Ask around and you will hear that freelancers should put 25% to 30% of every payment aside for taxes. For a lot of people that is roughly right. For others it is too much, and they leave money sitting idle. For higher earners in high-tax states, it can be too little, and they end up with an April bill they cannot cover.
A better approach is to build your own percentage from the pieces that actually make up your tax bill.
The three layers of a freelance tax bill
Most self-employed people in the US owe some combination of:
- Self-employment tax, roughly 15.3% on about 92% of net profit, with the Social Security portion capped at an annual wage base
- Federal income tax, at your marginal bracket on taxable income after deductions
- State and sometimes local income tax, which ranges from zero in some states to a significant percentage in others
Base the percentage on profit, not revenue
Taxes are owed on net profit, after business expenses. If you spend 20% of your revenue on software, equipment, mileage, and other deductible costs, setting aside 30% of gross revenue is effectively setting aside closer to 37% of profit. Either track expenses closely and save a percentage of profit, or accept that a gross-revenue rule will over-save if your expenses are high.
Account for other income in the household
Freelance income stacks on top of everything else. If you or a spouse have a W-2 salary, your freelance profit starts in a higher bracket than it would on its own. Someone with a full-time job and a side gig often needs to save a higher percentage of their gig income than a full-time freelancer with the same gig earnings and no other income.
A simple system that works
Open a separate savings account just for taxes. Every time a client payment lands, move your set-aside percentage into it right away, before you spend anything. Pay your quarterly estimates out of that account. If there is money left over after you file, that is a sign you can lower your percentage next year.
Recalculate once or twice a year
Your percentage should change as your income, expenses, and household situation change. Running your expected annual profit and state through a self-employment tax calculator gives you an estimated effective rate to use as your set-aside number, which is far more reliable than a rule of thumb.
This article is for general education only and is not tax or legal advice. Tax rules vary by jurisdiction, change over time, and depend on your specific situation. Talk to a qualified tax professional before making filing or payment decisions.