What percentage of income should self-employed people save for taxes?
The general rule is to set aside 25% to 30% of your net income for taxes. For self-employed people in California, that number can run closer to 30% to 35% depending on how much you earn.
Here’s why the number is that high. As a self-employed person you’re responsible for self-employment tax, which covers both the employer and employee portions of Social Security and Medicare. That alone is 15.3% on your first $168,600 of net earnings. On top of that you owe federal income tax based on your bracket, which for most trades business owners earning decent money falls somewhere between 12% and 24%. Then California adds state income tax ranging from 1% to 13.3% depending on your taxable income. Stack all three together and the total adds up fast.
The number that actually matters is your effective rate after deductions. A contractor who drives 25,000 business miles a year, buys tools and equipment, pays for insurance, and has legitimate home office expenses will have a much lower effective rate than someone with the same gross revenue but fewer write-offs. This is why bookkeeping for trades businesses makes such a difference. You can’t figure out the right savings percentage if you don’t know your real net income throughout the year.
Quarterly estimated payments are required if you expect to owe $1,000 or more in federal taxes or $500 in California taxes. The IRS and the Franchise Tax Board both charge penalties for underpayment, so saving consistently and paying on time every quarter keeps you out of trouble. The deadlines are April 15, June 15, September 15, and January 15.
Entity structure also changes the math significantly. Sole proprietors pay self-employment tax on all net earnings. An S-corp election lets you pay yourself a reasonable salary and take the remaining profit as distributions, which avoids self-employment tax on that portion. For many trades business owners earning over $80,000 to $100,000 in net profit, this saves thousands every year. A tax strategy conversation can help you figure out whether that switch makes sense for your situation.
The practical move is to open a separate savings account and transfer 30% of every payment you receive into it. If your actual tax bill comes in lower after deductions, you have money left over. That beats the alternative of only saving 20% and finding out you owe 30% when it’s time to file.
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More Questions
Can a bookkeeper help me catch up on months of messy records?
Yes. Cleaning up months of backlogged or disorganized books is one of the most common things a bookkeeper does for trade and service businesses. The process involves gathering bank and credit card statements, categorizing every transaction, and reconciling the accounts so your financials are accurate.
Read answerWhat's unique about accounting for a landscaping business?
Landscaping businesses deal with a mix of recurring maintenance revenue and one-time project work, seasonal cash flow swings, heavy equipment depreciation, and crew labor tracking. Each of these needs specific handling in your books.
Read answerI'm behind on my bookkeeping—where do I start?
Start by gathering your bank and credit card statements for the months you've missed. Figure out how far behind you are, then work forward from the last month your books were accurate. Prioritize anything tied to upcoming tax deadlines first.
Read answerCan I use QuickBooks to track subcontractor payments?
Yes. QuickBooks Online handles subcontractor tracking well if you set up each sub as a 1099-eligible vendor, code payments to the right jobs, and collect W-9s before you pay anyone.
Read answerWhen should a small business hire a bookkeeper?
Most small businesses should hire a bookkeeper as soon as they have regular income and expenses flowing through the business. Waiting until tax time or until things feel out of control usually means paying more to fix problems that proper bookkeeping would have prevented.
Read answerWhat are the tax benefits of an S-corp for contractors?
The biggest benefit is reducing self-employment tax. Instead of paying 15.3% on all your net profit, you only pay payroll taxes on your salary and take the rest as distributions that avoid that tax.
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