Tax PlanningMay 10, 20265 min read

How Much Should a Small Business Set Aside for Taxes?

Small business tax reserves depend on profit, entity type, payroll, deductions, and prior-year taxes. Here is a practical way to think about it.

This resource is educational and is not tax advice. Ask a qualified tax professional for a percentage based on your entity, profit, payroll, and tax history.

Short answer

Many owners start by setting aside a percentage of profit, not revenue, but the right tax reserve depends on entity type, profit, payroll, deductions, credits, and prior-year tax situation.

Checklist

Estimate current-year profit.
Separate income tax, self-employment tax, sales tax, and payroll tax liabilities.
Review prior-year tax results.
Ask a tax professional for a target percentage.
Use a separate tax savings bank account.
Review estimated tax payment requirements.

Common mistakes

Setting aside tax money from revenue instead of profit without context.
Spending collected sales tax.
Ignoring payroll tax liabilities.
Waiting until year-end to estimate tax cash needs.

Examples for service businesses

A sole proprietor may need to think about income tax and self-employment tax.
A business collecting sales tax should not treat that collected tax as spendable profit.
A company with employees should track payroll liabilities separately from income tax reserves.

Estimated taxes may apply

The IRS says individuals including sole proprietors, partners, and S corporation shareholders generally must make estimated tax payments if they expect to owe $1,000 or more when their return is filed.