How Much to Set Aside for Taxes as a Business Owner (2026)

Set aside a percentage of your profit, not your revenue, and for most sole proprietors that percentage lands between 25% and 30%. Self-employment tax alone takes about 14% of profit. Federal income tax adds roughly 6% to 13% at typical small-business profit levels, and your state adds its own share on top. Move the money into a separate account every month after the books are closed, and pay your quarterly estimates out of it.

The 25% to 30% rule is a starting guess. Here is where it comes from, so you can build your own number.

Why profit, not revenue

Both taxes a business owner pays on the business, income tax and self-employment tax, are charged on net profit: what is left after business expenses. A shop that brings in $40,000 in a month and spends $28,000 on materials, subs and payroll has $12,000 of profit to tax, not $40,000.

Setting aside a percentage of every deposit gets this wrong in both directions. In a month heavy with equipment sales, it sets aside tax on money that went straight back out to the supply house. In a month of high-margin service calls, it sets aside too little. The reserve is only right if it follows profit, which means it follows the books.

The three pieces of the rate

For a sole proprietor or single-member LLC, the rate is three taxes added together.

1. Self-employment tax. 15.3% on 92.35% of net profit, so about 14.1% of profit. The Social Security part, 12.4%, stops at the 2026 wage base of $184,500; the Medicare part, 2.9%, does not.
2. Federal income tax. Charged on profit after deductions: half of your self-employment tax, the standard deduction ($16,100 for a single filer in 2026), and the qualified business income deduction, which is 20% of business income for most owners under the 2026 threshold of $201,750 (single), limited to 20% of taxable income.
3. State income tax, if your state has one. Texas does not.

The arithmetic at three profit levels

These examples are for a single sole proprietor with no other income, taking the standard deduction, with no retirement or health insurance deductions. They are approximations to show the shape of the numbers, not a tax calculation for your return.

At $200,000, self-employment tax is lower than 14.1% would suggest because the Social Security part stops at $184,500 of earnings.

Add your state. In a state with a 5% income tax on that profit, those three owners are at roughly 25%, 29%, and 32%. In Texas, they stay at 20%, 24%, and 27%. That is where the 25% to 30% rule of thumb comes from: it is roughly right for a profitable owner in a state with an income tax, and a little high in a state without one.

Why slightly high is the better mistake

Money left in the tax account after you file is still your money. Move it back to operating, or leave it as the first deposit toward next year. A reserve that comes up short leaves you with an April bill and no cash behind it, often in the same month as the first estimate for the new year.

Start at 25% if you are in a no-income-tax state, 30% if you are not. After your CPA files your first full year, divide the year's total tax by the year's profit and use that rate instead.

How to move the money

• Open a separate savings account at the same bank as your operating account, named for taxes and used for nothing else.
• Move money monthly, after the books are closed. The close tells you the month's profit. Multiply by your rate and transfer it.
• Pay estimates from the tax account. The quarterly estimated taxes guide has the 2026 dates and the safe-harbor amounts.
• Check the balance against the year so far each quarter. The reserve should roughly equal the year's profit to date times your rate, less estimates already paid.

The safe harbor and the reserve do different jobs. Safe-harbor estimates keep you out of the underpayment penalty, and they are often less than the year's real tax when the business is growing. The reserve covers the whole bill, including the balance due when you file.

S-corp owners: a different split

An S-corp owner's salary runs through payroll, which withholds income tax and pays Social Security and Medicare on it. There is no self-employment tax on S-corp distributions. So the reserve only has to cover the personal income tax on the profit above the salary, which the owner pays through quarterly estimates.

That makes the reserve rate on the profit above salary lower than a sole proprietor's rate, by roughly the 14% that self-employment tax would have taken. Your CPA can give you the number once they know your salary.

How Poof keeps the reserve

Poof puts two numbers side by side on the dashboard: how much tax this year's profit has built up so far, at your rate, and how much is in the bank account you named as your tax reserve. The rate starts at 25% as a starting guess, and you or your CPA can change it. When the reserve falls behind, a monthly reminder after the close says by how much, and it stays quiet when the reserve covers what is owed. Poof never moves money; the transfer is yours to make.

Related: the 1099 threshold for 2026 and the bookkeeping cleanup checklist.

*General information, not tax advice; your CPA has the final word.*

*Written by Austin Semple, a former controller: three years in audit, seven running the books for small businesses, and the founder of Poof. Poof shows how much tax you have built up this year next to what you have set aside. Start a 30-day trial, no card required.*