How Much Should a Small Business Save for Taxes?
Not saving enough for taxes is one of the most common (and painful) financial mistakes small business owners make. Here is how to calculate the right amount for your situation.
The Tax Savings Rule of Thumb
The general guideline is to save 25-30% of net business income for taxes. However, this is a starting point, not a precise answer. Your actual tax rate depends on your entity structure, total income, state taxes, and deductions.
Tax Rates by Entity Type
| Entity Type | Federal Tax | Self-Employment Tax | Typical Total Rate |
|---|---|---|---|
| Sole Proprietor | 10-37% (income brackets) | 15.3% | 25-40% |
| LLC (single member) | 10-37% (income brackets) | 15.3% | 25-40% |
| S-Corporation | 10-37% on salary | 15.3% on salary only | 20-35% |
| C-Corporation | 21% flat corporate rate | N/A | 21% + personal on distributions |
Breaking Down Self-Employment Tax
Sole proprietors and LLC members pay self-employment tax of 15.3% on net earnings. This covers Social Security (12.4%) and Medicare (2.9%). If your income exceeds $200,000, an additional 0.9% Medicare surtax applies.
This is on top of income tax, which is why the total effective rate for self-employed individuals is higher than most expect.
How to Calculate Your Savings Target
Step 1: Estimate Your Net Profit
Take your expected annual revenue and subtract all deductible business expenses. This is your net self-employment income.
Step 2: Apply the Self-Employment Tax
Multiply net income by 92.35% (the taxable portion), then multiply by 15.3%.
Step 3: Estimate Income Tax
Use your total taxable income (business profit plus any other income) to determine your marginal tax bracket. Apply that rate to your business income.
Step 4: Add State Taxes
State income tax ranges from 0% (Texas, Florida, Wyoming) to over 13% (California). Factor this into your total.
Savings Targets by Income Level
| Net Profit | Recommended Savings Rate | Monthly Set-Aside |
|---|---|---|
| $40,000 | 25% | $833 |
| $75,000 | 28% | $1,750 |
| $100,000 | 30% | $2,500 |
| $150,000 | 32% | $4,000 |
| $250,000+ | 35% | $7,292 |
The Quarterly Estimated Tax System
Self-employed individuals and business owners must pay taxes four times per year:
- Q1: April 15 (for income earned Jan-Mar)
- Q2: June 15 (for income earned Apr-May)
- Q3: September 15 (for income earned Jun-Aug)
- Q4: January 15 (for income earned Sep-Dec)
Practical Tax Savings Strategy
- Open a separate tax savings account. Every time you receive income, transfer your savings percentage immediately.
- Automate the transfer. Remove the temptation to skip it during slow months.
- Review quarterly. Compare actual profit to projections and adjust your savings rate.
- Maximize deductions. Track every legitimate business expense to reduce taxable income.
Use the business tax calculator to estimate your specific liability and see our complete 2026 business tax deadline calendar so you never miss a payment.
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