How Much Should Small Businesses Set Aside for Taxes?

The Short Version:
Most small businesses should set aside 25–30% of net profit for taxes, which typically covers federal income tax plus self-employment tax. If you’re in a state with its own business taxes (like Tennessee), that range generally still holds for most owners, though higher-tax states may need to bump it up. The easiest way to stay ahead is to use the Profit First method to automatically sweep a percentage of every deposit into a dedicated tax account, then pay quarterly estimated taxes so you never face a surprise bill.

Nothing ruins a good year like an unexpected tax bill. But how much should you actually be setting aside?

Too little, and the IRS comes knocking with penalties and interest. Too much, and you've got cash sitting in a tax account that could've been growing your business.

The right number sits somewhere in between, and it depends on your entity type, your income level, and where you operate. Here's how to figure out the right number for your business.

How Much Should You Set Aside for Taxes? The 25-30% Rule of Thumb

The general rule of thumb for small businesses is to set aside at least 25% of your net profit for taxes. So, if your business earns $100,000 in profit, that's $25,000 going into a tax savings account.

Once you're earning above six figures, bump that closer to 30%. Why? At higher income levels, a few extra taxes start to kick in, and that extra cushion keeps you covered.

*Above this level, your exact percentage depends heavily on deductions, credits, and your mix of salary vs. distributions.

Keep in mind that these are starting points, not gospel. Your actual tax liability depends on deductions, credits, entity structure, and state taxes. But 25–30% is a solid range to keep you out of trouble until tax time rolls around and you know your exact number.

What Taxes Do Small Businesses Actually Pay?

Taxes can feel like a grab bag of acronyms and percentages, but for most small business owners it comes down to a few layers.

1. Federal income tax

If your business is a pass-through entity (sole proprietorship, partnership, S-corp, or LLC), your business income flows through to your personal return, and you pay tax at your individual rate. The more you make, the higher that rate climbs. If you're an S-corp owner, you also need to pay yourself a reasonable salary with proper withholdings. Uncle Sam expects that, and skipping it invites an audit. (More on getting that number right in our guide to reasonable compensation for S-corp owners.)

2. Self-employment tax

This one surprises new owners. If you're a sole proprietor, partner, or single-member LLC, you owe self-employment tax of 15.3% on top of income tax. It's the self-employed version of Social Security and Medicare, the same thing an employer would normally split with you, except now you're both the employer and the employee. The upside: you get to deduct half of it, and S-corp owners can reduce it by taking part of their income as distributions instead of salary. (That tradeoff is the heart of our S-corp vs. LLC comparison.)

3. State taxes

This depends entirely on where you operate. In Tennessee, there’s good news: no state income tax on wages. But if your entity has liability protection (LLC, S-corp, C-corp), you’ll owe excise tax on your profits plus franchise/business taxes on assets or gross receipts, often at both the city and county level.

If you own equipment, inventory, or vehicles, you’ll also face tangible property assessments. Many Tennessee owners see those offset with credits against their business tax, but they still require separate filings.

Your accountant handles the specifics. The main thing to know is that your state adds a layer on top of federal, and for most Tennessee businesses, that layer is already baked into the 25–30% starting rule. If you’re in a higher-tax state, your accountant may nudge that percentage up.

What Does This Look Like in Practice for a Tennessee Business?

Put it together and a typical Memphis sole proprietor making around $100,000 in profit ends up owing somewhere in the high-20% to mid-30% of that profit once federal income tax, self-employment tax, and Tennessee business taxes stack up. In many cities, you’ll file business tax at both the city and county level, which feels like double the fun, right?

Our Tennessee clients typically land somewhere between the high-20s and mid-30s of profit once everything is factored in, which is why we recommend starting at 25–30% and adjusting once you see your actual numbers. We’ve worked with hundreds of small businesses across Tennessee, and that range holds up for the vast majority. The exact number shifts with your deductions, entity type, and industry, which is the part worth pinning down with an accountant.

What's the Easiest Way to Save for Taxes?

Now that you understand what you’ll owe in taxes, here's how to make sure you've got the cash when it's time to pay.

How Does the Profit First Method Work for Tax Savings?

At our firm, we follow the Profit First method, which is all about setting aside a percentage of every dollar you collect into dedicated accounts, including one just for taxes. Instead of hoping there's money left at tax time, you take it off the top automatically.

