How Much Should Small Business Owners Set Aside Each Month For Taxes?

A very common question I get is how much should I set aside for taxes at the end of the year. Now this is a question that cannot be simply answered in a short article as it is very complex and depends on the business situation. Such as net income level and different elections that can change tax amounts to name a couple.

For this article lets just imagine a simple small single member LLC. As a default, this business is going to be treated as a sole proprietor and use a schedule C on personal taxes to pay the business income tax. The breakdown example is as follows:

Gross Revenue $100,000

Expenses $(60,000)

Net Income $40,000

The first tax to talk about is the self employment tax with a rate of 15.3%, this will be calculated on 92.35% of the net income. The $40,000 would then get taxed $5,651 (half of this tax bill can be used as a deduction on the 1040).

The next tax will be the income tax on the $40,000 that was profited on the year. This will depend on your tax bracket to calculate but lets assume 12%. the $40,000 will be taxed $4,800.

The total tax on the $40,000 will be $10,451 or an effective tax rate of about 26%.

With these numbers we can reasonably conclude that this particular business owner would want to retain around 30% of net earnings into a separate tax account to be used throughout the year to pay the quarterly estimated taxes.

This is just a simple example used to show how it can be beneficial to retain a percentage of profits into a tax account to have the funds available when needed. As this level of business increases and so does net income it would be time to discuss an S Corp election to have a lower tax burden at the end of the year.

Keep it reconciled,

-Justin Oliveri