How Much Should I Set Aside for Taxes as a Small Business Owner?

"How much should I save for taxes?" might be the most common question we hear from new business owners. There's no single right number, but there is a reliable way to figure out yours.

The quick answer

As a starting point, many self-employed people set aside 25% to 30% of their net profit for federal taxes. In Washington, there's no state income tax, which helps, but you also need to plan for B&O tax and, if applicable, sales tax you've collected (which was never your money to begin with).

What that percentage has to cover

1. Self-employment tax: about 15.3% on most of your net profit
2. Federal income tax: based on your tax bracket after deductions
3. Washington B&O tax: based on gross revenue, if you're above the thresholds where the small business credit no longer covers it
4. Sales tax collected: 100% of it goes to the state

Your actual percentage depends on your profit, filing status, spouse's income, deductions and business structure.

Why "profit," not "revenue"

You're taxed on profit: revenue minus deductible expenses. If you received $100,000 and had $40,000 in legitimate expenses, your federal taxes are based on roughly $60,000. That's why tracking every expense matters.

Exception: sales tax and B&O tax are based on gross receipts, not profit.

A simple system that works

Step 1: Open a separate tax savings account

Keep it at your bank but out of sight. This money is not available for spending.

Step 2: Transfer a fixed percentage of every deposit

Each time a client payment lands, move a set percentage to the tax account. If you collect sales tax, move that amount too.

Step 3: Pay quarterly estimates from that account

Federal estimated payments and Washington excise tax returns come out of this account, not your operating account.

Step 4: Adjust after the first year

Once you see your actual tax bill, refine your percentage. If you ended with a big surplus, lower it. If you came up short, raise it.

When to save more

• Your profit margin is high (more of each dollar is taxable)
• Your spouse also has high income
• You collect sales tax
• You had a big jump in income this year

When you might need less

• You have large deductible expenses or equipment purchases
• You contribute to a SEP-IRA or Solo 401(k)
• Your income is modest

The bottom line

Start at 25% to 30% of profit, keep it in a separate account, and refine it with your bookkeeper or tax professional after your first year. The goal is that tax day is just a transfer, not a crisis.

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Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.