When you start a new business, one of the hardest things to figure out is how much money you need to set aside to pay your taxes.
One question I hear all the time is: How much should I put away to pay my business taxes? If you’ve been in business for a few years, you probably have a good feel for how much you take in versus how much your expenses are and what your overall tax bracket is. After a while, you’ll be able to make estimated tax payments with fairly good accuracy. But if you’re just starting out and you don’t have a lot of experience, it’s really hard to guess. This post is for you.
Starting with the very first payment you receive, put away 10% of your revenue. Ideally, you will set up a special savings account at a bank to escrow your taxes, but you can use a piggy bank at home for all I care. Set aside 10% of your revenue.
But I thought my self-employment taxes were more than that? They are. Generally, self employment taxes are 15% of your income, and then you pay your regular tax rate on top of that. If you’re in the 25% tax bracket, the taxes on your business are 40%. This puts people into a panic—most people don’t pay 40% of their revenues, you have to back out your expenses first.
So shouldn’t I put away 40% of my profit? Yes, after you’ve got your business settled in and running smoothly. In the beginning, most start ups lose money, so your business taxes might be zero. You could even reduce your other taxes by reporting a business loss. Setting aside the 10% is your safety net. 10% is easy. 10% is a number you can live with. Most importantly, 10% might save your life.
You were right, I had a loss my first year. Can I spend the tax money that I had set aside? No. You’re going to add to it the next year so that you’ll have enough money to pay taxes then.
What if I have a loss for my second year of business? Keep setting aside 10%. There are basically three things that could happen:
Eventually your business will start making a profit and you’ll be glad that you set aside some money to pay your taxes.
Your business will never make money, so the IRS will decide to call your business a hobby and you’ll have to pay back the taxes you avoided by claiming business losses. We don’t want that to happen! But again, you’ll be glad you have that money set aside.
Your business doesn’t make any money and you’re smart enough to get out before the IRS declares you to have a hobby. Now you’ve got a nice little savings account started.
The 10% rule is a win/win situation for you no matter what.
I make really good income as a contract laborer and I don’t have any expenses. What if I expect to definitely make a profit my first year? A good example of this situation would be an independent IT contractor; a lot of these folks are profitable from day one. If you’ve got a similar situation, I’d hold back 25% at a minimum, 30% is better. If you’re married and you’re adding your income onto a spouse’s earnings, I’d put away 40% right from the start. If you anticipate over $100,000 of income your first year, you should sit down with a professional and do some strategy planning. Your self-employment taxes will actually go down after $106,800 but you could be in a higher overall tax bracket.
Face it, if you’re making over $100,000 a year, you can afford to pay the consulting fee to an accountant. By the way, you’ll write that off as a business deduction.
Okay, so I set aside 10% of my revenue for my business taxes the first year but it wasn’t enough. Now what do I do? First, be glad that at least you had the 10% set aside. Now you’ve got some figures to work with for next year. Based upon your tax return, you can now compute a percentage for you to set aside. Maybe it’s 20%, maybe 30%. Once again, you’ll set aside a percentage of your revenues. You’ll make estimated tax payments every quarter based on what you owed last year. Let’s say you had a balance due of $4,000 last year, then you’ll make quarterly estimated tax payments of $1,000 each this year. You’re still putting money in the bank for your taxes and you’ll pay the estimated taxes from your set-aside fund.
I see a lot of people with small businesses get into tax trouble. They scrape to get ahead and then when success finally comes, the tax bill is a big slap in the face. Success is sweet, but there’s a price. If you start from day one setting aside a portion of your revenue for taxes, you’ll be prepared.
Hmmm. Good question. I’m going to say I don’t know – and here’s why: I’ve got too many other questions for you. First – your name implies that you’re in the UK. I’m in the US – completely different tax rules. But – you mentioned 1099s – that’s definitely a US tax thing, so, maybe you are talking about US income. But if you have any kind of international issue – it’s worth asking more questions.
