How Much Should I Set Aside for Taxes as a 1099 Worker?

The short answer is 25 to 35 percent of every deposit.

The real answer depends on three things:

Your federal tax bracket
Your state's tax rate
Your business deductions

Here is how to figure out your actual number instead of guessing.

Why the "25 to 35 Percent" Range Exists

Self-employed people pay two taxes on profit:

Federal income tax. Starts at 10 percent, climbs to 37 percent as you earn more. Most self-employed people land in the 12 to 24 percent brackets.

Self-employment tax. A flat 15.3 percent on the first $168,600 of net earnings. Drops to 2.9 percent above that. (These thresholds adjust each year for inflation.)

Add those together and you get your federal total. For someone in the 22 percent federal bracket, the combined rate is 22 + 15.3 = 37.3 percent of profit.

Except you also get to deduct half of your self-employment tax from your taxable income, which brings the effective combined rate down. And you get a Qualified Business Income deduction on top of that for most self-employed people, which brings it down further.

After those adjustments, the real effective tax rate for most self-employed people lands between 20 and 32 percent of gross income. Add 3 to 9 percent for state income tax, depending on where you live. Most people end up between 25 and 35 percent of every deposit.

Unless you want to do the math yourself every year, 30 percent is a solid starting point.

The Fast Way to Find Your Number

If you filed self-employment taxes last year, this takes five minutes.

Step 1. Open last year's tax return.

Step 2. Find your total federal tax liability. This is the number on line 24 of your 1040 (it may be a different line in older returns, look for "Total tax").

Step 3. Find your gross business income. This is the top-line revenue from your business before expenses. On Schedule C, this is line 1 or line 7.

Step 4. Divide total federal tax by gross business income. That's your federal rate.

Step 5. Add your state's effective rate.

Step 6. Round up 3 percentage points for safety.

Example: - Last year's total federal tax: $14,200 - Last year's gross business income: $62,000 - Federal rate: 14,200 ÷ 62,000 = 22.9% - State rate (California example): about 6% - Total: 28.9% - Round up to 32%

32 percent is your set-aside rate going forward. Every deposit, send 32 percent to the tax account.

What If This Is Your First Year?

You have no tax return to reference. Use a starting default and adjust.

Start at 30 percent if you live in a state with income tax.

Start at 25 percent if you live in a state with no income tax (Florida, Texas, Washington, Nevada, Tennessee, South Dakota, Wyoming, Alaska, New Hampshire).

Keep every receipt for business expenses. Keep a spreadsheet of your gross income. When you file your first return, you'll see your actual rate and can dial the number in for year two.

First-year self-employed people frequently under-save for taxes. They hear a friend say "set aside 20 percent" and take it as gospel. Then they end up in a higher bracket than expected, or they forget about self-employment tax, or they live in a high-tax state, and April hits them for thousands they don't have.

If you're going to err, err high. A small refund beats a tax bill you can't cover.

The Deductions That Change Your Number

Your set-aside rate assumes a certain level of deductions. If you track more deductions than the average self-employed person, your actual tax is lower and you're over-saving. If you track fewer, you're under-saving.

Here are the deductions that matter most:

Business expenses. Software, subscriptions, phone, internet, office supplies, professional services, insurance, marketing, contractor payments. Every one of these reduces your taxable profit.

Home office. If you have a dedicated space in your home used regularly and exclusively for business, you can deduct a portion of your rent or mortgage, utilities, and maintenance. Two methods: simplified ($5 per square foot up to 300 square feet) or actual (percentage of home used for business).

Mileage. If you drive for business, either track actual expenses (gas, maintenance, insurance, depreciation) or use the standard mileage rate. The IRS adjusts the standard rate each year.

Self-employed health insurance premiums. If you pay for your own health insurance, the premiums are deductible.

Retirement contributions. SEP IRA, Solo 401(k), and SIMPLE IRA contributions reduce your taxable income. For some self-employed people, this is the biggest deduction available.

