How Much Should I Be Setting Aside for Taxes as a Small Business Owner?
Running a small business comes with plenty of rewards—but it also comes with responsibilities. One of the biggest mistakes we see business owners make is failing to set aside enough money for taxes throughout the year.
Whether you're a contractor, Realtor, consultant, online business owner, gym owner, landscaper, or any other entrepreneur, you don't want tax season to become a financial emergency.
The good news? With the right strategy, you can eliminate surprises and stay in control of your finances all year long.
In this guide, we'll answer one of the most common questions we receive at Knobbe & Associates CPA:
"How much should I be setting aside for taxes as a small business owner?"
We'll break down exactly what taxes you're paying, how to estimate them, examples based on income, and practical strategies to help you avoid penalties and keep more of your hard-earned money.
Why Small Business Owners Owe More Taxes Than Employees
When you work a traditional W-2 job, your employer automatically withholds taxes from every paycheck.
Those withholdings include:
Federal income tax
Social Security
Medicare
State income tax (if applicable)
As a business owner, nobody is withholding those taxes for you.
That means every dollar deposited into your business bank account is not yours to spend.
Part of it belongs to the IRS.
Unfortunately, many new business owners don't realize this until tax season arrives and they're hit with a five-figure tax bill they weren't prepared for.
The Three Main Taxes Most Small Business Owners Pay
Understanding what you're paying makes it much easier to estimate how much to save.
1. Federal Income Tax
Federal income tax is based on your taxable income after deductions.
The amount varies depending on:
Business profit
Filing status
Other household income
Tax deductions
Tax credits
There isn't one flat percentage that works for everyone.
2. Self-Employment Tax
This is the tax many new entrepreneurs forget.
Employees split Social Security and Medicare taxes with their employer.
Business owners pay both halves.
Current self-employment tax is approximately:
12.4% Social Security
2.9% Medicare
Total:
15.3%
This tax applies to your business earnings before considering many income tax calculations.
3. State Taxes
Depending on where you live, you may owe:
State income tax
Local business taxes
Franchise taxes
Excise taxes
Business owners should always understand the tax rules in their specific state.
The General Rule of Thumb
One of the simplest recommendations is:
Set aside 25%–30% of your net business profit.
This works well for many newer businesses.
However, if your income increases, your percentage may also need to increase.
Here's a general guideline:
Annual Business ProfitRecommended Tax Savings
Under $30,000: 20–25%
$30,000–$75,000: 25–30%
$75,000–$150,000: 30–35%
Over $150,000: 35–40%
These percentages aren't exact tax rates—they're conservative savings targets designed to help you avoid being short when taxes are due.
Let's Look at Some Examples
Example 1
Sarah owns a cleaning company.
Annual profit:
$50,000
Recommended savings:
30%
She should set aside:
$15,000
Instead of waiting until April, she transfers money every month into a dedicated tax savings account.
Example 2
John is a Realtor.
Annual profit:
$120,000
Recommended savings:
35%
Tax savings goal:
$42,000
Since his income fluctuates, he transfers 35% from every commission check before spending anything.
Example 3
Emily owns an online boutique.
Annual profit:
$20,000
Recommended savings:
25%
Savings goal:
$5,000
Although her tax bill may end up lower, saving extra provides peace of mind.
Why Saving a Percentage Beats Saving a Dollar Amount
Many entrepreneurs ask:
"Can I just save $500 every month?"
Maybe.
But percentages are much safer because business income changes.
For example:
January:
Profit = $2,000
Tax savings:
30% = $600
March:
Profit = $15,000
Tax savings:
30% = $4,500
Your tax liability grows as your profits grow.
Using percentages automatically adjusts with your business.
Open a Separate Tax Savings Account
One of the easiest habits you can build is separating tax money immediately.
Every time money comes into your business:
Calculate your savings percentage.
Transfer it immediately.
Pretend it never existed.
This keeps you from accidentally spending money that belongs to the IRS.
Many successful business owners treat tax savings like another monthly bill.
Don't Forget Quarterly Estimated Taxes
Many self-employed individuals must make estimated tax payments throughout the year.
Instead of paying one giant bill in April, you'll typically pay four times per year.
Generally, payments are due around:
April
June
September
January
Making estimated payments helps you:
Avoid penalties
Avoid interest charges
Manage cash flow
Reduce stress
If you're unsure whether you need to make estimated payments, a CPA can help determine your requirements.
What Happens If You Don't Save Enough?
Unfortunately, we see this every tax season.
Business owners spend every dollar that comes in.
Then April arrives.
Suddenly they owe:
$8,000
$15,000
$30,000
With no money available.
That often leads to:
IRS payment plans
Penalties
Interest
Credit card debt
Cash flow problems
Planning ahead is almost always easier—and less expensive—than trying to catch up later.