Second – you mention that the business is expecting income of around $100,000 a year – that’s great! But you also mention your three workers – so how much you pay them can make a big difference in how much your taxes will be.
Third – if your revenues are going to be $100,000 – and that’s close to your profit – then it really makes sense to sit down and think about your business tax set up. I’m guessing, but of course I don’t know, that you’re a sole proprietor right now. But with that kind of revenue – is it time to become an S corporation? Of course, that answer is going to be “it depends.” I say that a lot, sorry.
So, I really think that for you, a visit to a local professional before the end of the year makes a lot of sense. It will be money well spent.
Hi Tony,
Most importantly, you and your partner should sit down with a tax professional in person and go over the numbers before tax time. That’s going to give you your best answers. But here’s a few things to consider.
1. You and your partner might be in different tax brackets. So – you’ll just have to deal with that.
2. A partnership doesn’t pay taxes, the people do. So, you may be holding back 30% of your partnership income, to pay tax, but the partnership won’t pay it. You’ll need to distribute that money to the two of you so that you may pay your individual taxes.
Let me explain that a little further. I work with one partnership, they figure their income, and what we expect their taxes to be, and then they do a distribution to each of the partners to pay the tax. I like that plan. But you and your partner will need to do what works best for you two. But just remember that your partnership income taxes are paid on your personal tax returns.
I’m curious about something: I just started a company (trades; roofing and siding) just two of us, partners) my question is, how much % do we save? So far we have put 30% of every job aside. But as a company, not 30% of our personal “take” after we put money aside. Is this wrong?
Hi Vero,
I’m sorry but I can’t answer that. You need to sit down and do a real planning session. I can’t possibly do that in an online forum. But these are the questions you need to ask.
1. You know your income will be $100K – but what about your expenses? You’re going to pay tax on the net – not the gross so that makes a big difference.
2. As a sole proprietor with income of $100,000 – is that the best tax filing for you? Maybe it is, maybe you’d be better off as an S corporation. It depends on a lot of factors – once again, you need to sit down with someone.
3. What about your health insurance? How is that paid? Why does that matter? It could be a tax deduction- maybe yes, maybe no.
4. Are you married, do you have children? What does that have to do with being self employed? It could mean a lot.
See what I mean? I can’t possibly tell you how much tax you’re going to owe without know all of that stuff. And more! Sorry.
Hi Chase,
I don’t do tax planning online. Sorry, but that’s how I make a living. People come into my office and pay me to sit down with them and figure that out. I only answer general questions online. Sorry.
Hi Denise,
It would make good sense for you to sit down with someone and talk about your situation. There are so many things to think about. First and most important – do not put yourself on payroll if you are filing as a sole proprietor, that’s a no-no. If you change to an S corporation, then you must issue yourself a paycheck.
BUT– and this is important – what’s the best filing status for you? And I would ask things like how much is your business profit? What type of business do you have? Are your married? Do you have children? (Because there are deductions for a sole proprietor that has a family that you can’t claim as an S corporation.)
So, I recommend making an appointment and sitting down with a professional in person. It will be worth the money for a consultation.
Hi I own a business in Georgia as sole proprietor. My question is how much of the monthly earning should I put aside to pay taxes later this is a new starting business so I’m calculating the income for the business will be around 100000 a year I also have 3 workers to whom I give 1099’s . I’m in Georgia
Hi Johnathan D,
You should correct her W2 and send her the corrected version. But she won’t have to refile or anything like that. You’re just letting the state know about the correction.
I started my online marketing April first, and have made 9,500.00 this month. What should expect to pay if this holds steady?
My name is Denise. I am small business owner Dba single member LLC who receive a 1099. I am not sure if I should put myself on payroll or pay estimated taxes. I have one employee that’s on my payroll. The confusing part is how much estimated taxes do I pay if i have payroll. After I pay payroll taxes from the money that I make monthly I need to pay bills so I not sure if I need to put myself on payroll, pay my one employee and pay estimated taxes.