Half of self-employment tax. Automatic. You don't do anything to claim this. It just happens on your return.

The more deductions you track, the lower your taxable profit, the lower your real tax rate. Someone with disciplined expense tracking might end up at an effective rate of 22 percent. Someone with poor tracking on the same income might pay 32 percent. Same business. Same revenue. Different tax bill.

Common Mistakes When Setting Your Number

Mistake 1: Using a friend's rate.

Your friend pays 22 percent. You decide that's your number too. Except your friend lives in Texas and you live in California. Your friend runs an LLC with an S-Corp election and you're a sole prop. Your friend earns $50,000 and you earn $95,000.

Your number is your number. Don't borrow someone else's.

Mistake 2: Forgetting about self-employment tax.

You look at your federal tax bracket, see "22 percent," and set aside 22 percent. You forget about the additional 15.3 percent for Social Security and Medicare. Come April, you're short by thousands.

Self-employment tax is the thing W-2 people don't know about. You have to account for it.

Mistake 3: Setting aside on net instead of gross.

You set aside 30 percent, but you calculate it on the check minus business expenses you paid the same day. This gets complicated fast and usually ends with you under-saving.

Do it the simple way. Set aside 30 percent of every gross business deposit the moment it lands. Reconcile at tax time.

Mistake 4: Dipping into the tax account for a "real" emergency.

Your roof leaks. Your car breaks down. You have $8,000 in the tax account. You tell yourself you'll replace it. You don't. April comes. You can't pay.

The tax account is not your emergency fund. It is the IRS's money. Protect it like you would a client's trust account, because functionally that's what it is. If you need an emergency fund, build one separately.

Mistake 5: Changing your rate mid-year based on a good quarter.

You have a great Q1, your projected income is higher, you raise your set-aside rate to 35 percent in the middle of the year. Then Q2 is bad. Now you're over-saving and short on current cash.

Set your rate in January. Leave it alone. Reconcile at tax time.

How to Actually Execute the Set-Aside

The hardest part is not picking the number. It's actually moving the money.

Option 1: Manual transfer. Every time a deposit clears, you manually transfer the tax percentage to a separate account. Reliable if you're disciplined. Fails if you aren't.

Option 2: Standing rule at your bank. Some banks let you set up a percentage-based sweep. Every deposit over a certain size, X percent moves automatically. Only works if your bank offers this.

Option 3: Automated via Able. Every deposit gets routed automatically. Tax account fills up in the background. No decisions. No discipline required.

Whichever method you use, the account must be separate from your regular checking. If the tax money sits in the account you swipe from, it will get spent eventually. Separation is not optional.

A Simple Decision Tree

Still not sure what percentage to use? Use this:

Have you filed a self-employment tax return before? If yes, use your actual rate from last year (from the Step 1-6 process above). Done.
Is this your first year and do you live in a state with income tax? Start at 30 percent.
Is this your first year and do you live in a state without income tax? Start at 25 percent.
Do you earn over $200,000 net self-employment income? Add 3 to 5 percent to whatever rate you picked. Higher brackets kick in.
Do you have unusually high deductions (big home office, big retirement contributions, major equipment purchases)? You can probably drop your rate by 2 to 3 percent.

Adjust once a year, in January, based on the return you just filed.

The Goal: Not Having to Think About This

The right amount of tax-related mental energy to spend as a self-employed person is almost zero.

You pick your number once. You set up the automation once. You verify it's working once a week for 30 seconds. You make four payments a year through Direct Pay. You file the return.

Any system that asks you to make tax decisions every time a deposit hits is a system that will eventually fail on a Tuesday when you're tired. Pick the number. Automate the movement. Move on with your life.

You are able to pay down debt, even on slow months.

You are able to save without second-guessing.

You are able to predict what is coming.

You are able to budget inconsistent income.