Being self-employed gives you freedom and flexibility, but it also means you are responsible for planning and paying your own taxes. One of the most common questions self-employed individuals ask is how much money they should set aside for taxes throughout the year.
Understanding Self-Employment Taxes
Unlike W-2 employees, self-employed individuals must pay both income tax and self-employment tax. Self-employment tax covers Social Security and Medicare and is typically higher than what traditional employees see withheld from their paychecks.
How Much Should You Save?
A general guideline is to set aside 25% to 30% of your net income for taxes. This amount can vary depending on:
- Your income level
- Your state and local taxes
- Available deductions and credits
Why Quarterly Payments Matter
The IRS requires estimated quarterly tax payments if you expect to owe taxes at the end of the year. Missing these payments can result in penalties, even if you pay your full balance later.
Avoiding Surprises at Tax Time
Setting money aside consistently and working with a tax professional helps ensure you:
- Avoid penalties
- Stay compliant
- Maintain steady cash flow
Professional guidance makes tax planning far less stressful and far more predictable.