Business owners · Tax planning

How much should a business owner set aside for taxes?

This is one of the first questions business owners ask me. The honest answer is: it depends. But “it depends” should not leave you without a plan.

Start by separating tax money from business money

If the money is sitting in your operating account, it can feel available. But some of that cash may already have a job. It may need to cover federal income tax, self-employment tax, payroll obligations, or a state payment.

A separate tax savings account creates a boundary. Each time money comes into the business, move a percentage into that account before deciding what is available to spend.

Why people mention 25% to 30%

You will often hear a general suggestion to reserve 25% to 30% of net income. That range can create a useful habit, but it is not right for everyone. Two businesses with the same revenue can have very different expenses, entity structures, and tax obligations.

The important phrase is net income. Gross deposits are not the same as taxable profit. Accurate bookkeeping helps us see the difference.

Three numbers you should know each month

1. Gross revenue: what the business collected.
2. Operating expenses: ordinary and necessary costs supported by good records.
3. Estimated profit: what remains before owner withdrawals and taxes.

Do not wait until April

The real problem is often not the tax calculation. It is discovering the number after the money has already been spent. Review your profit and projection during the year, especially when revenue changes, you add employees, make a large purchase, or your household income shifts.

The next step

If your business is earning more than $200,000 and you are still guessing what to save, H&G can help you organize the numbers and build a repeatable process based on your actual situation.

This article provides general educational information and is not individualized tax advice.