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FAQ: How Much Should I Be Saving for Taxes?

  • Writer: Miranda Kishel
    Miranda Kishel
  • 5 days ago
  • 2 min read
Saving for Taxes

1) Direct Answer


A good rule of thumb is to set aside 25%–30% of your net income for tax savings throughout the year. This typically covers federal income tax, self-employment tax, and state income tax (if applicable).


However, the exact percentage can vary depending on your business structure, location, deductions, and credits. For example, S-Corporation owners who pay themselves a reasonable salary might save closer to 20%, while sole proprietors and freelancers may need the full 30% to stay on track.


2) Why Knowing How Much Should We Be Saving for Taxes Matters


Unlike W-2 employees, small business owners don’t have taxes automatically withheld from their paychecks. That means you’re responsible for making Estimated Payments to the IRS and your state on a quarterly basis.


Failing to save enough—or missing estimated tax deadlines—can lead to:


  • Unexpected tax bills in April

  • IRS underpayment penalties

  • Cash flow stress during tax season

Consistent tax savings ensure that when tax time comes, you’re ready—without scrambling or draining operating cash.


Want help estimating and managing your quarterly payments? Learn more about Development Theory's Tax Advisory Services.

3) Related Questions Clients Often Ask


“Do I have to make quarterly tax payments?” Yes, most business owners who expect to owe more than $1,000 in taxes must pay estimated taxes quarterly. See IRS Form 1040-ES for details.


“What if I already have withholding through another job?” You can adjust your W-4 at your job to withhold more tax, reducing or eliminating the need for separate estimated payments.


“Do I save based on gross income or net profit?” Always calculate tax savings based on net income (after business expenses).


“Can I keep my tax savings in my business account?” Yes, but it’s best to move it to a separate savings account so it’s not accidentally spent on operations.


4) Actionable Tips


1. Estimate your annual profit early. Use last year’s tax return or current-year projections to estimate net income.


2. Apply a conservative savings rate.

  • 25% for S-Corps or LLCs taxed as S-Corps

  • 30% for sole proprietors and single-member LLCs

  • 15%–20% for W-2 employees with a side business

3. Make quarterly estimated payments. Due dates (for most taxpayers):

  • April 15

  • June 15

  • September 15

  • January 15 (following year)

4. Use a dedicated tax savings account. Automate transfers each time you receive income—treat it like a non-negotiable expense.


5. Recalculate midyear. If your income changes significantly, adjust your estimated payments to avoid underpayment penalties or over-saving.


5) Summary of Best Practices


  • Save 25–30% of net income for Tax Savings.

  • Pay Estimated Payments quarterly to avoid penalties.

  • Separate tax funds from operating cash.

  • Revisit your estimate midyear as profits change.

  • Work with a tax advisor to optimize your rate, entity structure, and deductions.


Pro Tip: Automating your tax savings is one of the simplest ways to reduce stress and improve financial control. A well-structured tax plan turns surprises into strategy.

Quick Takeaway: Plan for taxes year-round, not just in April. By saving consistently and paying quarterly, you’ll protect your business’s cash flow, avoid penalties, and keep more of what you earn through smarter tax planning.

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