I been using QuickBooks for payroll. Is there any software that can help me.
I have started up two business one is older never took off the other has done ok this year but I have one employee and when I did up her w2 I think she ended up with the wrong state identification number what should I do if she already submitted her taxes.
Hi Candace, At this point, just do your taxes rather than have me try to guess what your taxes will be. Do Your Own Taxes
We are a small business with no employees that are struggling with what to expect for federal taxes. Is the 10% a good number? We had are first full year of business only ran part time the first 6 months making enough to keep the bills paid. Someone told us it woyld be 29% of net profits does that sound right?
Hi Denise,
So the question for you is – how much is that rent going to cost you? By the time you take into account the rent, the heat, electricity, etc. What’s that? $20 grand? I don’t know, it all depends upon where you’re located and what the prices are. But let’s use $20 grand as an example. I’m guessing that you’re in the 15% tax bracket, which, when you add in the self employment tax is really 30.3%. So, if your rent is $20,000 then you’d be saving over $6,000 on your personal income tax. But you’re spending $20,000 on rent!
For me, rent is my second largest expense. I also know I don’t want to meet clients at my kitchen table, so it’s worth it to me. So for you, what do you gain out of having a store front? Will it produce more sales? (Make your life better? That’s valuable too!)
You’ve been running your business successfully without the storefront for 20 years, so you want to ask yourself, what’s your motivation for getting the store front now? Yes, your taxes will go down because you have more expenses, but you’ll also have less cash – unless the storefront generates more sales for you.
Hi, my husband and I are a sole proprietor. We have been in business for more than 20 years. We are a mobile service and have been thinking about a store front shop. It’s pretty scary to make that jump. We pay close to 20,000 a year in taxes not including sales and use. My question is this would we be crazy not to make the jump to save in taxes and have a visible storefront? I’m assuming rent etc… is a write off before paying self employment taxes and federal. We gross about 120,000 to 140,000 a year but after write off, hardware, ect… we pay taxes on about 65,000 to 70,0000 a year. Thank you for sharing any info you have.
Hi Billy,
You’re going to hate this answer: it depends. Sorry. But I’ll explain. First, there are your “company” taxes. Your company tax return is filed once a year.
Payroll taxes, on the other hand, are usually filed quarterly. Especially if you only have one employee. But, you may need to pay the tax monthly depending upon how much payroll tax you have to pay.
I’m guessing that if you make less than $50K a year, the payroll isn’t all that high so you’re probably paying quarterly instead of monthly. Don’t forget your state withholding, and your state unemployment insurance also. That’s usually quarterly too.
It’s probably a good idea for you to meet with someone local and just double check to make sure you’re handling the payroll taxes correctly.
If I own a business and only have 1 employee who works 32 hrs a week. How often do i need to file my company taxes. I don’t even make $50,00 a year. Do I file monthly or do I file quarterly? and can I file yearly?
Hi Al,
I assume that you’re getting paid as a 1099 contract laborer and not as a wage earner. Interns often are wage earners, but you’re at this site so I’m guessing that’s not the case for you.
Okay so California has 9 income tax ranges and I have no idea where you income is. I’m just going to shoot from the hip here. Save 8% for California. I’m guessing you’re not in the top bracket and not in the lowest bracket.
I’m guessing that you have few business expenses. As an intern – you’re using someone else’s office space, etc. So you should probably withhold about 30% of your income for your tax. But I’m totally just guessing here. I think you’d be helped best by going into an office and speaking with a person face to face.
Greeting,
I am a Therapist Intern starting out a private practice seeing clients where I receive money for services but not sure what to set aside for tax purposes. I reside in CA.
