How much should I set aside for taxes as a contractor?
The general rule is 25% to 30% of your net income. Net income means revenue minus your business expenses, not your gross deposits. If you collect $20,000 in a month and spend $8,000 on materials, labor, and other job costs, you’re setting aside 25% to 30% of the remaining $12,000. For California contractors, the number tends to land closer to 30% because of state income tax on top of everything else.
The biggest surprise for contractors who haven’t dealt with this before is self-employment tax. As a sole proprietor or single-member LLC, you pay both the employer and employee portions of Social Security and Medicare. That comes out to 15.3% on your first $168,600 of net earnings in 2024. This is separate from income tax. It hits before you even get to federal brackets.
Federal income tax adds another layer on top. Depending on your total taxable income and filing status, you could be in the 12%, 22%, or 24% bracket. Then California state income tax adds roughly 4% to 9% for most contractors. Stack all three together and you can see why 25% to 30% isn’t an exaggeration.
Your actual number depends on a few things. How much you earn, your filing status, how many deductions you have, and how your business is structured all play a role. A contractor earning $80,000 net with a family of four pays a very different effective rate than a single contractor netting $200,000. If you’ve formed an S-corp and pay yourself a reasonable salary, that changes the self-employment tax calculation significantly. These are conversations worth having with someone who does bookkeeping and tax services for contractors so you’re not guessing.
The practical side matters just as much as the percentage. Open a separate savings account and transfer your tax percentage every time you get paid or at least every week. Don’t leave tax money sitting in your operating account where it gets spent on materials or payroll. Contractors who mix tax savings with operating cash almost always come up short in April.
You also need to make quarterly estimated tax payments to the IRS and the California Franchise Tax Board. The deadlines are April 15, June 15, September 15, and January 15. Miss these and you’ll owe underpayment penalties on top of what you already owe. The penalties aren’t huge but they add up, and they’re completely avoidable.
Good bookkeeping throughout the year makes this whole process easier. When your expenses are tracked properly, you know your actual net income and can set aside the right amount instead of guessing. You also capture every deduction you’re entitled to, which lowers what you owe. A lot of contractors overpay because they missed deductions, or they underpay because they had no idea what their real profit was. Tax strategy built on accurate books lets you plan ahead instead of scrambling every quarter.
If 30% feels like a lot, that’s because it is. But owing $15,000 in April with no money saved feels a lot worse. Start with 30%, adjust once you have a year of actual numbers, and you’ll never be caught off guard.
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More Questions
How do contractors handle uneven or seasonal cash flow?
Build a cash reserve during busy months, collect deposits and progress payments on every job, and keep fixed costs low enough to survive the slow stretches. The contractors who manage this well aren't guessing. They have accurate books and a simple cash flow forecast that shows what's coming.
Read answerDo I need a local bookkeeper or can I use someone remote?
Either can work, but industry expertise matters more than geography. A remote bookkeeper who understands trades and construction will serve you better than a local generalist who doesn't know job costing or contractor deductions.
Read answerHow do I avoid red flags on my tax return?
The best way to avoid red flags is to report accurate numbers backed by real documentation. Most red flags come from sloppy bookkeeping, not intentional fraud. Clean books and honest reporting keep you off the IRS radar.
Read answerWhat's the best way to track business miles?
Use a mileage tracking app that logs trips automatically. The IRS requires the date, destination, business purpose, and miles for every trip, and no one remembers all of that at year end.
Read answerAre advertising and marketing expenses tax deductible?
Yes. Advertising and marketing costs are fully deductible as ordinary business expenses. This includes everything from Google Ads and vehicle wraps to yard signs and branded uniforms. The key is documenting the expense and keeping it clearly tied to the business.
Read answerWhat's the threshold for issuing a 1099 form?
The threshold is $600 for the 1099-NEC, which covers payments to subcontractors and other non-employees. If you paid someone $600 or more for services during the year, you need to file one.
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