Here's what I do personally: I put 7% of my gross revenue into a tax account. Every dollar that comes in, 7% goes straight there. When quarterly estimated payments are due, the money's already sitting there. No scrambling, no stress. My percentage is lower than a typical starting point because I know my deductions, credits, and effective rate well enough. You'll get there too, but start higher until you've got a year or two of data to work with.

Can You Automate Tax Savings?

Absolutely, and you should. Once you've settled on your percentage, set up automatic transfers from your operating account to a dedicated tax savings account. You can schedule it weekly, bi-weekly, or monthly.

I prefer weekly transfers because the amounts are smaller and easier to stomach than one big quarterly move. Take your best estimate of what you'll owe by year-end, divide it across the remaining weeks, and set it as a recurring auto-transfer. The money accumulates without you thinking about it.

Also, use a separate bank account, not just a mental note. Having the money physically separated makes it real and removes the temptation to dip into it for a slow month.

When Are Quarterly Estimated Tax Payments Due?

The IRS divides the year into four estimated tax payment periods:

Note that these dates sometimes shift when the 15th falls on a weekend or holiday.

If you don't pay enough by each deadline, you may get hit with an underpayment penalty, even if you're owed a refund at the end of the year. The IRS doesn't care that you eventually caught up. They want the money when it's due.

What Happens If You Don't Plan Ahead?

Every year, we meet business owners, often brand new to us, who had a great year and got blindsided at tax time. They find out they owe far more than they have on hand. No savings. No quarterly payments made. Just a bill they can't pay. It's usually what brings them to us in the first place.

Here's what that costs you beyond the tax itself:

• Penalties for paying late and for missing quarterly estimates

• Interest on the unpaid balance, which keeps growing until it's paid

• Payment-plan fees if you have to set one up with the IRS

• Stress and distraction that pulls you away from actually running your business

Compare that to setting up a 15-minute system at the start of the year: pick your percentage, automate the transfers, make four quarterly payments. That's it. The planning takes less time than filling out the paperwork for a payment plan.

The Best Tax Strategy Is the One You Actually Follow

Taxes don't have to be a constant source of stress. If you stick to the 25–30% rule, follow a system like Profit First, automate your savings, and make your quarterly payments, you'll be ready when tax season rolls around. No last-minute panic, and no unexpected tax bills.

The best way for you as a business owner to avoid tax time surprises is to have eyes on your numbers all year, not just in April. That's the real difference between scrambling every spring and knowing exactly where you stand.

If you'd rather stop guessing and start planning year-round, that's worth understanding before your next tax season. See why monthly accounting matters for small business owners, and what it actually changes about how you run your business.

Frequently Asked Questions

How much should an LLC set aside for taxes? For a single-member LLC, plan on 25–30% of net profit. That covers both federal income tax and self-employment tax. For most states we work with, that’s already accounted for in the range. Multi-member LLCs taxed as partnerships follow the same rule: each partner sets aside 25–30% of their share.

Do S-corp owners need to set aside as much for taxes? Usually less than sole proprietors for many owners. S-corp owners pay themselves a reasonable salary (with normal payroll withholdings), and distributions above that salary aren't subject to self-employment tax. That can save a meaningful chunk on the distribution portion, one of the main reasons profitable businesses elect S-corp status. But you still owe income tax on the full amount, so don't stop setting aside.

What happens if I miss a quarterly estimated tax payment? The IRS charges an underpayment penalty, even if you're owed a refund when you file. The simplest way to avoid it is to base your quarterly payments on what you owed last year and pay in four equal installments. Your accountant can set the exact safe-harbor amount for you.

Can I deduct my home office to lower my tax bill? Yes, if you use a dedicated space in your home regularly and exclusively for business. There's a simplified flat-rate method and a regular method that tracks actual expenses. Either way, it lowers your taxable income, so you'll owe less, but it doesn't change the percentage you should set aside.

What if my income varies a lot month to month? Use the Profit First percentage method instead of a fixed dollar amount. That way your tax savings automatically scale with revenue: big month, bigger transfer; slow month, smaller transfer. This is especially helpful for seasonal businesses, freelancers, and anyone whose income isn't predictable.

Should I hire a CPA or can I figure this out myself? You can absolutely set up the 25–30% savings system yourself. Where you’ll find the most value in working with a CPA is figuring out your exact percentage, finding deductions you're missing (our guide to common deductions for business owners is a good place to start), planning your entity structure, and handling compliance. Once your business is consistently profitable or you've taken on employees, a good accountant almost always saves you more than they cost.