Hi Amsey,
So, are you starting a charity? Which would mean you set up a 501c3. Or, do you just mean that you want to donate all of your profits to charity? That’s different. That means you will have taxable income – but be donating to charity. Depending upon your situation, you may still have taxable income. So – you need to sit down with an accountant and explain exactly what you’re up to and run the numbers.
Hello! I am in the process of getting a charity-like business up and running. I will earn no money from this. The idea is for a percentage of the money I receive to go to a 501c3 charity and the remaining percentage to go back to the vendor supplying the product or service.
Hi Marie,
Sorry, but my minimum charge of a tax return with self employment is $600. Not to blow you off but if I start answering questions about how much tax people would owe, I’d be out of business. I only answer general questions.
Hi – I read all your responses and they are really helpful. First of all thanks of taking time to do this. I have a small business and have a net income of $20K. I did not do a good job of tracking all my expenses so I may be paying a bit more but that’s OK. What would be my rough income taxes for a net income of $20K. I do not know my tax bracket as for first two years its zero net after expenses but I am wondering about this year. Any help?
Hi Rachel,
At this point in the year, I’d just finish up the books and file the taxes. See how you did. If you need to save more – save more.
I think my situation is similar to Paul’s. I own a boutique and this is my first year. My estimated profit after taking the total sales – expenses – inventory, etc is around $42,000-$45,000. I have been paying monthly taxes every month which are 7% of the total sales made that particular month. I’m getting super nervous about filing yearly taxes. My husband and I file ‘married filing jointly’ – I’m just nervous as to how much I’m going to be owing 🙁 I saw you mentioned a refund to Paul but how do we determine if we will owe more after paying 7% all year each month and how much vs a refund or not?
Yes, Abby.
I think you understand that perfectly. Remember, we’re talking net profit. But you’ve got it.
Hi Jan,
I’m considering starting my own LLC, but I want to make sure I’m understanding the business tax.
Federal: 25% (This is the tax bracket we’re in)
State: 3.07% (PA)
Local: 1%
SS & Medicare: 15.3%
TOTAL: 44.37% (Confirming I need to set aside 44.37% of the net profits?)
Thanks!
Hi Paul,
You’re in the 25% income tax bracket so your accountant is pretty good. I’m thinking you may have a bit of a refund this year, but if you had made more, that 35% ratio would be spot on.
You’ll pay 15.3% on the entire net of $56,000 so that’s $8568. Then you pay your regular income tax on the $56,000 all over again. Assuming that you’re single with a standard deduction, you would subtract $10,350 for your exemption and standard deduction. That leaves you with $45,650 of taxable income. Because the brackets are progressive, you’ll pay 25% on $8000, 15% on $28,375 and 10% on $9,275. (2000 + 4256 + 973 = 7229)
Combine your income tax together with the self employment tax and you’ve got $15,797. So yes, right now you’re looking at a refund. BUT – you are in the 25% tax bracket. Had you made more money, you’d be much closer (even though you’d pay in more, the percentage would even out.)
I think your accountant was steering you right.
Hi Sara,
Want a job? You seem like you’d be good at accounting. I think you’re spot on. And, if you get to the point where you’re in a higher tax bracket – then just start setting aside more when you get there. (How do you know until you get there, right?)
But you’re organized. You’ve got a plan. It makes sense. Good luck! I think you’ll have a very successful 2017!
Thank you T,
Here’s a post that should help you get started: Small Business Basics
Starting a new business is difficult. It’s normal to have losses early on. Don’t lose hope.
Hi, I am a sole proprietor. I make about $80,000 annually and my expenses are roughly $24,000 annually. An accountant told me that I should stash away 35% of my profit for federal taxes. So if my annual profit after expenses is $56,000, does that mean my federal tax owed is $19,600? This is how I’ve been doing it so far, and I’ve been making quarterly tax payments. I also stash away 5% of my annual net profit for state taxes. After reading your site, it sounds like I am paying WAY too much in federal taxes and may actually be getting a nice refund. Is this true? Or am I doing it correctly?