxes?
How Much Should Small Business Owners Set Aside for Taxes?
One of the most common questions we hear from business owners is, "How much should I be saving for taxes?"
It's a good question, but there isn't a one-size-fits-all answer. The amount you should set aside depends on your income, business structure, deductions, and the state where you live.
Saving too little can leave you with an unexpected tax bill. Saving too much can tie up cash that could be used to grow your business. The goal is to find the right balance.
Why Business Owners Need to Save for Taxes
Unlike employees, most business owners don't have taxes withheld from every paycheck.
If you're self-employed or own a business, you're generally responsible for setting money aside throughout the year to cover your federal and, in some cases, state tax obligations.
That may include:
Federal income tax
Self-employment tax
State income tax, if applicable
Estimated tax payments
Planning ahead helps you avoid scrambling for cash when tax payments come due.
Is There a Good Rule of Thumb?
Many business owners start by setting aside 25% to 35% of their net business income.
This isn't a tax rule. It's simply a conservative starting point until your actual tax liability can be estimated.
For example, if your business earns $10,000 in net income for the month, setting aside $2,500 to $3,500 can help prepare you for future tax payments.
Your actual percentage may be lower or higher depending on your individual circumstances.
Factors That Affect Your Tax Bill
Several factors determine how much you'll ultimately owe.
These include:
Your total household income
Your filing status
Your business entity
Retirement contributions
Business deductions
Investment income
Tax credits
Because every situation is different, estimating taxes based on last year's refund or balance due isn't always reliable.
Working with a professional on Tax Strategy & Planning can help you estimate your tax liability more accurately throughout the year.
Don't Forget Estimated Tax Payments
Many business owners are required to make quarterly estimated tax payments.
Missing those payments may result in penalties and interest, even if you pay the full amount when you file your return.
If you're unfamiliar with estimated taxes, our article on Quarterly Taxes Explained for Small Business Owners discusses when payments are due and who is generally required to make them.
Keep Tax Money Separate
One simple habit can prevent a lot of stress.
Consider opening a separate savings account dedicated to taxes.
Each time your business receives income, transfer your estimated tax amount into that account. That money won't accidentally be spent on operating expenses or personal purchases.
Many business owners find this system makes cash flow easier to manage.
Accurate Books Make Tax Planning Easier
You can't estimate taxes accurately if you don't know how your business is performing.
Maintaining current Bookkeeping & Accounting records gives you a clearer picture of your income, expenses, and profitability throughout the year.
Instead of guessing, you'll be making decisions based on reliable financial information.
Good bookkeeping also makes tax preparation faster and helps reduce errors.
What About S Corporations?
Business owners who have elected S corporation tax treatment often have different tax considerations than sole proprietors.
Although S corporations may reduce self-employment taxes in some situations, owners still need to plan for federal and state income taxes.
The right amount to save depends on your salary, business profits, and overall tax situation.
Review Your Tax Savings Throughout the Year
Business income rarely stays the same every month.
If revenue increases significantly, you may need to increase the amount you're setting aside.
Likewise, major purchases, retirement contributions, or changes in income may affect your estimated tax liability.
Reviewing your numbers periodically allows you to make adjustments before small issues become larger ones.
How Groundwork Tax & Accounting Can Help
Estimating taxes doesn't have to be guesswork.
At Groundwork Tax & Accounting, we help business owners understand their tax obligations before filing season arrives. Through proactive Tax Strategy & Planning, ongoing Business Tax Preparation, and accurate Bookkeeping & Accounting, we help clients make informed financial decisions throughout the year.
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Frequently Asked Questions
What percentage of my income should I save for taxes?
Many business owners begin by setting aside 25% to 35% of their net business income. Your actual tax liability may differ based on your income, deductions, and business structure.
Should I keep tax money in a separate account?
Yes. Many business owners use a dedicated savings account for taxes. Separating those funds helps reduce the chance of spending money that will be needed for future tax payments.
Do I still need to save for taxes if I make quarterly estimated payments?
Yes. Quarterly payments are funded from the money you've set aside throughout the year. Saving consistently makes those payments much easier to manage.
Do S corporation owners need to set aside money for taxes?
Yes. While S corporations may reduce certain taxes, owners are still responsible for income taxes and should plan accordingly.
How can I estimate my taxes more accurately?
The best approach is to maintain current financial records and review your tax situation throughout the year. Regular tax planning allows adjustments before filing season instead of after.