What About LLCs?
Many people think:
"I'm an LLC, so I pay less tax."
Not necessarily.
An LLC is a legal structure—not automatically a tax strategy.
Single-member LLCs are generally taxed the same as sole proprietorships unless another tax election has been made.
Your tax savings strategy should be based on your expected taxable income—not simply your business entity.
Should I Save Taxes Based on Revenue or Profit?
This is another common question.
The answer is:
Profit.
Revenue is simply the money your business brings in.
Profit is what's left after deductible business expenses.
For example:
Revenue:
$200,000
Expenses:
$80,000
Profit:
$120,000
Your tax calculations are generally based on profit—not gross sales.
However, because profit isn't always easy to calculate in real time, many business owners estimate taxes using a percentage of deposits until bookkeeping is updated.
The Importance of Accurate Bookkeeping
Here's something many entrepreneurs overlook:
You can't accurately estimate taxes if your books aren't current.
Poor bookkeeping often results in:
Overpaying taxes
Underpaying taxes
Missed deductions
Cash flow issues
Tax filing delays
Monthly bookkeeping gives you an accurate picture of:
Income
Expenses
Profit
Estimated taxes
Business performance
Good bookkeeping isn't just for tax season—it's a powerful tool for making better business decisions all year long.
Tax Planning Can Save You Thousands
Setting aside money is only one piece of the puzzle.
Tax planning focuses on legally reducing your tax bill before the year ends.
Depending on your situation, strategies may include:
Retirement contributions
Vehicle deductions
Home office deductions
Equipment purchases
Depreciation strategies
Health insurance deductions
Entity structure reviews
Timing income and expenses
The earlier you plan, the more opportunities you have to reduce your taxes.
Waiting until March often limits your options.
Signs You're Not Saving Enough for Taxes
Ask yourself these questions:
Am I spending every dollar my business earns?
Do I know my monthly profit?
Do I have a separate tax savings account?
Have I made quarterly estimated tax payments?
Would I know my estimated tax bill today?
If you answered "no" to several of these questions, it's probably time to create a tax savings plan.
A Simple Tax Savings System
Here's a process that works for many small business owners:
Step 1
Keep business and personal finances separate.
Step 2
Maintain accurate bookkeeping every month.
Step 3
Transfer 25–35% of profits into a dedicated tax savings account.
Step 4
Review profits monthly.
Step 5
Pay quarterly estimated taxes when required.
Step 6
Meet with a CPA before year-end to identify tax-saving opportunities.
Following this routine helps make tax season predictable instead of stressful.
Frequently Asked Questions
Is 30% enough?
For many small business owners, yes. However, higher-income businesses or owners with additional income sources may need to save more.
What if I save too much?
That's actually a good problem to have.
If your tax bill is lower than expected, the remaining funds can be reinvested in your business, added to savings, or used for future tax obligations.
Should I save taxes from every payment?
Yes.
Saving a percentage from every payment helps you build consistency and reduces the temptation to spend money earmarked for taxes.
Can a CPA calculate exactly how much I should save?
Absolutely.
A CPA can estimate your annual tax liability based on your income, deductions, business structure, and personal tax situation. This often results in more accurate savings targets and fewer surprises.
Partner with Knobbe & Associates CPA
At Knobbe & Associates CPA, we know that taxes can feel overwhelming—especially when you're focused on growing your business. That's why we work with entrepreneurs throughout the year, not just during tax season.
Our goal is to help you stay proactive, improve cash flow, and make informed financial decisions that support long-term success.
Our services include:
Monthly bookkeeping
Payroll services
Quarterly estimated tax planning
Tax preparation
Tax strategy and planning
Business consulting
QuickBooks support
Entity selection guidance
Rather than wondering whether you've saved enough for taxes, we'll help you build a plan tailored to your business so you can move forward with confidence.
Whether you're just getting started or your business is growing rapidly, having a trusted CPA in your corner can make a significant difference.
Final Thoughts
One of the best financial habits you can build as a small business owner is setting aside money for taxes before you spend it.
While every business is different, saving 25%–35% of your profits is a solid starting point for many entrepreneurs. Combine that with accurate bookkeeping, timely quarterly estimated payments, and year-round tax planning, and you'll be far less likely to face unpleasant surprises when tax season arrives.
Remember, successful businesses don't simply react to taxes—they plan for them.
If you're unsure how much you should be saving, need help calculating quarterly estimates, or want to reduce your overall tax burden through proactive planning, Knobbe & Associates CPA is here to help.
Contact us today to schedule a consultation and take the guesswork out of managing your business taxes. Together, we can help you keep more of what you earn and build a stronger financial future for your business.
