How much to set aside for taxes when you're self-employed

The rule of thumb

Set aside 25 to 35 percent of what a 1099 client pays you. Self-employment tax runs about 15.3 percent of net profit (you deduct half of it), and federal income tax lands on top at your marginal rate. If you also have a W-2 job, that job’s wages already fill the lower brackets, so the 1099 money is taxed at the top of your pile: a household with a six-figure W-2 and a side consulting gig often ends up near 30 percent, higher if the consulting is large.

Rough, because the rule ignores the QBI deduction, your actual bracket, how much your W-2 withholding already covers, retirement contributions, and whether you itemize.

The better way: project the year

Truenote’s tax projection takes what it can see and what you tell it:

• each W-2’s year-to-date gross, 401(k), and federal withholding (typed in, or read from a paystub you upload);
• each 1099 or business source: money received (from the connected accounts), still expected, expenses;
• bonuses, estimated payments already made, last year’s tax (for the safe harbor), investment income.

It returns the statement line by line (wages, self-employment tax, the deduction for half of it, QBI, the standard or itemized deduction, credits, tax), whether you’ll get money back or owe, and the extra withholding per paycheck that breaks even. Texas has no state income tax; elsewhere the projection says it’s federal only.

To run the same math on a few figures without an account, use the quarterly estimated tax calculator: the four payments, their due dates, the safe harbor and the projected amount.

Ask your agent: “Will we owe for the year? How much more should come out of each paycheck?” It calls get_tax_projection and answers with the figures and the assumptions.

Withholding instead of quarterlies

If you have a W-2 job, raising its withholding (a new W-4 with extra per paycheck) does the job of quarterly estimates with no deadlines: withholding counts as paid evenly across the year, even if you raise it in October. The projection’s “extra per paycheck” is exactly that number. Where there’s no W-2, quarterlies it is: the projection shows the quarterly set-aside and the next due date on the overview.

Where the money sits

A bucket called Taxes on the savings account, filled by a plan line or by a share of each 1099 deposit, keeps the set-aside visible and out of the way. Truenote’s buckets do that without a second bank account; see Buckets instead of budgets.

This isn’t tax advice: it’s arithmetic on your inputs. Not advice.

Questions

What percentage of 1099 income should I set aside for taxes?

A common rule is 25 to 35 percent: self-employment tax is about 15.3 percent of net profit (half of it deductible), plus federal income tax at your marginal rate. A household with a W-2 job and a side 1099 often lands near 30 percent; a projection from real figures is better than any rule.

Do I have to pay quarterly estimated taxes?

You have to pay enough during the year to avoid a penalty (the safe harbor: 100 or 110 percent of last year's tax, or 90 percent of this year's). Quarterlies are one way; raising withholding at a W-2 job is another, and withholding counts as paid evenly through the year.

Does Truenote give tax advice?

No. It projects federal tax from the figures you give it and shows its arithmetic. Check anything that matters with a preparer.