What if I do not know my effective rate?

Take last year’s total tax and divide it by last year’s net profit. Both are on the return. If you have never filed as this business, ask your CPA for an estimate for your entity and state and use that until you have a real year — and reserve on the high side while you find out.

Does this include self-employment tax?

It does if your effective rate does, which it will if you calculated it from a filed return. That is another reason to use your own figure rather than an income tax bracket — the bracket alone leaves out a substantial obligation for most sole proprietors and partners.

What about state and local tax?

Same answer. An effective rate taken from what you actually paid includes everything you actually paid. If you operate in more than one state, the position is more complicated and worth a conversation with your CPA rather than a calculator.

Free tool

How much to set aside for taxes

Nobody withholds tax for you any more. The fix is mechanical: a fixed percentage of every deposit moves to a second account the day it lands, and you never look at it again.

Method reviewed by Darren Lim, US CPALicence CPA.74253602

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Move this share of every deposit

2.9%

Tax is charged on profit, not on what came through the door — so 24% of a 12% margin is 2.9% of the deposit. Move it the day the money clears.

Revenue a month$90,000

Net profit a monthat 12% net margin$10,800

Tax on thatat 24% effective$2,592

Set aside per month$2,592

Per quarter$7,776

Per year$31,104

Still to set aside$31,104

If your margin is 5 points higher than you thinkA year's tax. Under-reserving is nearly always a margin error, not a discipline one.$44,064

Nothing you type is sent anywhere. The calculation runs in your browser and your figures stay on this device.

Why this asks for your rate instead of guessing it

Most set-aside calculators hard-code a percentage — thirty percent, or a bracket table someone copied in a year that has since passed. Rates, brackets, thresholds and deduction rules change, and a stale number here produces a shortfall discovered in April.

So this asks for your own effective rate: total tax divided by net profit, off last year’s return. Your CPA can give it to you in a sentence, and it already reflects your entity type, your state, your deductions and your situation, which no generic percentage does.

If the business has changed size a lot since that return, adjust upward rather than downward. Being over-reserved is an inconvenience; being under-reserved is a payment plan.

Set aside on profit, not on revenue

Tax is charged on what the business made, not on what came through the door. A contractor doing $80,000 a month with $62,000 of costs is taxed on the $18,000, not the $80,000 — so the set-aside percentage applied to a deposit has to be scaled by your profit margin.

That is what this calculator does: it converts your effective tax rate into the share of each incoming dollar that belongs to the tax account, using your actual net margin. Getting that margin wrong is the main way people under-reserve.

The mechanism matters more than the number

The percentage is easy. The habit is what fails. What works, consistently, is a second bank account that is boring and slightly inconvenient to reach, and a rule that money moves into it the same day a deposit clears — not weekly, not monthly, and never "when things settle down".

The account is not a savings account and it is not a buffer. It holds money that was never yours. Treating it as available cash during a tight month is how a manageable quarterly payment becomes a compounding problem, and it is the single most common version of this story.

Set the quarterly payment dates as calendar reminders a week early, with the amount attached.

Common questions

What if I do not know my effective rate?: Take last year’s total tax and divide it by last year’s net profit. Both are on the return. If you have never filed as this business, ask your CPA for an estimate for your entity and state and use that until you have a real year — and reserve on the high side while you find out.
Does this include self-employment tax?: It does if your effective rate does, which it will if you calculated it from a filed return. That is another reason to use your own figure rather than an income tax bracket — the bracket alone leaves out a substantial obligation for most sole proprietors and partners.
What about state and local tax?: Same answer. An effective rate taken from what you actually paid includes everything you actually paid. If you operate in more than one state, the position is more complicated and worth a conversation with your CPA rather than a calculator.

What we do about it

Books closed monthly mean the profit figure this depends on is current rather than a guess, so the set-aside percentage stays right as your margin moves — and the quarterly estimate is built on a number rather than a hope.