How Much Self-Employed Workers Should Set Aside for Taxes

The amount you should save depends on your net profit, tax bracket, and whether you owe self-employment tax

There is no single number that works for everyone. A self-employed person earning $30,000 in net profit will owe less in federal income tax than someone earning $100,000, and the percentage you set aside also depends on your state income tax rate and filing status. The most reliable approach is to calculate what you actually owe based on your expected income, then set that amount aside in a separate account before you spend it.

The IRS does not require you to save a specific percentage. However, the agency does require you to pay estimated taxes four times a year if you expect to owe $1,000 or more in federal income tax for the year. If you do not pay enough throughout the year, you may owe a penalty when you file your tax return, even if you have the money saved.

Key Takeaways

• Self-employment tax (Social Security and Medicare) is 15.3% of your net profit, and you owe this in addition to federal and state income tax.
• Your federal income tax rate depends on your total income and filing status, ranging from 10% to 37% of taxable income.
• The safest approach is to set aside 25% to 30% of your net profit each month, then adjust after you file your first return and see what you actually owed.
• Estimated tax payments are due on April 15, June 15, September 15, and January 15 of the following year, and missing a payment can trigger penalties.
• Keeping records of income and expenses throughout the year makes calculating what you owe much faster and more accurate.

How self-employment tax works and what percentage it is

Self-employment tax covers Social Security and Medicare for people who do not have an employer withholding these taxes. The rate is 15.3% of your net profit — 12.4% for Social Security and 2.9% for Medicare. You calculate net profit by subtracting your business expenses from your gross income.

You owe self-employment tax on any net profit above $400, regardless of your age or how many hours you work. This tax is separate from federal income tax, meaning you owe both. For example, if you earn $50,000 in net profit, you owe approximately $7,065 in self-employment tax alone, plus federal income tax on top of that amount.

One small offset: you can deduct half of your self-employment tax when you calculate your adjusted gross income on your tax return. This reduces the amount of income subject to federal income tax, but you still owe the full 15.3% when you pay estimated taxes.

Calculating federal income tax based on your bracket

Federal income tax is progressive, meaning different portions of your income are taxed at different rates. The rates for 2024 range from 10% to 37%, but most self-employed people fall into the 12%, 22%, or 24% brackets. Your bracket depends on your total taxable income and whether you file as single, married filing jointly, or another status.

To find your approximate federal tax, add your net profit to any other income (wages, interest, rental income), subtract the standard deduction for your filing status, and explore the tax rates for your bracket. The standard deduction for 2024 is $14,600 for single filers and $29,200 for married filing jointly, though these amounts change each year.

A rough shortcut: if you are in the 22% bracket and earn $50,000 in net profit, you might owe roughly $11,000 in federal income tax (before accounting for deductions or the self-employment tax offset). This is not exact — your actual tax depends on your full financial picture — but it gives you a starting point for how much to set aside.

State income tax and local taxes

Most states tax self-employment income the same way they tax wages. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only dividends and interest). If you live in one of these states, you owe no state income tax on your self-employment income.

In states that do tax income, the rate varies widely. Some states tax at a flat rate (like Illinois at 4.95%), while others use brackets similar to federal tax (like California, which ranges from 1% to 13.3%). You can find your state's rate on your state revenue department's website.

A few cities also tax self-employment income. New York City, for example, taxes self-employed residents at rates up to 3.876% depending on income. If you work in a city different from where you live, you may owe tax to both. Check your city and county websites if you live in a major metropolitan area.

A practical savings formula for monthly set-asides

The simplest approach is to set aside a percentage of each payment you receive, before you spend it. Most self-employed people set aside 25% to 30% of gross income each month. This covers self-employment tax (15.3%), federal income tax (roughly 10% to 15% depending on bracket), and state income tax (0% to 13% depending on location).

If you live in a no-income-tax state and are in the 12% federal bracket, 25% may be more than you need. If you live in California or New York and are in the 24% federal bracket, 30% may not be enough. The formula is a starting point, not a may provide.

Here is how it works in practice: if you invoice a client for $5,000, set aside $1,250 to $1,500 in a separate savings account when ready. Do not spend this money. At the end of each quarter, use what you have set aside to pay your estimated taxes. If you have money left over at the end of the year, you can use it to pay your final tax bill or carry it forward to next year.

When to adjust your savings after your first tax return

After you file your first tax return as self-employed, you will know exactly how much you owed. Compare that to what you set aside. If you set aside too much, you can reduce your monthly savings for the next year. If you set aside too little, increase it.

Your income may also change from year to year. If you earned $40,000 last year but expect to earn $70,000 this year, you will owe more in taxes and should increase your monthly set-aside. The IRS uses your prior year's tax liability to calculate whether you need to pay estimated taxes, so if your income jumps significantly, you may owe penalties even if you set aside the same percentage as last year.

Keep records of what you actually set aside and what you actually owed. Over time, you will develop a sense of the right percentage for your situation. Many self-employed people use accounting software or work with a tax professional to refine this number each year.

Estimated tax payment important date and penalties for missing them

Estimated tax payments are due four times a year: April 15, June 15, September 15, and January 15 of the following year. These dates are firm — there is no grace period. If you miss a payment, the IRS charges a penalty on the unpaid amount, even if you pay everything when you file your annual return.

You can pay estimated taxes online through the IRS website (IRS.gov), by mail, or through your bank. You will need your Social Security number or employer identification number, your filing status, and the amount you are paying. The IRS sends a voucher with your estimated tax notice if you request one, but you do not need it to pay.

If your income is uneven throughout the year — for example, you earn most of your money in the fall — you can pay different amounts each quarter. The IRS allows you to base each payment on the income you actually earned in that quarter, rather than dividing your annual estimate into four equal parts. This requires more record-keeping but can reduce penalties if your income is seasonal.

Frequently Asked Questions

What happens if I do not set aside enough and cannot pay my taxes?

You can still file your return and pay what you owe, but you will owe interest and penalties on the unpaid amount. The IRS charges interest at a rate that changes quarterly (currently around 8% annually) plus a failure-to-pay penalty of 0.5% per month. Setting up a payment plan with the IRS can reduce the when ready burden, but you will still owe the interest and penalties.

Can I deduct my business expenses before calculating how much to set aside?

Yes. You owe taxes on your net profit, not your gross income. Subtract all legitimate business expenses — equipment, supplies, home office, mileage, professional services — from your income first. The lower your net profit, the lower your tax bill. Keep receipts and records for everything you deduct.

Do I have to pay estimated taxes if I have a spouse with a regular job?

Yes, if you expect to owe $1,000 or more in federal income tax from your self-employment income. Your spouse's withholding does not cover your self-employment tax. However, you can ask your spouse's employer to increase their withholding to cover some of your expected tax bill, which reduces the estimated payments you need to make.

What if my income is so low I do not think I will owe taxes?

If your net profit is below the standard deduction for your filing status, you may not owe federal income tax. However, you still owe self-employment tax on any net profit above $400. For 2024, if you are single and earn less than $14,600 in net profit, you may not owe federal income tax, but you will still owe self-employment tax on the amount above $400.

Should I set aside money for state and local taxes separately?

You can, but it is not necessary. The total you set aside (25% to 30% of income) should cover federal, state, and local taxes combined. If you want to track them separately for clarity, set aside 15.3% for self-employment tax, then divide the remainder between federal and state/local based on your brackets and rates.