How Much Should a Freelancer Set Aside for Taxes?

When you're employed, tax comes out of every paycheck. When you freelance, nobody does that for you, and the bill arrives in one painful lump. The fix is to move a fixed share of every payment into a separate savings account the day it lands. The hard part is picking the share.

The quick answer

Most US freelancers land somewhere between 25% and 35% of profit. Profit means what clients paid you minus business expenses. If you have no idea where you fall, start at 30% and adjust once you've filed a year.

Where that number comes from

Your set-aside covers three things:

• Self-employment tax. This is Social Security and Medicare, normally split with an employer. You pay both halves: 15.3% on 92.35% of your profit, which works out to about 14.1% of profit.
• Income tax. This depends on your bracket. Many freelancers' effective federal rate is 10% to 15% once deductions are counted.
• State and local tax. Anywhere from 0% to about 10%.

A worked example

Say you invoice $6,000 in a quarter and spend $500 on software and equipment. Profit is $5,500.

• Self-employment tax: $5,500 × 92.35% × 15.3% ≈ $777
• Federal income tax at a 15% effective rate (on profit minus half the SE tax): ≈ $767
• State tax at 5%: $275

Total: about $1,819, or 33% of profit. That's what goes into the tax account this quarter.

Pay quarterly, not in April

If you expect to owe $1,000 or more for the year, the IRS expects estimated payments four times a year, usually due around April 15, June 15, September 15 and January 15. Missing them adds an underpayment penalty. A common safe harbor is paying at least 100% of last year's total tax (110% if your income was over $150,000), spread across the four dates.

Make it automatic

1. Open a separate savings account just for taxes.
2. Every time a client pays, move your percentage over the same day.
3. Log income and expenses as you go, so the quarterly number is ready when the due date comes.

This is general information, not tax advice. Rates and rules change, so check with a tax professional for your situation.