One of the biggest surprises for new freelancers and sole proprietors is that taxes generally are not automatically withheld from business income. When you work for yourself, you are responsible for planning for those taxes and paying them. Set aside too little, and you can face a large bill plus possible penalties.

So how much should you save? A common planning range is 25% to 30% of your net self-employment income — but this is a budgeting heuristic, not an IRS rule. The right number depends on your complete tax situation. Here is how to think about it.

Why You May Owe More Than Just Income Tax

When you are self-employed, your business profit can affect two different federal taxes:

  1. Self-employment tax — if your net earnings from self-employment are $400 or more, this generally includes Social Security and Medicare taxes. A common estimate starts with 92.35% of net profit and applies 15.3%: 12.4% for Social Security and 2.9% for Medicare. The Social Security portion has an annual limit, while the Medicare portion does not. At higher incomes, the 0.9% Additional Medicare Tax may also matter.
  2. Income tax — your business profit also feeds into your overall taxable income. The result depends on your filing status, other income, deductions, and credits.

A W-2 employee splits Social Security and Medicare with an employer. A self-employed person generally pays both halves. That is why your effective tax rate can feel higher than you expected, and why setting money aside matters so much.

For a closer look at how these two taxes connect, read Schedule C vs. Schedule SE.

The 25–30% Rule of Thumb

For many self-employed people, saving 25% to 30% of net profit can be a useful starting point for federal taxes. It is meant to create room for:

  • Self-employment tax, and
  • Federal income tax

Net profit here means your business income minus your allowable business expenses — not your gross revenue. The more allowable deductions you track, the more accurate your net profit and tax estimate will be.

Example: If you earn $60,000 in revenue and have $15,000 in allowable business expenses, your net profit is $45,000. A 30% savings target would mean setting aside about $13,500 across the year. That is a cash-planning target, not a calculation of your final tax bill.

When 25–30% Is Not Enough

The rule of thumb is just a starting point. You may need to save more if:

  • You have higher income. Higher marginal income tax brackets push your total rate up.
  • The Additional Medicare Tax applies. A 0.9% tax can apply above filing-status-based income thresholds.
  • You owe state or local tax. The 25–30% starting point discussed here addresses federal taxes. State and local rules vary.
  • You have little other withholding. If you do not also have a W-2 job withholding taxes, you carry the full burden.

You may be able to save less if deductions, credits, or withholding from another job cover part of your liability. Because every situation is different, use Form 1040-ES to estimate your federal payments and revisit the calculation when your income changes.

Don’t Forget the QBI Deduction

Many self-employed people qualify for the Qualified Business Income (QBI) deduction, which can allow a deduction of up to 20% of qualified business income, subject to limits and rules. QBI does not always equal your Schedule C net profit, and the limitations can depend on your taxable income and type of business.

The QBI deduction can lower your income tax, but it does not reduce your self-employment tax. It is one more reason your actual tax rate may differ from a flat savings percentage — and a reason to calculate your estimate rather than rely only on a rule of thumb.

How to Actually Set the Money Aside

A percentage only helps if you act on it. A simple system:

  1. Open a separate savings account just for taxes.
  2. Every time you get paid, move your chosen percentage (say, 30%) into that account immediately.
  3. Pay your quarterly estimated taxes from that account during the year.

Because the U.S. tax system is pay-as-you-go, you may need to make estimated tax payments if you expect to owe at least $1,000 after subtracting withholding and credits and you do not meet an IRS exception. Our guide to self-employed quarterly estimated taxes explains the deadlines and the safe-harbor rules that help you avoid penalties.

Your Estimate Is Only as Good as Your Books

A useful estimate starts with knowing your real numbers throughout the year, not guessing in April. When your income and expenses are organized, calculating what to set aside (and what you may actually owe) becomes far simpler.

Simple-C helps organize your business transactions by Schedule C category so you can review your net profit and prepare a cleaner, tax-ready breakdown for yourself or your tax professional. Knowing your profit as it grows is the foundation of saving the right amount.

This article provides general information, not tax advice. Tax rates, limits, and your correct withholding depend on your complete situation and can change. Confirm your numbers with the IRS or a qualified tax professional.

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