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.
Long Beach's CPA for Contractors and Trades
The Next Step:
A Quick Conversation
Tell us about your business and where you need help. We'll ask a few questions, let you know what we can do, and give you a quick quote.
More Questions
How does equipment depreciation work for small businesses?
Depreciation spreads the cost of equipment purchases across multiple years as tax deductions. But options like Section 179 and bonus depreciation let most small businesses write off the full amount in year one.
Read answerWhen is the deadline for filing a business tax return?
It depends on your business structure. Partnerships and S-corporations are due March 15. Sole proprietors and C-corporations are due April 15. Extensions are available but don't extend your time to pay.
Read answerWhat is progress billing and how does it work?
Progress billing means invoicing a client in stages as work gets completed rather than waiting until the project is finished. It's standard on larger construction jobs and keeps cash flowing while the work is underway.
Read answerHow do cleaning companies handle bookkeeping for multiple clients?
Set up each client as a sub-customer or project in your accounting software so every invoice and expense ties back to a specific account. Use recurring invoices for regular clients and review profitability per account monthly.
Read answerHow do I file taxes for my LLC?
It depends on how your LLC is classified for tax purposes. The IRS doesn't treat all LLCs the same. Your filing requirements change based on whether you're a single-member LLC, a partnership, or have elected S-corp or C-corp status.
Read answerWhat bookkeeping software is best for contractors?
QuickBooks Online is the best option for most contractors. It handles job costing, invoicing, 1099 tracking, and integrates with nearly every construction and field service app. It's also what most bookkeepers and CPAs already use.
Read answer