If you’re an indy, you’ve probably been given dozens of different recommendations on how much to save for self-employed taxes — usually anywhere from 25 to 50 percent. But is there a magic percentage, so to speak?
Unfortunately, the answer isn’t that simple. There’s no single “magic percentage” that can be applied to all solopreneurs, explains Argel Sabillo, a CPA. That’s because the self-employed taxes someone owes are determined by a multitude of factors: their annual income, business expenses, industry, expertise, location, tax breaks, tax credits and whether or not they have dependents.
So how can solopreneurs make sure they save enough for self-employed taxes? Here are some tips:
Go by Ballpark Percentages
While there’s no single, standard number to go by, there are general percentages depending on your income level. Sabillo’s tax preparation company analyzed its self-employed clients’ tax liabilities and came up with the following estimates. If you’ll be making:
- $30,000 to $75,000 a year: Aim to save 33 percent of your earnings
- $75,000 to $150,000 a year: Aim to save 43 percent of your earnings
- $150,000 to $300,000 a year: Aim to save 48 percent of your earnings
As indys, you’ll need to pay both the employee and employer’s portion of FICA, which is tax paid toward Social Security and Medicare — totalling about 15.3 percent. Depending on how much income you earn, you’ll also need to save at least 15 percent for federal income taxes and anywhere from 0 to 13 percent for state income taxes. Sabillo provided the chart below to illustrate this, with effective income representing your taxable income:
Do a Mid-Year Tax Review
Because your income can fluctuate and you may make less — or more — than you anticipated, it’s best to do a mid-year tax review every summer, recommends Tai Stewart, founder of Saidia Financial Solutions. This includes checking to see how much income you’ve made thus far, tracking and categorizing your tax-deductible business expenses and organizing your receipts. “That way, you can stay on track and not have a surprise, crazy-large tax bill at year’s end,” says Stewart.
If you can swing it, aim to do a tax review at least once a quarter. To make sure it doesn’t fall by the wayside, you can check on your savings when you’re keeping financial house, like when you’re sending invoices at the end of the month. I personally do a tax review once a month (but I’m an extreme money nerd over here). While it may not be the most exciting thing to do, it’s better to stay on top of things now than be stressed and disorganized at crunch time.
Make Adjustments Accordingly
You’ll want to increase the amount you reserve for taxes when you level up in income, increase your services or have a big launch, says Stewart. Maybe you just landed a few more retainer clients, or you’re rolling out an e-book or online course. If you anticipate a boost in your income for any reason, make sure you review your taxes and adjust the percentage you stash away accordingly.
Create a Savings Account for Your Taxes
If you haven’t done so already, create a savings account just for your taxes. I’d recommend that you establish this particular account at a different bank than where your main account resides, so it’s that much harder to tap into these funds if you’re in a financial pinch. Plus, creating this separate account makes it easier for you to see whether or not you’re on track for your income taxes.
Save From Every Paycheck
While it can be difficult and painful to see your funds shrink every time you set aside a chunk of money for taxes, you should strive to make it a habit to save the same percentage from each paycheck. Of course, this could be challenging, especially when clients pay you at different times of the month, in different ways (i.e., direct bank transfer, PayPal or check). And sometimes you may need to use your entire paycheck to cover an upcoming bill. As such, it may be easier to set up regular, automatic transfers to your tax account so you never have to think about it — and you probably won’t miss the money you never see.
When it comes to self-employed taxes, there’s no magic number, but there are ballpark percentages. By staying on top of your taxes, performing regular reviews and practicing good financial housekeeping, you can make sure you have enough saved to pay Uncle Sam.