How Much Should a Small Business Set Aside for Taxes?

The first profitable year usually ends the same way: a five-figure bill in April and no account to pay it from. Nobody withholds for you when you’re self-employed — so the fix is to pick your percentage now, move it somewhere you can’t spend it, and check it against real profit once a month.

The short answer: 25–30% of profit, not revenue

Two layers of federal tax hit a sole proprietor or single-member LLC. First, self-employment tax: 15.3% on roughly 92.35% of your net earnings — that’s Social Security and Medicare, both halves, because you’re the employer now. Then ordinary income tax on top, at whatever bracket your profit lands in. Add state income tax in most states, and 25–30% of profit is the range that covers a typical solo operator.

The base matters more than the percentage: it’s profit — revenue minus deductible expenses — not what hits your bank account. Which means the rule only works if you actually track your expenses. Miss $20,000 of truck, materials, and insurance costs and you’re either over-saving by $6,000 or, worse, guessing.

The math on a real example

A solo handyman, single filer, no other income, 2026 federal figures rounded:

• Revenue: $120,000. Expenses (truck, materials, insurance, software): $35,000. Profit: $85,000.
• Self-employment tax: ~$12,000. 15.3% on 92.35% of that profit.
• Federal income tax: ~$8,600. After deducting half the SE tax and a ~$16,000 standard deduction, taxable income lands around $63,000 — mostly in the 12% and 22% brackets.
• State income tax at ~5%: ~$3,400. Zero in Texas or Florida; more in California or New York.

Total: about $24,000, or 28% of profit. Set aside 30% all year and April is a transfer, not a crisis. These are rough single-filer numbers — filing status, a spouse’s W-2 income, and your state all move them, so confirm your own rate with a CPA.

Pick your percentage

Nudge the number up 3–5 points in high-tax states like California, New York, or Oregon; down a few in the nine states with no income tax. If profit is climbing fast — say you just raised your rates — use the bracket you’re heading into, not the one you left.

Don’t skip the quarterlies

If you’ll owe $1,000 or more, the IRS wants payments during the year, not one check in April. The 2026 due dates: April 15, June 15, September 15, and January 15, 2027 — note the second “quarter” is only two months long. Skipping them costs an underpayment penalty that accrues like interest, currently in the 7–8% range annually.

The easy button is the safe harbor: pay 100% of last year’s total tax (110% if your income topped $150,000) in four equal installments, and there’s no penalty even if you owe more at filing. Great year in progress? Safe harbor keeps the extra in your account until April instead of the IRS’s.

The 10-minute weekly system

• Open a separate savings account and name it “Taxes.” Money sitting in your operating account will get spent on a transmission or a slow month. Every time.
• Every Friday, move your percentage. Take the week’s deposits minus the week’s expenses and transfer your set-aside rate. Weekly beats monthly because the amounts stay small enough that you’ll actually do it.
• Once a month, reconcile. Compare year-to-date profit × your percentage against the account balance. If your books run on cash basis (most small service businesses should), this takes one glance.

The whole system rests on knowing your real profit each week. If invoices, payments, and expenses live in three different places, you don’t know it — and the percentage is theater.

FAQ

Does the 25–30% include sales tax?

No. Sales tax you collect from customers was never your money — it’s a liability you remit on your state’s schedule. Keep it out of the income-tax math entirely, ideally in its own account.

What if April comes and I can’t pay what I owe?

File on time anyway. The failure-to-file penalty is 5% per month — ten times the failure-to-pay penalty of 0.5%. Then set up an IRS installment agreement online; balances under $50,000 are usually approved automatically.

I’m an S-corp — same rule?

Different math. Your salary already has withholding; distributions don’t, so most S-corp owners set aside 20–25% of distributions. The election itself can trim self-employment tax once profit clears roughly $80,000 — worth a CPA conversation, not a blog decision.