How Much Should Small Businesses Set Aside for Taxes?

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

Too little, and the IRS will come knocking.

Too much, and you're just giving yourself the pleasure of watching money sit in a tax account doing absolutely nothing.

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.

So, if you’re making $100,000 in profit, put $25,000 aside. This will typically cover your self-employment taxes as well as your income tax.

Now, if you’re fortunate enough to be making more than $100,000 (congrats!), you’ll want to bump that percentage up to closer to 30%. Why? Well, once you’re earning more, taxes like the extra Medicare tax come into play, so having that extra cushion will make sure you’re not left short.

Bottom line: 25-30% is a solid range to keep in mind to stay out of trouble when tax time rolls around.

What Taxes Do Small Businesses Pay?

Taxes can vary depending on where you’re based, but here’s a breakdown of what a small business in Tennessee, for example, might expect to pay:

1. Federal Income Tax

If your business is a flow-through entity like a partnership or S-corp, you’ll be paying federal income taxes through your personal return. But S-corp owners—don’t forget that you need to pay yourself a salary with proper tax withholdings. Uncle Sam likes things to be orderly.

2. Tennessee Excise and Franchise Taxes

In Tennessee, your business will be hit with a 6.5% excise tax on net income. On top of that, there’s a business tax of about 2% of your gross revenue. It can feel like a lot, especially because you’ll likely have to pay both city and county taxes. For instance, in Memphis, you get the joy of paying taxes to both Memphis City and Shelby County. Double the fun.

3. Tangible Property Tax

Own any business equipment, inventory, or vehicles? Great, there’s a tax for that too. It’s called the tangible property tax. Thankfully, you get a credit against your business tax when you pay this, but it’s still another thing to keep track of.

4. Sales Tax

If you’re in an industry where you collect sales tax, in Tennessee that rate is around 9.9%. It varies slightly depending on your specific area, but that’s the ballpark. Sales tax rules differ by state, so it’s important to know what’s taxable where you are.

Simple Ways to Save for Taxes

Now, let’s talk strategy. Saving for taxes doesn’t have to be complicated. In fact, there are a couple of easy methods to make sure you’ve got the cash ready when it’s time to pay Uncle Sam.

1. Profit First Method

At our firm, we follow the Profit First method, which is all about setting aside a percentage of every dollar you collect. This strategy recommends putting aside at least 15% of your gross revenue for taxes.

However, we often see clients saving a bit less than that, especially if they have a good idea of what their actual tax obligations will be. Personally, I put 7% of my gross revenue into a tax account. It’s simple: every dollar that comes in, I take 7% and throw it into that account. Then, when quarterly tax payments are due, I’ve already got the money set aside. Easy. No stress.

2. Automate Your Savings

Another easy option? Automate the process. Once you’ve got an idea of how much you need to save for taxes, set up automatic transfers into a dedicated tax savings account. You can schedule it to transfer weekly, bi-weekly, or monthly—whatever works best for you.

Personally, I prefer doing it weekly because it’s a smaller, more manageable amount. For example, if I know I’ll owe $25,000 by the end of the year and there are 26 weeks left, I divide $25,000 by 26. That’s how much I transfer into my tax account every week. It’s simple and takes the guesswork out of saving.

Think Ahead and Plan

The most important thing you can do is plan ahead. The earlier you know what you’ll owe, the easier it is to prepare.

When you know your numbers in advance, you’re in control—you can adjust your spending, set aside the right amount, and avoid nasty surprises at the end of the year.

The Best Tax Strategy? Preparation

Here’s the deal: 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, and automate your savings, you’ll be ready when tax season rolls around. No more last-minute panic, no more unexpected tax bills.

And if you’re ever feeling unsure or overwhelmed, that’s what tax professionals are for. They’ll make sure you’re on track, so you can focus on what matters—growing your business and not worrying about your tax bill.

Take a quick look at how much you're setting aside for taxes—are you on track? If not, it might be time to rethink your strategy or even switch to a new accountant. We know change can feel a bit scary, but it could be exactly what your business needs.

To help you out, we’ve listed the top 5 fears people have about switching small business accountants and how to overcome them. With the right support, managing your taxes can be simpler than you think.