November 2024 Managing the Money with Megan Schmitke

How Much Should You Be Saving For Income Taxes?

by Megan Schmitke

I get this question a LOT, and really the answer can drastically vary depending on a few specific instances.

Before we really dive in, it’s important to note that only businesses that are organized as a Corporation (C Corp) owe federal income taxes as a business. All other business types will have the business income & expenses flow through onto the owner’s PERSONAL income tax return.

If you are a Partnership or an S Corporation, you will still have to file a tax return for your business, but the business itself does not pay the tax. Those tax returns will generate what’s called a K-1, and the owner(s) will use that to report the net income & any adjustments on their personal income tax return.

If you are a sole proprietor or a single member LLC business, you will report all your income & expenses directly on your personal income tax return, on a form called a Schedule C.

And because income taxes are so personal - all your personal finances come into play,, along with other factors such as how many kids you have, any other jobs you or your spouse may have, etc…

Now…back to the original question - how much should you be saving for income taxes?

As a general rule, I recommend that sole proprietors, LLC owners and partnerships try to set aside approximately 30% of your NET PROFIT throughout the year. You’re going to be paying 15% in self employment tax alone, and the remaining amount due will be based on your personal tax bracket.

If you’re an S Corp, you’ll be paying in the 15% for Medicare and Social Security with every paycheck (the equivalent of self employment tax), so I recommend setting aside the extra 15% for the year end tax return.

But remember, it’s 15-30% of your NET PROFIT, not your total revenue. That means you should subtract your business expenses before calculating this percentage. This is why it’s extremely important to keep up with your bookkeeping throughout the year, so you can have a better indication of what you should be saving.

Taxes are an unavoidable part of running a boutique, but with the right knowledge and preparation, they don’t have to be a source of stress. Be proactive, set some money aside throughout the year, and keep organized and up to date bookkeeping records so you can have a general idea of how much you’ll need to be saving.