How Much Should You Set Aside for Taxes When Self-Employed?

If you’ve ever gotten a 1099, you’ve probably asked the scariest question in self-employment: how much of this do I actually get to keep? Unlike a W-2 job, nobody withholds taxes from your pay. The full amount hits your account, feels like yours, and then in April the IRS wants its share back — often a lot more than people expect.

The good news: the answer isn’t complicated, and once you have a target percentage you can automate the whole thing. Here’s how to figure out your number.

The quick answer: 25–30% of net income

The most common rule of thumb is to set aside 25% to 30% of your net self-employment income for taxes. “Net” means after business expenses — your profit, not your revenue. So if you invoice $10,000 and have $2,000 of expenses, you base your set-aside on $8,000.

That range works because it covers the two taxes every self-employed person owes:

• Self-employment tax (15.3%) — Social Security (12.4%) and Medicare (2.9%). This is the one that surprises people, because at a W-2 job your employer quietly pays half of it. When you work for yourself, you pay both halves.
• Federal and state income tax — based on your tax bracket and where you live. This is on top of self-employment tax, not instead of it.

Why 25–30% is a starting point, not an answer

A flat percentage is a guardrail, not a calculation. Four things move your real number, often significantly:

1. Your income level

Income tax is progressive — the more you make, the higher the rate on your top dollars. A freelancer netting $40,000 and a consultant netting $180,000 do not owe the same percentage. Higher earners often need to set aside 35% or more.

2. Your state

Nine states have no income tax at all (Texas, Florida, Washington, and others), so someone there might comfortably sit at the low end of the range. Someone in California, New York, or Oregon may need to reserve an extra 5–10 percentage points just for state tax.

3. Your deductions

Every legitimate business expense you track lowers your taxable income — and therefore how much you need to save. Home office, mileage, software, health insurance premiums, and retirement contributions can meaningfully shrink the bill. The flip side: if your bookkeeping is a mess and you miss deductions, you effectively over-pay.

4. Other income in the household

If you also have a W-2 job or a spouse who does, your 1099 income stacks on top of that income and can be taxed at a higher marginal rate than you’d guess from the 1099 alone.

A worked example

Say you’re a single freelancer in a no-income-tax state who nets $60,000 after expenses:

• Self-employment tax: roughly $8,500 (15.3% on 92.35% of profit)
• Federal income tax: roughly $4,500 after the standard deduction and the SE-tax deduction
• State income tax: $0

That’s about $13,000 on $60,000 of profit — around 22%. That’s actually a slightly conservative target: it ignores the qualified business income deduction (§199A), which can knock up to 20% off the business profit subject to federal income tax — so in practice the federal piece, and the overall percentage, often come in a little lower. Move that same freelancer to California and the total climbs past 28%. Double the income and the percentage climbs again. This is exactly why a single blanket number can’t be right for everyone — and why it’s worth spending two minutes with a calculator using your real figures.

Rule of thumb for the rule of thumb: use 30% if you want to be safe and simple. If a calculator says you’ll owe less, the extra just becomes a refund or a head start on next year.

How to actually set the money aside

1. Open a separate savings account just for taxes — ideally high-yield so it earns something while it waits.
2. Move your percentage the moment you get paid. Got a $5,000 payment and you’re targeting 30%? Transfer $1,500 immediately. Out of sight, out of temptation.
3. Pay quarterly. The IRS expects estimated payments four times a year if you’ll owe $1,000 or more. Paying from your tax savings account keeps you penalty-free. New to this? Read quarterly estimated taxes explained.

The real fix: stop guessing

A percentage in your head is a decent backstop, but it’s always a guess — and it gets stale the moment your income or expenses change. The reason the number is hard to pin down is that it depends on data you already have: your income and your deductions, sitting in your bank account right now.

That’s the whole idea behind Cash Basis AI. It connects to your bank, categorizes every transaction so your deductions are captured, and keeps a live quarterly tax estimate on your dashboard. Instead of a rule of thumb, you get an actual number that updates as you earn and spend — and you can ask it questions about your books in plain English. Good bookkeeping isn’t busywork; it’s what makes the tax number trustworthy (here’s why cash basis is usually the right method).