Here’s How Much of Your Income You Should Be Setting Aside for Taxes

The last thing you want to do during tax season is be caught in a situation owing more than you have on hand — but, how much should you be saving for small business taxes? How much of your income should be set aside for taxes as a creative or coach so you’re not left with a big bill at tax time? 

In most situations, it’s recommended you set aside 30% of your income for taxes and this is a conservative figure. If you want a specific percentage, you can consult with a licensed tax professional.

But now that you’re equipped with a number, here’s what you need to do with it:

How to Save for Taxes in Your Small Business

Setting aside a portion of your profits can be annoying to say the least, especially if you’re not used to it. It’s tempting to look at your incoming payments and use them to budget your income for the month rather than set chunks aside for the IRS.

But, if there’s one thing you should know, it’s that the IRS will always come after missing, unreported, or misrepresented money. The IRS can collect back taxes up to 10 years after the original assessment — and they have.

To stay on top of your taxes, automatically plan to set aside 30% of each incoming payment. Depending on your bank, you can set up automatic transfer rules for when money is deposited into your account.

For example, if you bank with Relay, you can set up smart transfers that will automatically transfer 30% of your deposit from your checking account into your savings account.

Once you set it aside, do not touch it unless taxes are due.

What About Quarterly Tax Payments?

Once you’re expected to owe $1,000 or more when your tax return is filed (not in total tax for the year), you’ll need to start making quarterly tax payments. These payments are estimated each quarter based on that quarter’s earnings.

You can, and should, use your tax savings to pay for your quarterly tax payments. That’s what it’s there for!

But, just because you’ve paid your estimated taxes doesn’t mean you won’t have any to pay at your year-end. Save any remainder from the quarter for the end of the year—don’t touch it until after tax season.

How to Know How Much to Pay and When to Pay It

The easiest way is to work with a tax professional. Tax professionals can calculate how much you’re expected to owe each quarter and over the year so you know exactly how much and when. 

Additionally, most bookkeepers will calculate an estimated number for you to set aside for taxes in your monthly review. It’s one of the many benefits of keeping a bookkeeper on hand.

Ready to get started? Get in touch, and let’s see if I’m the right fit for you.