“Just tell me the percentage.”
I hear that all the time.
Sometimes it’s from someone who just landed their first client. Other times it’s from a business owner who’s been self-employed for years but was caught off guard by a tax bill they weren’t expecting.
The question is always the same.
“How much should I be saving for taxes?”
I completely understand why people ask.
It would be wonderful if I could simply say:
“Save 30%.”
Conversation over.
The problem is… That answer might be exactly right for one business owner—and completely wrong for another.
The amount you should save depends on much more than how much money you make. It depends on how your business is taxed, your deductions, where you live, whether you’re running payroll, and several other factors.
The good news? Once you understand which taxes apply to your business, creating a savings plan becomes much less intimidating.
Let’s start there.
In This Guide You’ll Learn
By the end of this guide, you’ll understand:
- Why there isn’t one “correct” savings percentage for every business owner.
- How the way your business is taxed affects the amount you may need to save.
- The difference between sole proprietorships, partnerships, and S corporations from a tax planning perspective.
- One simple habit that can make tax season much less stressful.
First Things First: How Is Your Business Taxed?
Before deciding how much to save, it’s important to understand how your business is taxed. This is where many business owners get confused—and that’s completely understandable.
People often use terms like LLC, sole proprietor, and S corporation interchangeably, but they don’t all mean the same thing.
An LLC is a legal structure. A sole proprietorship, partnership, or S corporation describes how your business is taxed.
That distinction matters because different tax classifications come with different tax responsibilities. Understanding how your business is taxed is the first step toward creating a realistic savings plan.
If You’re Taxed as a Sole Proprietorship
Whether you’re operating as a sole proprietor or you own a single-member LLC that has not elected S corporation status, your business is generally taxed as a sole proprietorship for federal income tax purposes.
That means your business income is generally subject to:
- Federal income tax
- State income tax (if applicable)
- Self-employment tax
Many new business owners remember to plan for income tax because they’re familiar with it from their previous jobs. The surprise often comes from self-employment tax.
When you worked for an employer, Social Security and Medicare taxes were shared between you and your employer.
Now that you’re self-employed, you’re responsible for both portions. That’s one of the biggest reasons first-year business owners are surprised when tax season arrives.
If You’re Taxed as a Partnership
Partnerships work a little differently.
A partnership generally doesn’t pay federal income tax itself. Instead, the business reports its income, deductions, and other tax items, and each partner reports their share on their own individual tax return.
Depending on the nature of the business and each partner’s role, some or all of that income may also be subject to self-employment tax.
Because partnership taxation can vary depending on the facts and circumstances, it’s especially important to understand how your share of the business income will be taxed when deciding how much to save throughout the year.
If You’re Taxed as an S Corporation
S corporations often create the biggest misunderstanding. Many business owners believe that once they elect S corporation status, they no longer need to worry about setting money aside for taxes.
Unfortunately, that’s not how it works.
If your business is taxed as an S corporation, you’re generally required to pay yourself a reasonable salary through payroll.
Just like any employee, payroll may withhold:
- Federal income tax (depending on your Form W-4)
- Social Security tax
- Medicare tax
- State income tax, if applicable
Because taxes are being withheld from your paycheck, it can feel like everything is being taken care of automatically.
But payroll is only part of the picture.
An S corporation’s profits generally pass through to the owners and are reported on their individual tax returns. While those profits generally aren’t subject to self-employment tax in the same way as sole proprietorship income, they may still be subject to income tax.
That’s why some S corporation owners still owe taxes at the end of the year, even though they’ve been running payroll all year.
Many business owners choose to set aside additional money throughout the year to help cover any income tax that may be due on those business profits.
Later, when those after-tax profits are distributed from the business, the distribution itself generally isn’t a separately taxable event because the income has already been reported on the owner’s tax return.
Every Business Is Different
Here’s a simple way to think about it.
| How Your Business Is Taxed | Taxes You May Need to Plan For |
| Sole Proprietorship | Income tax + Self-employment tax |
| Partnership | Income tax on your share of business income + potential self-employment tax |
| S Corporation | Payroll withholding + income tax on pass-through business income |
Notice something? There isn’t one savings strategy that works for everyone.
That’s why advice like “just save 30%” can be helpful as a starting point for some people—but completely inappropriate for others.
The Habit That Makes Tax Season Less Stressful
If I could give every new business owner just one piece of advice, it would be this:
Open a separate tax savings account. Every time your business receives a payment, immediately move money into that account. Treat it like that money was never part of your spending budget.
One of the biggest mistakes I see is waiting until the end of the month—or worse, the end of the year—to save whatever is left.
Unfortunately… There usually isn’t much left. Creating the habit of setting money aside as you get paid is one of the simplest ways to reduce stress when tax season arrives.
Quick Tip
Give the account a simple name like “Tax Savings.” Seeing that name every time you log into your bank account serves as a reminder that the money already has a purpose.
If you’re unsure how much to set aside, your tax professional can help you determine a percentage that’s appropriate for your specific situation.
Common Mistake
Many business owners treat taxes like an unexpected expense. They’re not.
Taxes are simply one of the costs of running a successful business. The sooner you treat tax savings as part of your regular financial routine, the less stressful tax season becomes.
So…How Much Should You Actually Save?
I wish there were one percentage that worked for everyone. There isn’t.
The right amount depends on:
- How your business is taxed
- Your income
- Your deductions
- State tax laws
- Payroll withholding
- Estimated tax payments
- Other sources of income
- Your overall tax situation
Rather than trying to find the perfect percentage online, focus on building a system that helps you save consistently and review your tax situation throughout the year.
A realistic savings plan is far more valuable than a generic rule of thumb.
The goal isn’t to guess the perfect percentage. The goal is to understand which taxes apply to your business so you can plan with confidence.
A Quick Reality Check
If you’re just starting your business, don’t expect to get everything perfect right away.
Most successful business owners adjust their tax savings strategy over time as their business grows and gain a better understanding of their finances.
The important thing isn’t choosing the perfect percentage on day one. The important thing is building the habit. Even a good estimate is far better than being surprised next tax season.
________________________________________________________________________________________________
DISCLAIMER: The information in this article is intended for general educational purposes only and should not be considered tax, legal, or accounting advice. Every taxpayer’s situation is different, and tax laws can change over time.
Before making financial or tax decisions based on this article, consider consulting with a qualified tax professional who can evaluate your specific circumstances.
Leave a Reply