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Tax Guide for Small Businesses: How Much Should You Save for Taxes?

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Running a small business has its pros and cons. It can be incredibly freeing to be your own boss, but doing your own self-employment taxes? That can be intimidating. 

All businesses need to pay annual taxes. If your small business expects to owe more than $1,000 in federal taxes, you’ll also need to pay quarterly taxes. There are several ways to calculate how much (and when) you need to pay. The type of business you are running and the state you live in will affect what you owe. 

Let’s look at this in more detail. 

Which Taxes Do I Have to Pay? 

If you are self-employed, you are subject to the following taxes:

Self-Employment Tax

The federal government sets the self-employment tax at 15.3%. This applies to all profits made by self-employed individuals and businesses. 

Federal Income Tax

You will need to pay federal income tax in addition to the self-employment tax. The percentage you must pay in federal income tax depends on which income bracket you fall into. The percentages range from 10% to 37% and are determined by income and your filing status (whether you are a single filer, married and filing jointly, or the head of household). 

RateSingle FilersMarried Filing JointlyHead of a Household
10%$0 – $10,275$0 – $20,550$0 – $14,650
12%$10,275 – $41,775$20,550 – $83,550$14,650 – $55,900
22%$41,775 – $89,075$83,550 – $178,150$55,900 – $89,050
24%$89,075 – $170,050$178,150 – $340,100$89,050 – $170,050
32%$170,050 – $215,950$340,100 – $431,900$170,050 – $215,950
35%$215,950 – $539,900$431,900 – $647,850$215,950 – $539,900
37%$539,900+$647,850+$539,900+

State Income Tax

Not all states have income tax, but the majority do. The amount varies from 3% in Pennsylvania to 13.3% in California. You’ll need to look up your state’s income tax laws.

State Sales Tax 

Every time your business sells a product, it is subject to state sales tax (for the 45 states that require it). When you charge your clients for the sale of products, you should collect sales tax. 

In most states, you do not need to collect sales tax for the sale of services, but check with your state’s specific laws to make sure you’re compliant. 

Other Taxes

A few other common taxes you may need to pay are: 

  • Property Taxes 
  • Franchise Taxes
  • Excise Taxes

The best way to know which taxes you will need to pay is to contact a tax professional

How Much Should a Small Business Save for Taxes?

A common question small business owners have is: How can I know exactly how much I’ll owe until I file at the end of the year? 

The truth is that you won’t know with full certainty.

However, you don’t need an exact number, only a good estimate. The federal government allows you to make estimated quarterly tax payments throughout the year, and at the end of the year, you settle up with your annual filing. 

A Good Rule of Thumb

So, how much should your small business save for taxes? About 30-40%. 

This is a reliable rule of thumb because, on average small business owners make $66,000 or less, putting them into the 22% tax bracket or below. Add that to the 15.3% federal self-employment tax, and you’re probably right in the middle of that range. 

This doesn’t account for everything you’ll have to pay, and you may want to pay more based on your particular financial situation, but it’s a good place to start. 

What If I Don’t Pay Enough Taxes? 

If at the end of the year you file your taxes and discover you’ve underpaid, don’t panic. 

The government’s Safe Harbor rule states that so long as you paid 90% of the taxes you owed for the current year or 110% of the taxes you owed based on the earnings you made in the previous year, you will not be fined for underpaying your estimated taxes. 

This is why the 30-40% rule of thumb can be a safe way to help small businesses decide how much to save for taxes. However, you will need to pay whatever amount you still owe at the end of the year. 

If you underpaid your taxes (less than 90% of what you owed), you might be subject to fines and penalties. 

What If I Pay Too Much in Taxes? 

There’s no fine for paying too much. If you overpay, you’ll get a tax refund at the end of the year for the amount you’re owed.

Of course, overpaying can hurt your business indirectly, as it ties up money you could otherwise use to run day-to-day operations or make investments. Hiring a reliable bookkeeper, however, can prevent this from occurring. 

Get Professional Tax Help

Taxes don’t have to be stressful. With the help of expert tax and accounting professionals, tax season will just be another date on the calendar. 

Don’t wait, contact Mazuma to assist you in all of your small business taxes needs.

Ben Sutton

Ben Sutton

Ben Sutton is the founder of Mazuma USA, an accounting firm providing tax, bookkeeping and payroll services to small businesses. Since founding Mazuma, Ben has established himself as an expert in the small business world. He’s still driven by that same desire to provide accounting help to all small businesses – from photographers, bloggers and creatives to lawyers, doctors, and dentists, everyone needs affordable accounting help. Ben is a Certified Public Accountant, and a member of the American Institute of Certified Public Accountants. But Ben considers his greatest achievement and credential to be his happy wife and four children.

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