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Last updated: May 27, 2026 · Reading time: 7 minutes
As a self-employed business owner, set aside 25–30% of every payment you receive in a separate savings account for taxes. That covers the 15.3% self-employment tax (Social Security + Medicare) plus federal income tax. Lower earners can aim closer to 25%; higher earners or those in income-tax states should aim for 30–35%. Pay it in four quarterly installments (April 15, June 15, Sept 15, Jan 15) to avoid IRS penalties.
Why this catches new business owners off guard
When you're an employee, your employer withholds taxes from every paycheck and splits the Social Security/Medicare bill with you. When you're self-employed, nobody withholds anything — and you pay both halves of Social Security and Medicare yourself. That's the "self-employment tax," and it surprises almost everyone in their first year.
The two taxes you're saving for
| Tax | Rate | Applies to |
|---|---|---|
| Self-employment tax | 15.3% (12.4% Social Security + 2.9% Medicare) | 92.35% of your net profit |
| Federal income tax | 10%–37% (your bracket) | Taxable income after deductions |
| State income tax (if applicable) | 0%–13% depending on state | Varies by state |
Social Security's 12.4% portion only applies up to an annual wage cap (adjusted yearly — verify the current cap at SSA.gov). The 2.9% Medicare portion has no cap, and high earners pay an extra 0.9% Medicare surtax above certain thresholds.
The simple rule that works
You don't need to compute your exact bracket every month. Use this:
The moment a customer payment lands, move 30% into a separate "Taxes" savings account. Don't touch it. At quarterly tax time, the money is already there.
Tune the percentage to your situation:
- 25% — lower net income, no state income tax, lots of deductions
- 30% — the safe default for most solo operators
- 35% — higher income, a state with income tax, or few deductions
A worked example
Say you net $60,000 in profit for the year:
- SE tax: $60,000 × 92.35% × 15.3% ≈ $8,478
- You deduct half the SE tax ($4,239) before income tax.
- Federal income tax on the remainder, after the standard deduction, might be roughly $4,000–$6,000 for a single filer (varies with your full situation).
- Total ≈ $12,500–$14,500, which is about 21–24% of $60,000.
Setting aside 30% gives you a cushion — and a refund-sized buffer beats a surprise bill.
Don't forget: the deductions that shrink the bill
You're taxed on net profit, not gross revenue. Every legitimate business expense you track reduces what you owe: mileage, the home-office deduction, equipment, software, insurance, supplies, half your SE tax, and self-employed health insurance. This is exactly why diligent bookkeeping pays for itself — untracked expenses are taxes you overpay.
Frequently asked questions
How much should I set aside for taxes as a sole proprietor?
A reliable default is 30% of every payment received, moved into a separate savings account. Lower earners with many deductions can use 25%; higher earners or those in income-tax states should use 30–35%.
What is the self-employment tax rate?
15.3% — made up of 12.4% for Social Security (up to an annual wage cap) and 2.9% for Medicare (no cap). It applies to 92.35% of your net self-employment profit. You can deduct half of it when calculating income tax.
Do I really have to pay quarterly?
If you expect to owe $1,000 or more in tax for the year, the IRS expects quarterly estimated payments (April 15, June 15, Sept 15, Jan 15). Skipping them can trigger an underpayment penalty even if you pay in full at year-end.
Where should I keep the tax money?
A separate high-yield savings account dedicated only to taxes. Keeping it apart from your operating cash removes the temptation to spend it and earns a little interest until the IRS needs it.
Daily Invoice Maker tracks income and expenses in real time, so your net profit — the number your tax set-aside is based on — is always current. Scan receipts, log mileage, export a tax-ready report. $149.95 lifetime or $5.95/month, works offline on Windows, Mac & Android.
Track your profit →This article is general educational information, not tax, legal, or accounting advice. Tax rates, limits, and thresholds change every year and sometimes mid-year — verify all current figures at IRS.gov and consult a licensed CPA or enrolled agent for your specific situation.
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